United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1997
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or
Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
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Commission file number 0-13502
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TSENG LABS, INC.
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(Exact name of registrant as specified in its charter)
UTAH 87-0391229
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
6 Terry Drive, Newtown, PA 18940
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 968-0502
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(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days X
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report (applicable
only to corporate issuers).
Class - Common Stock, $.005 Par Value
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Outstanding at September 30, 1997 - 19,088,337 shares
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This report includes a total of 10 pages.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TSENG LABS, INC.
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CONDENSED CONSOLIDATED BALANCE SHEETS
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(In thousands)
September 30, December 31,
ASSETS 1997 1996
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(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 6,340 $ 7,996
Short-term investments 22,136 14,916
Accounts receivable, net 2,072 5,165
Inventories 49 2,369
Notes receivable 0 4,441
Recoverable income taxes 3,224 5,824
Prepaid expenses and other 473 877
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Total current assets 34,294 41,588
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PROPERTY AND EQUIPMENT, net 8,901 9,333
OTHER ASSETS 574 618
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$ 43,769 $ 51,539
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES:
Accounts payable $ 365 $ 2,098
Accrued expenses 2,569 3,222
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Total current liabilities 2,934 5,320
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DEFERRED INCOME TAXES 991 991
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SHAREHOLDERS' EQUITY:
Common stock 98 98
Additional paid-in-capital 11,211 11,113
Retained earnings 33,253 38,660
Treasury stock, at cost (4,718) (4,643)
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39,844 45,228
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$ 43,769 $ 51,539
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See accompanying notes to financial statements
TSENG LABS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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(In thousands, except per share amounts)
For the
Three Months
Ended
September 30
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1997 1996
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(Unaudited)
NET SALES $ 1,919 $ 12,360
COST OF SALES 1,521 9,694
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Gross profit 398 2,666
RESEARCH AND DEVELOPMENT 2,509 1,771
SELLING, GENERAL AND ADMINISTRATIVE 1,246 1,909
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(3,357) (1,014)
Operating loss
INTEREST INCOME 360 292
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Loss before income taxes (2,997) (722)
INCOME TAX (1,038) (259)
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(BENEFIT)
NET LOSS $ (1,959) $ (463)
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NET LOSS PER SHARE $ (.10) $ (.02)
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Weighted Average Common and Common
Equivalent Shares Outstanding 19,088 19,047
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See accompanying notes to financial statements
TSENG LABS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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(In thousands, except per share amounts)
For the
Nine Months
Ended
September 30
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1997 1996
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(Unaudited)
NET SALES $ 6,980 $ 23,211
COST OF SALES 5,366 19,039
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Gross profit 1,614 4,172
RESEARCH AND DEVELOPMENT 7,224 4,357
SELLING, GENERAL AND ADMINISTRATIVE 3,888 5,417
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(9,498) (5,602)
Operating loss
INTEREST INCOME 1,197 1,113
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Loss before income taxes (8,301) (4,489)
INCOME TAX (BENEFIT) (2,895) (1,578)
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NET LOSS $ (5,406) $ (2,911)
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NET LOSS PER SHARE $ (.28) $ (.15)
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Weighted Average Common and Common
Equivalent Shares Outstanding 19,079 19,001
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See accompanying notes to financial statements
TSENG LABS, INC.
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
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(In thousands)
For the
Nine Months
Ended
September 30
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1997 1996
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(Unaudited)
OPERATING ACTIVITIES:
Net loss $ (5,406) $ (2,911)
Adjustments to reconcile net loss
to cash provided by (used in) operating activities -
Depreciation and amortization 1,472 2,000
(Increase) decrease in -
Accounts receivable 3,093 (2,820)
Inventories 2,320 (317)
Recoverable income taxes 2,600 (2,050)
Prepaid expenses and other 404 393
Other assets 44 (65)
Increase (decrease) in -
Accounts payable (1,733) (1,822)
Accrued expenses (653) (236)
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Net cash provided by (used in) operating activities 2,141 (7,828)
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INVESTING ACTIVITIES:
Purchases of property and equipment (1,040) (2,515)
Increase in deferred costs 0 (2,229)
(Increase) decrease in short-term investments (7,220) 13,199
(Increase) decrease in notes receivable 4,441 (5,697)
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Net cash(used in) providing by investing activities (3,819) 2,758
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FINANCING ACTIVITIES:
Proceeds from exercise of stock options 97 758
Purchase of treasury stock (75) 0
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Net cash provided by financing activities 22 758
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Net decrease in cash and cash equivalents (1,656) (4,312)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,996 9,004
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,340 $ 4,692
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See accompanying notes to financial statements
1. SUMMARY FINANCIAL INFORMATION AND RESULTS OF OPERATIONS:
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In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 1997, the results of operations and the changes in financial position for
the periods presented.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes included in the Company's latest annual
report on Form 10-K. The results of operations for the interim periods presented
are not necessarily indications of the results for the full year.
