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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________________ to ________________________
Commission file Number 6-13502
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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 of (IRS Employer
incorporation or organization) Identification No.)
6 Terry Drive, Newtown, Pennsylvania 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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Securities registered pursuant to Section 12(b) of the Act :
Name of each exchange on
Title of each class which registered
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.005 par value per share
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(Title of class)
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(Title of class)
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. Yes X No_____.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (see
definition in Rule 405, 17 CFR 230.405.)
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Note--If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense, the
aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this form.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
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(Applicable Only To Corporate Registrants)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.*
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DOCUMENTS INCORPORATED BY REFERENCES
List hereunder the following documents if incorporated by reference and the Part
of the Form 10- K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
None
*As of February 28, 1997, 19,084,837 common shares were outstanding. The
aggregate market value of the 13,697,813 common shares outstanding (based upon
the average of the closing price of these shares as of February 28, 1997, as
reported by NASDAQ) and held by non-affiliates was $49,654,572.
This report (including Exhibits) contains 37 pages.
The index to Exhibits starts on page 21.
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PART I
Item 1. Business
General
Tseng Labs, Inc. ("Tseng" or the "Company") is a designer and supplier of high
performance video graphic controller chips. The Company's accelerators are
designed to enhance the personal computer's (PC(TM)) performance by off-loading
the graphics and video functions from the Central Processing Unit (CPU) to the
accelerator chip. By working in conjunction with the personal computer's CPU,
the graphic accelerator can offer significant improvement to the quality of the
graphics and also improve the system's overall performance.
Incorporated in 1983, Tseng has built a long-standing reputation as an
innovative company offering technological advancements and reliable products to
the graphics market. This reputation has resulted in Original Equipment
Manufacturers (OEM) agreements with some of the most respected names in the
computer industry.
Tseng has long been considered a pioneer in the graphics market. The Company
successfully introduced the ET4000(TM) chip set in 1989. The ET4000 has the
distinction of being the most successful SVGA controller in history. Following
the debut of the ET4000, the Company offered a series of products designed to
accentuate its video capabilities and performance. The result was the systematic
introduction of the W32(TM), W32i(TM), W32p(TM) and the Video Image Processor
(VIPeR(TM)). The Company began shipping the current generation 128-bit
ET6000(TM) in 1996. In response to the growing demand for greater multimedia
capabilities and 3D graphics performance in the consumer marketplace, Tseng
announced during the fourth quarter of 1996, a significant write-off of its
investment in 2D products and a refocus of its research and development efforts
on the 3D graphics market. The Company is currently working to complete
development of its first 3D graphics product.
Markets and Products
PC Graphics Since VGA
Following the advent of the IBM PS/2(TM) series of personal computers in 1987,
the era of video graphics array (VGA(TM)) arrived. Tseng Labs, on the strength
of its fast response to VGA with its ET3000(TM) controller, quickly became
recognized as a leader in the market of VGA-compatible video graphics products.
Operating at 640x480 screen resolution with 16 to 256 colors and a refresh rate
of 60Hz, VGA greatly improved the productivity of the PC user. Microsoft had
recently introduced Windows(R) 3.0, a graphical user interface (GUI) that made
PC applications easier to use. By depicting common tasks and applications as
small graphical images, or icons, Windows provided a more user-friendly
environment to interact with the PC. A mouse or other pointing device was used
in combination with the keyboard to select particular applications to launch or
documents to open. The ability to efficiently manage these graphic images
on-screen became extremely important following the introduction of Windows. With
this new user interface to the PC came the desire for greater graphics drawing
speed and higher screen resolutions. These requirements placed a heavy burden
upon the resources of the CPU, however. Subsequently, graphic chips represented
a way to utilize the new interface while maintaining the speed and power of the
system. While the VGA standard represented a quantum leap ahead of its
predecessors, it had its own set of limitations, which drove graphic companies
in search of a higher standard. The VGA standard became the building block for
the next generation of graphic controllers, the Super VGA (SVGA(TM)).
The Company was influential as a pioneer of SVGA. Introduced as a solution to
limited screen resolution and colors, SVGA was later ratified by the Video
Electronics Standards Association (VESA) as the standard for the graphic
industry. Operating originally at 800x600 screen resolution while maintaining
the 16 to 256 color palette and between 60Hz and 72Hz refresh, SVGA was widely
accepted by third-party developers of standards and accelerated chip sets.
During this period, Tseng Labs reinforced its position as a leader in design and
engineering with the ET4000 chip set targeting the SVGA standard.
Introduced in 1989, the ET4000 grew to become one of the single highest volume
SVGA-compatible devices ever produced, permitting 1024x768 resolution at 256
colors, while using low cost DRAM. In addition, the low cost ET4000-based
adapters were capable of displaying 16.8 million colors simultaneously, allowing
for "true color" imaging on a low cost adapter. The ET4000 was the first SVGA
class device to be connected to the CPU directly, which is now referred to as a
"local bus" implementation. With a properly designed graphics chip, local bus
provides the CPU with far greater access to the graphics memory, increasing the
performance of the entire display subsystem. The ET4000 was noticeably faster
than other SVGA chips, allowing the CPU to write to the video card without
losing access time to the video memory, known as "wait states," typical in
previous technology.
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As the popularity of Microsoft Windows increased, the need for higher
performance graphics solutions became more apparent. Although Windows
significantly improved the PC's ease of use, it also diminished the processing
power available to applications, since the CPU was required to manage this
highly graphical operating environment. The Company, along with other graphics
companies, realized that as more applications made use of the Windows GUI, the
demand for high performance, high resolution graphics solutions would continue
to grow. The graphics industry saw an opportunity in providing high resolution
and color while improving performance by reassigning Windows GUI tasks to the
graphics chip, freeing the CPU from these tasks and accelerating the entire
system.
The Company responded with the ET4000/W32, which retained full compatibility
with the ET4000 software, but increased it from a 16-bit to a 32-bit local bus
which was more appropriate for 486 CPU designs. The W32 allowed the CPU to write
to the video memory at the same or faster rates than to its own system memory,
and included an ability to power Windows and other applications between four and
ten times faster than the acceleration of the original ET4000. Because of its
price/performance value, the W32 was integrated onto the system motherboards of
a number of leading OEMs.