In October 1997, the Company announced that in consideration of the lead time
and research and development costs required to produce new graphics products,
the Company would cease development efforts on future products, and attempt to
continue to complete 3D and multimedia strategies under development to attempt
to position the Company to attract strategic partners and/or merger candidates
in the technology industry. Additionally, the Company will explore opportunities
to utilize its cash to make acquisitions of potential growth companies including
but not limited to those that are technology-based. There can be no assurance
that the Company can identify one or more such transactions that can be
consummated on terms acceptable to the Company , if at all. In connection with
this plan, the Company has reduced its staff approximately 50 employees
(approximately 40%) believed essential to this effort. The Company is currently
evaluating whether a previously announced charge of $500,000-$1,000,000 in early
October 1997 related to a 20%-30% reduction in employees is adequate to cover
cost and severance related to this plan.
On November 11, 1997, Jack Tseng resigned as President, Chief Operating Officer,
Chairman of the Board and as a Director of the Company effective October 31,
1997. Mr. John J. Gibbons will assume the titles of President, CEO and Chairman
of the Board. Mr. Gibbons was Vice Chairman of the Board of Directors and the
Company's Executive Vice President and Chief Operating Officer.
In connection with Mr. Tseng's resignation, in addition to the charge noted
above, the Company will take a one-time, pretax charge of approximately $700,000
in the fourth quarter of 1997.
2. NET LOSS PER SHARE:
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Net loss per share was computed using the weighted average number of common
shares and share equivalents outstanding during the periods.
3. INVENTORIES:
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Inventories are stated at the lower of weighted average cost or market and
consist of the following:
September 30, December 31,
1997 1996
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(In Thousands)
Purchased parts $ 9 $ 769
Finished goods 40 1,600
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$ 49 $ 2,369
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4. SHORT-TERM INVESTMENTS:
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The Company accounts for its short-term investments under Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." Management determines the appropriate classification of debt
and equity securities at the time of purchase and reevaluates such designation
as of each balance sheet date. At September 30, 1997, all short-term investments
have been classified as held-to-maturity. Held-to-maturity securities are
carried at amortized cost, with coupon interest and dividends and discount and
premium amortization included in income each period.
5. RECLASSIFICATIONS:
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Certain prior year balances have been reclassified to conform to the current
year presentation.
6. NEW ACCOUNTING PRONOUNCEMENTS:
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In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No.
128 is designed to improve the earnings per share information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements and increasing comparability of earnings
per share date on an international basis. This pronouncement is effective for
periods after December 15, 1997; earlier adoption is not permitted. The adoption
is not expected to have a material impact on the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
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Revenues for the three- and nine-month periods ended September 30, 1997 were
$1,919,000 and $6,980,000, 84% and 70% reductions from the corresponding periods
in 1996. The decrease in both periods is due primarily to lower unit sales and
selling prices for the Company's ET6000-based products, which began shipping in
volume in the second quarter of 1996. In response to the market transition to 3D
graphics accelerators, the Company had been working to complete development and
commercialization of its initial 3D product, the ET6300. On October 21, 1997,
the Company announced that it will not commercialize the ET6300 in light of
problems with price and availability of 3.3 volt MDRAM as sales of this product
would not return the Company to profitability. In addition, the Company
announced that in consideration of the lead time and research and development
costs required to produce new graphics products, the Company would cease
development efforts on future products and attempt to continue to complete 3D
and multimedia strategies under development to attempt to position the Company
to attract strategic partners and /or merger candidates in the technology
industry. Additionally, the Company will explore opportunities to utilize its
cash to make acquisitions of potential growth companies including but not
limited to those that are technology-based. Broadview Associates has been
retained by the Company to assist in these efforts. Because of the uncertainties
and risks involved in attempting to negotiate strategic partnerships, mergers,
sales and/or purchases, no assurances can be given that the Company can identify
one or more such transactions that can be consummated on terms acceptable to the
Company, if at all. In addition, if completed, there can be no assurance that
such transactions would return the Company to profitability.