Windows Acceleration for 2D and Developing 3D
The market demand for performance graphics increased substantially as the
popularity of Microsoft's Windows 3.0 and follow-up Windows 3.1 continued to
grow. Many manufacturers of PCs chose to bundle Windows, or other GUI software
package such as OS/2(R), with every system. An explosion of high-resolution and
high-color applications authored for Windows occurred. By the end of 1992, the
best selling DOS applications in word processing, spreadsheets, graphics and
desktop publishing among others, had been re-written to support the Windows GUI
application interface. PC users benefited from this trend by having a multitude
of applications that ran in higher resolution and/or higher color modes.
However, as the graphical environment became important, so did the need for
increasingly powerful graphics hardware to maintain the users' expectation for
GUI application performance.
Tseng Labs introduced the W32i and the W32p in 1993 to address this demand for
increased Windows graphics acceleration. The W32i and W32p delivered increased
performance, resolution and color, and higher levels of integration to reduce
system chip count and cost. The W32i was the direct replacement for the W32 on
OEM designs. The W32p delivered the memory interface of the W32i with the direct
connection of PCI local bus architecture, an emerging industry standard. Both
the W32i and the W32p enhanced graphic systems performance by using an approach
known as memory interleaving that doubled the graphics processing power of the
device. The original W32 chip provided a 32-bit path between the graphics
controller and its memory. The W32i and W32p used memory interleaving to
effectively double the path to 64-bits, with only a minimum incremental cost to
deliver the enhanced performance. With interleaving, the W32i and W32p could
process 64-bits of graphic data in the same time that the original W32 could
process 32-bits of graphic data.
In 1995, the Windows95(TM) operating system was introduced by Microsoft.
Windows95 provided a number of enhancements over Windows 3.x, including faster
access to graphics and video hardware. Traditionally, game and entertainment
titles depended on fast graphics performance driven by real-time input from a
mouse, joystick, or other device to maintain the illusion of realism. These
title developers largely avoided porting their products from DOS to Windows,
unable to accept the performance penalty Windows' GDI (Graphics Device
Interface) imposed. By accessing the PC graphics hardware directly under DOS,
interactive titles achieved the performance they needed but lost the hardware
independence that Windows provided. Windows95 offered the best of both worlds
and represented an innovative departure from the traditional GUI as a "layer"
between user and the operating system.
Windows95 offered application developers access to a set of programming
interfaces that provide a thin layer of abstraction over graphics and multimedia
hardware acceleration features. Writing to this set of interfaces, known as
DirectX(TM), gives applications high performance and hardware independence as
well as access to other Windows95 features. This performance boost allowed
Windows95 to be positioned as a compelling multimedia operating system for the
growing consumer PC market, as well as for professional use. In late 1995, game
developers began releasing the first wave of titles to take advantage of
DirectX. As this list of software continues to grow, the Company believes that
the demand for graphics solutions that are optimized for Windows95 performance
will continue to increase.
In November 1995, the Company responded with the introduction of the ET6000
during Fall Comdex, and was awarded "Best of Comdex" in the Sound and Display
category. The ET6000 was a state-of-the-art 128-bit graphics and multimedia
engine that integrates a 2D graphics accelerator, a high quality video
processor, a revolutionary interface to Multibank(TM) DRAM (MDRAM) and PCI bus
interface. Optimized for Windows95 graphics performance, the ET6000 was designed
to offer high resolution and color without system performance degradation. The
ET6000 also continues the Company's trend of integrating technology by bringing
two important circuits, the RAMDAC and clock generator inside a single chip,
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positioning the Company to more effectively compete with a number of its
competitors who currently offer this level of integration.
To complement the ET6000 chip's internal video processing engine and to reduce
the required components for multimedia video applications, the Company
introduced the VPR6000(TM) video image processor. The VPR6000 captures digitized
video input, optionally scaling it for transfer to the ET6000 over the Company's
high speed, proprietary Image Memory Access (IMA(TM)) multimedia bus. The
VPR6000 was designed to allow OEMs to create feature-rich, PCI compliant, low
cost multimedia solutions on a single add-in card. The Company began shipping
the ET6000 and VPR6000 in 1996.
Video, Multimedia, and Entertainment
Advancing technologies including faster microprocessors and higher performance
memory have allowed microcomputers to perform more than traditional data
processing applications. Multimedia is the mixing of entertainment,
communications, and data processing capabilities. The majority of multimedia
solutions combine traditional communications, productivity, information,
education and entertainment applications in new ways. In both engineering effort
and market demand, multimedia represents a challenge and an opportunity for
growth for the Company.
The Company has continued to develop technology that responds to the trend
toward more feature-oriented computer systems. All of the members of the W32
family of graphic controllers include two input paths to the display memory. The
first path is for CPU bus data, and is standard on most SVGA and GUI accelerator
chips. The second path is proprietary to the Company and is called Image Memory
Access (IMA) bus. IMA architecture allows video input from a live TV source or
multimedia coprocessor directly into the display memory. In 1994, the Company
provided the VIPeR chip as an IMA bus device to handle display and capture of
live motion video, and to accelerate compressed motion video playback from
single-chip MPEG decoders. Based on a format defined by the Motion Picture
Experts Group, MPEG compression was a good solution for storing high quality
video, and quickly became a defacto industry standard. The high quality video
scaling VIPeR allowed decompressed MPEG images to be enlarged and displayed
without the blocky video artifacts often found in competitive graphics products.
The VIPeR allowed motion data to be dynamically sized in a window in real time,
requiring no recalculation time by the system CPU - meaning that proportional
resizing of the video image window was virtually instantaneous. The video image
window can be adjusted for brightness, contrast, and saturation, and also
coexist on-screen with traditional data processing applications. VIPeR's video
input port and scaling processor also provided a cost-effective and high-quality
solution for displaying broadcast television in a window on the PC. In 1995 the
Company introduced the VIPeR f/x which delivered higher resolution for video
display, among other enhancements. VIPeR and VIPeR f/x were designed for use
primarily with the W32 family of accelerators.
The current generation MPEG compression standard enables feature film motion
pictures to be compressed onto CD-ROMs, and applications for this enhanced MPEG
technology include home entertainment, education, information kiosks, and
others. The Company believes that the market demand for higher quality display
will favor this currently emerging standard, called MPEG-2. The new standard
provides for greater data throughput resulting in a smoother, more realistic
video, and MPEG-2 has been chosen as the video compression method for the
recently announced DVD (Digital Versatile Disk) standard. DVD based video can be
combined with more traditional graphics and live video in new ways to deliver
compelling multimedia solutions for next generation PCs. The Company believes
the ET6000 and VPR6000 family of products is well suited for these solutions due
to its high memory bandwidth, high resolution display capability, 128-bit GUI
accelerator, and integrated video processor for display of multiple scaled video
windows. The VPR6100(TM) was introduced in 1996 as a socket-compatible
enhancement to the VPR6000, providing better synchronization to external devices
and higher quality display. In January, 1997 the Company participated in an
announcement by Microsoft Corp. detailing plans to make personal computers more
interactive by integrating them with television. Reference designs using the
ET6000 and VPR6100 to deliver these features are currently available from the
Company.
3D Graphics for the PC
Driven primarily by the wealth of exciting games available for the PC, 3D
graphics has emerged as a defining feature of the new wave of graphics
accelerators. PC games have evolved considerably over the years, and will
continue to place greater 3D and 2D performance demands on PC processors and
graphics engines. Other entertainment and business applications such as VRML
visualization, 3D presentations and GUIs, training tools and others will also
move into the mainstream to take advantage of the advances in 3D technology, but
games more than any other application will continue to drive the innovation of
3D features in future graphics accelerator chips.
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As the trend towards first person action games on the PC increased, so did the
need for fast frame rates to sustain the illusion of reality. Early titles
traded image complexity for speed, realizing that without sufficient frame rate,
the illusion of reality would be lost. With increasing processor speeds to
calculate and render changing scenes, and faster graphics engines to push pixels
to the screen, developers were able to improve image quality without sacrificing
frame rate. Games emerged that provided an enhanced sensation of depth by
allowing the user to travel "into" the game, turning corners, climbing stairs,
etc. These "2 1/2D" games delivered high frame rates and an added depth element,
often at the expense of high quality scenery. Other titles used the improved
imaging horsepower to model more complex and life-like background scenes, while
limiting the ability of the user to enter the scene, and perhaps limiting frame
rate as well. Animation, video, and high resolution graphics can be used
separately or in combination to achieve these results.
The first wave of true 3D games created scenes modeled from individual objects,
allowing those objects to be rotated and transformed frame by frame. This gives
the user not only a more accurate perception of depth but the ability to move
completely into a scene and around objects, emulating a true three-dimensional
environment. These objects typically are described as a collection of triangles.
Smaller triangles used to compose an object create a finer three dimensional
granularity, providing a more realistic view of the object as it is undergoes
transformation scene by scene. The next wave of 3D games will rely on a greater
number of smaller triangles per frame to improve image quality, demanding system
performance that allows fast processing, or rendering of many triangles per
scene. Advanced triangle rendering techniques such as texture mapping,
perspective correction and filtering will deliver enhanced image quality.
Intel's announcement of the Advanced Graphics Port (AGP) promises to provide a
high bandwidth, dedicated channel to access texture maps and accelerate
rendering of 3D objects. Faster and more powerful Pentium(TM) and Pentium
Pro(TM) microprocessors featuring MMX instruction set enhancements are
challenging game and entertainment developers to incorporate higher quality
audio and video content into new titles. Microsoft's DirectX provides a widely
accepted, high performance API set for applications integrating 2D, 3D, live and
compressed video. These industry standards are enabling a broad market for high
performance, demanding entertainment and business applications. To power this
next wave of rich 3D and multimedia enabled titles requires more than a first
generation 3D controller.
In November, 1996 the Company announced its plans for a family of 3D graphics
accelerators to address the expanding needs of the next generation of 3D titles.
Developed around its award-winning ET6000(TM) 2D graphics and video accelerator,
the first of the new 3D processors called the ET6300(TM) enhances the
industry-leading Windows95 performance and video processing capabilities of the
ET6000 while adding critical 3D features lacking in competitive first generation
3D graphics devices. Featuring an integrated triangle setup engine with floating
point support, bus mastering command list interface and advanced rendering
support, the ET6300 has been designed to accelerate the next generation of
demanding game and entertainment applications. Additional 3D plans announced by
the Company include support for Intel's AGP standard.
ET3000, ET4000, W32, W32i, W32p, ET4000/W32, ET6000, ET6300, VPR6000 and VPR6100
are trademarks of Tseng Labs, Inc., Indeo, Peripheral Component Interconnect
(PCI) and Pentium are trademarks of Intel Corporation, Video for Windows,
Windows 3.0, Windows 3.1, Windows95 and DirectX are trademarks of Microsoft
Corporation, Personal Computer, PS/2, Enhanced Graphics Adapter (EGA), Video
Graphics Array (VGA) are trademarks of IBM Corporation, Motion Pictures Experts
Group (MPEG-1 and MPEG-2, respectively) are trademarks of Motion Pictures Expert
Group, Multibank is a trademark of Mosys Corporation. Other brands and names are
properties of their respective companies.
Factors Which May Affect Results
The Company cautions readers that it operates in a highly competitive and
rapidly changing technology marketplace and that there are many factors,
including those discussed below that, in some cases have, and may in the future,
affect the Company's operating results and could cause the Company's actual
consolidated results for one or more future periods to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company. Statements in this section and other sections of this Form 10-K which
are not historical statements constitute forward looking statements.
The competition in the markets which the Company competes is intense. The market
is characterized by rapid technological change, short product lives (typically
less than 18 months) and severe price competition. The Company is continually
attempting to develop new products to address market requirements. If new
products are not brought to the market in a timely manner or do not address the
market performance and price requirements, then sales and operating results in
future periods could be adversely affected. In addition, if the Company is not
able to effect a smooth transition from one product to another, competitive
forces in the market, including pricing and margin pressures, could result in
substantial fluctuations in quarterly operating results and adversely impact
sales and operating results in future periods. Competitive factors to be
considered include but are not limited to, the timing of new products,
performance, features, price, product availability, breadth of product line and
customer support.