Sales to two customers represented approximately 72% of the Company's revenues
in the three-month period ended September 30, 1997. Sales to three customers
represented approximately 42% of revenues in the nine-month period ended
September 30, 1997. Sales to two customers represented approximately 46% and 43%
of the Company's revenues in the three- and nine-month periods ended September
30, 1996.
Cost of sales as a percentage of revenues was 79% and 78% in the three-month
periods ended September 30, 1997 and 1996, and 77% and 82% in the nine-month
periods ended September 30, 1997 and 1996, respectively. Margins for the
three-month periods ended September 30, 1997 and 1996 remained relatively
constant as sales of ET6000 product represented the majority of sales in both
periods. The decrease in costs as a percentage of revenues in the nine-month
period ended September 30, 1997, when compared to the corresponding period in
1996, is due to higher margins generated by the Company's ET6000 product family
which represented a higher percentage of total sales in the nine-month period
ended September 30, 1997. The Company expects pricing pressures to intensify for
its 2D graphics products.
Research and development expense increased by 42% and 66% in the three- and
nine-month periods ended September 30, 1997 when compared to the corresponding
periods in 1996. The increase in both periods was due to additional personnel
and consulting costs to support the development of the Company's initial 3D
graphics products. The Company anticipates that it will continue to incur
significant research and development expenditures in the fourth quarter of 1997
as it attempts to continue to complete 3D and multimedia strategies under
development to attempt to position the Company to attract strategic partners
and/or merger candidates.
Operating expenses decreased 35% and 28% in the three- and nine-month periods
ended September 30, 1997 when compared to the corresponding prior year periods
as the Company implemented a plan to reduce operating expenses. Contributing to
the decrease were reductions in non-research personnel costs and lower sales and
marketing expenditures.
The Company recorded an income tax benefit of 35% in both the three- and
nine-month periods ended September 30, 1997 and 1996.
Inflation is not expected to have a significant adverse impact on the Company's
operations.
LIQUIDITY AND CAPITAL RESOURCES
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At September 30, 1997, the Company has $28,476,000 of cash and short-term
investments and a bank line of credit providing total availability of
$2,500,000. There was no borrowings on this line during the three months ended
September 30, 1997. The Company believes that these sources are sufficient to
fund the Company's short-term working capital requirements. Total working
capital was $31,360,000 and $36,268,000 at September 30, 1997 and December 31,
1996, respectively. The decrease in working capital was caused primarily by the
Company's operating loss in the first nine months of 1997 and its investment in
facilities, equipment and tools. As explained above, the Company is
de-emphasizing development of new graphics products and attempting to both
position the Company to attract strategic partners and or merger candidates in
the technology industry and identify opportunities to acquire potential growth
companies. There can be no assurance that the Company will be successful in
identifying and completing such transactions.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Report 8-K
(a) The following is a list of exhibits filed as part of the Form
10-Q:
10-h. Severance Agreement between Tseng Labs, Inc. and Jack Tseng
dated November 11, 1997
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TSENG LABS, INC.
Dated: November 13, 1997 By: /s/JOHN J. GIBBONS
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John J. Gibbons
President
Chief Executive Officer
Dated: November 13, 1997 By: /s/MARK H. KARSCH
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Mark H. Karsch
Senior Vice President
Chief Financial Officer
Dated: November 13, 1997 By: /s/BARBARA J. HAWKINS
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Barbara J. Hawkins
Vice President
Chief Administrative Officer