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The Company incurred an operating loss in 1996 and is continuing to operate at a
loss. In addition, the Company is expending significant additional resources to
complete development of its first 3D graphics product. While the effort to
complete development of this product is ongoing, because of the risks involved
in bringing new technologies to market, in the production process of custom
integrated circuits, and the competitive nature of the graphics market as a
whole, there can be no assurance that revenues and earnings from this product
will be sufficient to return the Company to profitability.
The Company's historical operating results have been, and its future operating
results may be, subject to fluctuations, including quarterly fluctuations due to
a variety of factors including, but not limited to, changes in pricing policies
by the Company or its competitors, including anticipated and unanticipated
decreases in average unit selling prices, concentration of a high percentage of
total sales in a few significant customers, gain or loss of significant
customers, cancellations or rescheduling of orders by customers, changes in
product or customer mix, new product introductions and acceptance by the Company
or its competitors, market acceptance of new or enhanced versions of the
Company's or competitors' products, strengths or weaknesses in the overall
markets in which the Company competes and seasonal demand. In addition, because
the Company must order product and build inventory substantially in advance of
customer orders and product shipments and because the markets for the Company's
products are volatile and subject to rapid technological and price changes,
there is a risk that the Company will forecast incorrectly and produce excess or
insufficient inventories of particular products which could adversely impact
operating results.
The semiconductor industry as a whole is characterized by a high percentage of
total sales in a quarter occurring in the third month of a quarter.
Historically, based upon customer demand, the Company has shipped more product
in the third month of each quarter than in either of the first two months. In
addition, shipments in the third month are often higher at the end of the month.
Accordingly, a disruption at the end of a quarter of either production or
shipping could materially impact operating results in that quarter. In addition,
such concentration can cause difficulties in both forecasting production
requirements for a product and/or forecasting operating results for a quarter.
The Company currently relies on outside foundries, packaging houses and test
houses for the manufacturing of its semiconductor devices. The use of third
parties involves many significant risks including, but not limited to, the
absence of adequate capacity to produce the Company's products, unavailability
of, or interruptions in access to the process technologies necessary to
manufacture the Company's products, the absence of guaranteed manufacturing
capacity, reduced control over delivery schedules, manufacturing yields and
costs. The Company may be required to qualify a number of foundries to provide
adequate production capacities for the Company's new products. However, the
qualification process and production ramp-up is a complex process and could take
longer than anticipated and there can be no assurance that such foundries will
be able or willing to produce parts in quantities, in the time frames and at the
price necessary to satisfy both the Company and customer requirements. In
addition, customers may be unable or unwilling to qualify parts from multiple
sources. The inability to meet customer requirements and price points for
delivery of products could adversely impact future operating results.
In addition to the risks associated with delivery of the Company's products, the
PC and the graphics subsystem rely on a number of component parts produced by
third parties. Any shortage of such components could adversely affect the
Company's business and operating results. Also, the Company's ET6000 and
upcoming first generation 3D product have been designed to attempt to optimize
the additional memory bandwidth of MDRAM by Mosys, Inc. Mosys, Inc. is also a
"fabless" semiconductor supplier and may be subject to risks similar to the
Company with respect to many of the business risks discussed above including,
but not limited to, reliance on outside foundries. In addition, market
acceptance of the Company's products may be adversely affected if the cost and
availability of MDRAM is not competitive with other types of memory available
for use in graphics subsystems. To date, Siemens AG is the only major supplier
of memory which has announced plans to produce and directly market MDRAM. Any
shortage of components used in the PC or graphics subsystem could affect the
Company's operating results.
Sales and Marketing
The Company employs traditional OEM channels to market its products. The Company
utilizes an internal sales and marketing team responsible for all aspects of
both domestic as well as international sales. Additionally, the Company uses a
series of independent manufacturers representatives and regional distributors,
to provide marketing and technical support for its customers. The Company
maintains close working relationships with its customers and potential customers
and periodically exchanges advance technical information with them under
nondisclosure agreements. The Company has initiated on-going programs for
continuous improvement geared towards customer satisfaction and fulfillment.
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In North America, the Company uses a combination of a direct sales force
operating from the Company's main headquarters in Newtown, Pennsylvania and
independent manufacturers representatives. The manufacturers representatives are
located in Massachusetts, Alabama, Pennsylvania, North Carolina, Georgia,
California, Texas, Washington, and Oregon.
Internationally, the Company operates an Asian sales and support office located
in Taipei, Taiwan with local distributors located in Hong Kong, Japan, Korea,
Singapore, as well as Taiwan. The European customers are serviced using a direct
sales force based at the Company's headquarters and manufacturers
representatives located in Belgium, Germany, and the United Kingdom.
As the Company's customer base has largely become OEM and add-in board
manufacturers, it has discontinued sales through distribution of its own brand
name products. The Company promotes the acceptance and use of its products
through direct contact with potential customers, coverage in trade and press
articles, and participation in industry trade shows.
During 1996 and 1995, sales to the Company's two largest customers accounted for
38%, and 37%, respectively, of the Company's revenues. Sales to one customer
represented 42% of revenues in 1994. This customer did not contribute
significantly to revenues in 1996 or 1995. In addition, sales to unaffiliated
distributors, primarily in the Far East, accounted for 12%, 12% and 9% of total
revenues for 1996, 1995, and 1994, respectively. (see Note 9 to the Company's
consolidated financial statements). The Company expects a significant portion of
its future sales to remain concentrated within a limited number of strategic
customers. Sales to these customers can fluctuate significantly from quarter to
quarter. In addition, orders from these customers may be subject to cancellation
or rescheduling. There can be no assurance that loss or significant fluctuations
in quarterly sales to the Company's significant customers (including but not
limited to canceling and/or rescheduling orders) may not adversely impact the
Company's operating results in the future.
Total export sales, including those to the Far East distributors, represented
approximately 43%, 59%, and 43% of revenues during 1996, 1995, and 1994,
respectively. As a significant portion of the Company's sales are export sales,
the Company is subject to the risks of conducting business internationally,
including unexpected changes in regulatory requirements, fluctuations in the US
dollar which could increase the sales price in local currencies of the Company's
products in foreign markets, tariffs, and other barriers and restrictions and
the burden of complying with a wide variety of foreign laws.
Product Support and Service
The Company believes that customer service and technical support are of
paramount importance in obtaining and preserving a competitive advantage in the
graphics accelerator market. To that end, the Company provides technical support
to its OEM and add-in board manufacturers through support staffs located in its
Newtown headquarters and in its Taiwan office. Additional support for the
Company's products is provided by manufacturers representatives and
distributors. Tseng also offers support via an electronic bulletin board
service, a site on the internet, evaluation boards, product design support and
demonstration software. Additionally, the Company provides application design
support and upgrading of customer software. By providing the latest enhancements
for its products through software upgrades, the Company can extend the life and
value of its products to the customer.
The Company will periodically provide product road maps, under non-disclosure
agreements, to OEMs and add-in board manufacturers. The Company believes that
such communication will improve customer satisfaction while enhancing the
Company's corporate image. Additionally, the Company believes it can better
understand current and future system requirements through a consistent dialog
with its customers. It is the Company's belief that customer satisfaction is
improved through open communication. Furthermore, the Company believes it can
identify important trends and concerns which assist in defining future products
and services.
Manufacturing
Historically, the Company has purchased all of its product from one foundry. The
Company is attempting to implement a strategy for major new products of
utilizing a number of qualified foundries that it believes provide the
technology, capacity, quality and cost required to support production of that
product. The Company's products are manufactured utilizing CMOS processes and
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current products utilize line geometrics as small as 0.6 micron. New products
are expected to utilize line geometrics starting at 0.35 micron. Most of the
Company's new products are manufactured using advanced triple or quadruple metal
processes. The Company has an on-going program of evaluating foundries with even
smaller geometries for future products. While the Company's strategy is to
develop multiple sources for its major new products to reduce its dependency on
any single foundry, improve its flexibility to respond to customer requirements,
increase the Company's ability to fulfill customer requirements, and gain
greater control over its production costs, the Company has not qualified second
sources for certain of its products. In addition, new products (including the
ET6000) are typically produced initially by a single foundry until alternate
sources can be qualified. The Company currently does not have long-term
contractual supply agreements with its foundries. Historically, the Company has
conducted its business with its foundries by written purchase orders which cover
a period or range of periods. Should a foundry terminate its relationship with
the Company, or its supply from a foundry be interrupted for any other reason,
the Company may not be able to replace, on a timely basis, the production loss
from this foundry.
The Company is working with existing foundries to insure adequate production
capacity for existing and new products and is evaluating the qualification of
new foundries to provide additional manufacturing capacity for its products. If
there are significant delays in qualifying new foundries, shipments of products
could be delayed, which could adversely affect operating results.
Prior to 1995, the Company's foundry also performed the packaging and testing
functions necessary to deliver finished, tested parts to the Company. The
Company paid only for finished, tested parts meeting predetermined
specifications. In 1995, the Company began purchasing product in wafer and
"known good die" forms and managed the subcontracting by third parties of the
assembly and test process. In 1996, the Company purchased the majority of its
product in wafer or "known good die" form and anticipates that it will continue
purchasing new products in wafer or "known good die" form. In the assembly
process, wafers are tested in accordance with predetermined specifications
established by the Company and assembled into packaged parts. The packaged parts
are again tested to the Company's specifications. Product returns to date have
not been significant.
The Company's reliance on third party foundries involves a number of risks
including, but not limited to, the absence of adequate capacity, the
unavailability of, or interruptions in access to the process technologies
utilized by the Company's products, the absence of guaranteed capacity, reduced
control over delivery schedules, manufacturing yields and costs. Inability to
obtain adequate, timely supply sources, whether due to capacity constraints,
disruption at foundry, assembly or test, delays in qualification of new
foundries or other reasons, could adversely affect the Company's operating
results.
In order to obtain an adequate supply of wafers, especially wafers manufactured
using advanced process technologies, the Company has considered and will
continue to consider various possible transactions, including the use of "take
or pay" contracts which commit the Company to purchase specified quantities of
wafers over specified periods or the use of standby letters of credit to secure
future capacity on a "take or pay" basis. In addition, a number of the Company's
competitors have entered into various transactions to secure wafer capacity
including equity investments in or advances to wafer foundries in exchange for
guaranteed production, or the formation of joint ventures to own, construct or
operate a wafer fabrication facility. The Company, to date, has not participated
in advance funding or joint ventures and will continue to work to secure
adequate capacity without such arrangements. Should the Company be required to
enter into any of the above manufacturing arrangements to secure foundry
capacity, such arrangements may require substantial capital investment, which
may require the Company to seek additional equity or debt financing, and there
can be no assurance that such additional financing, if required, will be
available when needed or, if available, will be on satisfactory terms. In
addition, the Company may, from time to time, as business conditions warrants,
invest in or acquire businesses, technology or products that complement the
business of the Company. No such investments or acquisitions are being
negotiated as of the date of this document.
The Company's current foundries and the additional foundries that it is working
to qualify are primarily located in the Far East and Europe. Fluctuations in the
value of the US dollar against local currencies could impact the price paid by
the Company for its products.
Research and Development
The Company believes that a continued investment in engineering personnel and
resources is critical to its ability to timely develop and introduce new
products. This investment in the engineering personnel is viewed as critical to
this effort and competition for attracting and retaining qualified personnel is
intense. The Company conducts most of its product development in-house with an
engineering staff which consisted of 59 personnel at March 1, 1997. The Company
is currently working to further leverage its design resources by both jointly
7
<PAGE>
developing products with technology partners, licensing certain technologies
incorporated in its products and/or utilizing outside, third party contractors
to assist in the development of new products and the portation of existing
products to additional foundries.
The Company uses advanced workstations, dedicated simulators, and a variety of
modeling and layout tools to design products. The engineers also use a high
level design language in the development of products. The Company is committed
to continuing to invest in state-of-the-art computer aided engineering (CAE) and
computer aided design (CAD) tools, to enable its engineers to effectively and
efficiently develop new products which are tested using a variety of hardware
and software modeling simulations. Additional support related to software driver
development and firmware are also located on-site to further enhance Tseng's
ability to bring product to market in the quickest, most cost-efficient manner.
Once developed, the Company offers development kits to customers and potential
customers to assist them in developing products based upon Tseng's technology.
The efforts of the Company resulted in the development of the ET6000 and its
family of products along with its predecessor W32 and ET4000 product families.
In addition, the Company is currently working to develop its initial 3D graphics
product. Research and development expense, including the one-time charge
discussed in Note 3 to the consolidated financial statements, was $14,561,000,
$3,440,000 and $1,922,000 in 1996, 1995 and 1994, respectively.
Competition
The Company competes in a highly competitive marketplace numbering some 50+
participants. The principal competitive factors in the market for PC enhancement
products are price, performance, brand recognition, product quality,
availability, breadth of product line, service and OEM support, the timing of
new product introductions by the Company and its competitors and the emergence
of new standards for graphics, multimedia and PCs. Price competition in the
industry is intense and may increase.
The Company's principle competitors include S3, Inc., Cirrus Logic, Inc., ATI
Technologies, Inc., Trident Microsystems, Inc. and Matrox, Inc. In addition,
Intel Corporation has announced plans to introduce a 3D graphics product during
1997. Many of the Company's competitors have greater financial resources, more
extensive business experience and greater design, development, manufacturing,
marketing and service capabilities than the Company. The rapid pace of
technological change in the computer and computer enhancement market places a
premium on such factors as the knowledge and experience of the Company's
management and personnel and their ability to develop and improve products. For
these reasons, the Company believes its future success to be directly linked to
the development and introduction of new products that are responsive to market
needs. There can be no assurance that the Company will be able to successfully
develop or market such products in a timely manner.
Licenses, Patents and Trademarks
Historically, the Company principally relied upon its advanced technological
innovations to enable it to compete in the graphics accelerator market. The
Company has recently applied for and received its first-ever patent for certain
proprietary functions included in the ET6000 product series. The Company has
attempted to protect its technologies and proprietary information through
non-disclosure agreements with its customers, suppliers, employees, and
consultants. The Company intends to attempt to aggressively protect its
intellectual property.
The Company has been issued trademarks for UltraPak and EVA (an application of
the ET2000 chip) and its ET3000, ET4000, ET4000/W32, W32i , W32p, ET6000,VPR6000
and VPR6100-based chip and board products. The Company believes that an active
trademark program is important to developing and maintaining recognition in the
market for its products.
Backlog
The Company's business, and to a large extent that of the entire semiconductor
industry, is characterized by short lead-time orders and frequent cancellation,
rescheduling and price negotiation of orders. Sales of the Company's products
have been historically made pursuant to purchase orders that are cancelable, at
the customers' option, without significant penalties. Because of the above
factors, the Company does not believe that backlog is a meaningful indicator of
sales in any future period.
8
<PAGE>
Employees
As of March 1, 1997, the Company had 96 full-time employees. Of these, 6 were
engaged in operations; 59 in product and software development; 17 in marketing,
customer service and support; and 14 in management, administrative and financial
positions.
Item 2. Properties
The Company owns a building with 34,000 square feet in an industrial and office
park in Newtown, Pennsylvania which is used as its advanced research and product
development facility, as well as its principal executive office. The Company has
occupied this facility since February 1, 1992.
Item 3. Legal Proceedings
In May 1993, two purported shareholders of the Company brought an action against
the Company and certain of its executive officers in the United States District
Court for the Eastern District of Pennsylvania, alleging that the defendants had
issued false and misleading statements concerning the Company, and thus had
violated the federal securities laws and committed common law fraud and
negligent misrepresentation. Subsequently, several other purported shareholders
filed similar actions in the same forum against the Company and certain of its
executive officers. The actions were consolidated. On July 8, 1994, pursuant to
stipulation, the Court certified a class for the federal securities law claims
and dismissed the state law claims, without prejudice. On August 21, 1995, the
Company filed a motion for summary judgment seeking to dismiss the action in its
entirety. On March 19, 1996, the Court ruled on the Company's motion and
dismissed the action in its entirety. The plaintiff's filed an appeal of the
summary judgment with the United States Court of Appeals for the Third Circuit
which, on January 28, 1997, affirmed the summary judgment order dismissing the
action in its entirety. The Company had recorded the expense of defending these
claims on an as incurred basis.
In addition to the complaint discussed above, the Company is involved in certain
legal actions and claims arising in the ordinary course of business. Management,
after discussion with legal counsel, believes that the outcome of such
litigation and claims will not have a material adverse effect on the Company's
financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
9
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Stockholders Matters
The Company's Common Stock is traded over-the counter under the symbol "TSNG"
There were approximately 1,187 holders of record of the Company's Common Stock
as of February 28, 1997. The following table sets forth, for the periods
indicated, the high and low bid quotations for the Common Stock, as reported by
the National Quotation Bureau.
Bid Prices
--------------------------
High Low
---- ---
1995:
First Quarter $ 7.00 $ 5.63
Second Quarter 9.50 6.25
Third Quarter 10.75 6.75
Fourth Quarter 10.63 7.50
1996:
First Quarter $ 10.63 $ 8.63
Second Quarter 13.06 8.38
Third Quarter 10.00 7.63
Fourth Quarter 6.38 3.00
On March 21, 1997, the closing bid price in the over-the-counter market of the
Company's Common Stock, as reported by the National Quotation Bureau was $3.13.
The high and low closing bid prices of the Company's Common Stock between
January 1, 1997 and March 21, 1997 were $4.38 and $3.00 respectively.
In August 1995, the Company's Board of Directors voted to suspend the Company's
quarterly cash dividend which had commenced in August 1993. Two dividends of
$.05 per share were paid to holders of the Company's Common Stock in 1995 and
four dividends of $.05 per share were paid in 1994. The Company does not
anticipate paying cash dividends in the foreseeable future and currently
intends, as most of its competitors currently do, to retain its cash and
earnings for the development of its business.
10
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year End December 31
-----------------------------------------
(In thousands, except per share amounts)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $26,231 $37,115 $79,418 $75,526 $75,346
Net income (loss) (13,965) 477 9,272 10,782 14,120
Net income (loss) per share (.73) .03 .49 .56 .73
Working capital 36,268 47,155 50,431 49,214 43,293
Total assets 51,539 64,671 65,819 64,434 56,256
Long-term debt -- -- -- -- --
Shareholders' equity 45,228 58,395 59,861 56,674 48,443
Cash dividends per share -- .10 .20 .10 --
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statements in this section other than historical statements constitute forward
looking statements and actual results could materially differ from those
expressed in any forward looking statements by the Company. See "Factors Which
May Impact Results."
Results of Operations
Revenues for 1996 were $26,231,000, a 29% decrease from 1995 levels. The
decrease is due primarily to the fact that shipments of ET6000-based products,
which commenced in volume in the second quarter of 1996, were not sufficient to
offset lower shipments and selling prices of the Company's second generation
accelerator products as these products reached maturation in a rapidly evolving
personal computer market. Sales volumes and selling prices of the Company's
ET6000 chip were adversely affected during 1996 by both high solution costs for
ET6000-based solutions as the ET6000 was designed primarily for use with MDRAM
and MDRAM prices did not keep pace with more industry-standard EDO memory prices
and the market transition at the high end of the graphics market to first
generation 3D graphic accelerators which accelerated in the fourth quarter of
1996. The Company expects operating losses to continue until the Company is
successful in developing and introducing a 3D graphics product which receives
market acceptance. While the Company is currently attempting to complete
development of its first 3D graphics chip, because of the risks involved in
bringing new technologies to market, in the production process of custom
integrated circuits, and the competitive nature of the graphics market as a
whole, there can be no assurance that revenues and earnings from this product
will be sufficient to return the Company to profitability.
Revenues for 1995 were $37,115,000, a 53% decrease from 1994 levels. The
decrease in revenues was due primarily to significantly lower shipments of the
Company's W32i-based products as these products reached maturation in a rapidly
evolving personal computer marketplace. Sales of W32i-based products to one
customer accounted for 42% of revenues in 1994. This entity discontinued its
W32i-based computer systems in the first quarter of 1995. Higher sales of
W32p-based products were not sufficient to offset lower unit shipments of the
W32i and lower selling prices on all of the Company's graphics accelerator
products. The Company introduced the first product of its third generation
graphics and multimedia family, the ET6000, at Comdex in November 1995. This
product was not in volume production in 1995.
Cost of sales as a percentage of revenues was 96% in 1996, 78% in 1995 and 72%
in 1994. The increase in cost of sales in 1996 is due both to pricing pressures
on the ET6000 due to the high solution cost of ET6000-based solutions as MDRAM
price reductions did not keep pace with EDO memory price reductions in 1996 and
a one-time charge of $2,354,000 for reserves for 2D graphics inventory and
purchase commitments related to the Company's decision in the fourth quarter of
1996 to focus on the development of 3D graphics products. The increase in cost
of sales in 1995 is due to the fact that the impact of cost reduction programs
11
<PAGE>
on the W32i and W32p graphics accelerator products was not sufficient to offset
lower selling prices on all of the Company's products. Also contributing to the
increase in 1995 was a one-time reserve of $735,000 recorded by the Company in
the fourth quarter related to establishing a reserve for certain of its older
technology-based inventory.
In the future, the Company's gross margin percentages may be affected by factors
including but not limited to increased competition and related decreases in unit
average selling price (particularly with respect to mature products), timing of
volume shipments of new products, the introduction of new products by
competitors, the availability and cost of products from the Company's suppliers
and changes in the mix of products sold and customers.
Research and development expense in 1996 was $14,561,000, a 323% increase from
the $3,440,000 incurred in 1995. The increase was due to additional personnel
and consulting costs to support the development of its third-generation graphics
products, including completion of the ET6000 and development of the Company's
first 3D graphics accelerator as well as a one-time charge of $8,660,000 related
to the write-off of investments and commitments in technologies related
primarily to 2D graphics and related multimedia products. The Company
anticipates that it will continue to incur significant research and development
expenditures as it continues to develop products to address the very competitive
graphics market. Research and development expense in 1995 was $3,440,000, a 79%
increase from 1994. The increase was due primarily to increased personnel and
outside consulting costs to support the development of the ET6000 product line,
and due to the pursuit of new opportunities to expand the Company's product line
to address multimedia applications.
Selling, general and administrative expenses were 35%, 17% and 9% of revenues in
1996, 1995 and 1994, respectively. The increase in both 1996 and 1995 is due to
lower revenue levels between periods, increased investments in personnel to
enhance the Company's operations, marketing and sales efforts, and the fixed
nature of certain of the Company's operating expenses. One-time charges of
$1,838,000 related primarily to the write-down of an investment in a multimedia
company and the Company's focus on 3D graphics also contributed to the increase
in 1996. In addition, legal costs associated with the successful defense class
action lawsuit referred to in Note 8 of the consolidated financial statements
contributed to the increase in both 1996 and 1995.
The Company's effective income tax rate was a benefit of 34.6% in 1996 compared
to expenses of 17.6% and 35.8% in 1995 and 1994, respectively. The primary
reason for the decreases in 1996 and 1995 is lower pretax income in each period.
Also contributing to the decrease in 1995 was research and development credits
represented a higher percentage of pretax income.
Inflation is not expected to have an adverse significant impact on the Company's
operations.
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its requirements results
primarily from cash on hand, operating cash flow and the availability of bank
borrowing. The Company believes that these sources are sufficient to fund the
Company's 1997 working capital requirements.
Total working capital was $36,268,000 and $47,155,000 at December 31, 1996 and
1995, respectively. The Company's cash and short-term investments decreased to
$22,912,000 at December 1996 from $39,214,000 at December 31, 1995. The decrease
in cash is due primarily to cash used to fund 1996 operations, to purchase
capital equipment to upgrade research and development capabilities and the
advance to the manufacturer of MDRAM discussed in Note 5 to the consolidated
financial statements. The Company also has a bank line of credit providing total
availability of $2,500,000. There were no borrowings on this line in 1996 or
1995.
The Company had capital expenditures of approximately $3,069,000 during 1996,
related primarily to the purchase of equipment and software utilized in the
Company's research and development activities. The Company expects its existing
sources of liquidity to be sufficient to fund its 1997 working capital and
capital expenditure requirements.
In order to obtain an adequate supply of wafers, especially wafers manufactured
using advanced process technologies, the Company has considered and will
continue to consider various possible transactions, including the use of "take
or pay" contracts which commit the Company to purchase specified quantities of
wafers over specified periods or the use of standby letters of credit to secure
future capacity on a "take or pay" basis. In addition, a number of the Company's
competitors have entered into various transactions to secure wafer capacity
including equity investments in or advances to wafer foundries in exchange for
guaranteed production, or the formation of joint ventures to own, construct or
12
<PAGE>
operate a wafer fabrication facility. The Company, to date, has not participated
in advance funding or joint ventures and will continue to work to secure
adequate capacity without such arrangements. Should the Company be required to
enter into any of the above manufacturing arrangements to secure foundry
capacity, such arrangements may require substantial capital investment, which
may require the Company to seek additional equity or debt financing, and there
can be no assurance that such additional financing, if required, will be
available when needed or, if available, will be on satisfactory terms. In
addition, the Company may, from time to time, as business conditions warrant,
invest in or acquire businesses, technologies or products that complement the
business of the Company. No such investments or acquisitions are being
negotiated as of the date of this Form 10K.
Item 8. Consolidated Financial Statements and Supplementary Data
The index to the consolidated financial statements and financial statement
schedule is listed in Item 14 on page 21.
Item 9. Disagreements with Accountants
None
13
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company as of March 28, 1997 are set
forth below:
Name Age Position
- ---- --- --------
Jack Tseng 46 Chairman and President
John J. Gibbons 58 Executive Vice President,
Chief Operating Officer and Director
David Kwok Ping Hui 48 Executive Vice President, Technology
Officer and Director
Mark H. Karsch 41 Senior Vice President, Chief Financial
Officer and Director
James E. Bauer 46 Senior Vice President, Sales and
Marketing
Thomas D. Snodgrass 40 Vice President,
Product Development
Barbara J. Hawkins 52 Vice President and Chief
Administrative Officer
Mark Dorfman 53 Director
Christopher F. Sutphin 60 Director
14
<PAGE>
Jack Tseng has been President (and, as such, serves as the Company's chief
executive officer) and a Director of the Company since December 9, 1983. He also
was Treasurer of the Company until December 1, 1986. He holds a Bachelor's
Degree in Electrical Engineering.
Mr. Gibbons rejoined the Company in December 1996 as Executive Vice President
and Chief Operating Officer. From January 1996 to November 1996, Mr. Gibbons
served as a consultant to the Company. Mr. Gibbons served as the Company's Chief
Financial Officer from January 1989 to May 1991, and as a Vice Chairman from May
1991 to December 1995. Mr. Gibbons has been a director of the Company since
1983.
David Kwok Ping Hui has been Executive Vice President and Technology Officer
since December 1995. Mr. Hui joined the Company in 1983 and had been an
Executive Vice President of the Company from May 1991 to December 1995, prior to
which time he was Senior Vice President responsible for Operations. Mr. Hui also
serves on the board of Directors of Telan Corporation.
Mark H. Karsch has been Senior Vice President and Chief Financial Officer since
December 1995. Mr. Karsch joined the Company in May 1991 as Senior Vice
President, Finance and Administration. Prior to joining the Company, Mr. Karsch
was a senior manager at Arthur Andersen LLP. Mr. Karsch had been with Arthur
Andersen LLP since 1978.
James E. Bauer joined the Company in February 1996 as Senior Vice President,
Sales and Marketing. From 1987 to January 1996, Mr. Bauer held several
management positions at Swan Technologies, Inc., where he most recently served
as Senior Vice President, Sales and Marketing.
Thomas D. Snodgrass joined the Company in October 1996 as Vice President,
Product Launch and Optimization and became Vice President, Product Development
in February 1997. Prior to joining the Company, Mr. Snodgrass held several
management positions at AT&T, where he most recently served as Manager of
Consumer Multimedia Services Development and Deployment.
Barbara J. Hawkins has been Vice President and Chief Administrative Officer of
the Company since December 1995. Ms. Hawkins had been Treasurer of the Company
since December 1986.
Mark Dorfman has been Director of Financial Management of Allegheny Health
Education and Research Foundation since February 1996. From October 1994 to
January 1996, Mr. Dorfman was President of Mark Dorfman & Company which was
engaged in consulting and acquisition related activities. Mr. Dorfman was
President of Quantum Development Corporation from February to September 1994.
Prior to joining Quantum Development Corporation, Mr. Dorfman had been the Chief
Operating Officer and Chief Financial Officer of Robec, Inc., a publicly-traded
corporation, since January 1993, and has been the Vice President-Finance since
December 1987. Mr. Dorfman was also a director of Robec.
Christopher F. Sutphin is President of C B Associates which is engaged in
consulting, venture capital and real estate activities. Mr. Sutphin was Vice
President of General Instrument from June 1987 to June 1990, and President of
its Power Semiconductor Division from June 1987 to September 1990. Prior to that
time, Mr. Sutphin was Senior Vice President of General Instrument's Components
Group.
15
<PAGE>
Item 11. Executive Compensation
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to each of the Company's most highly compensated executive
officers other than the Chief Executive Officer for services rendered in all
capacities to the Company during the fiscal 1996, 1995 and 1994, respectively.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------- ---------------------
Name and All Other
Principal Position Year Salary Bonus(3) Options(2) Compensation (1) (4) (5)
- ------------------ ---- --------- -------- ---------- ------------------------
<S> <C> <C> <C> <C> <C>
Jack Tseng 1996 $246,635 -- 75,000 $ 3,334
President 1995 $296,085 $71,005 150,000 $ 3,234
1994 $206,145 $20,225 -- $14,515
John J. Gibbons 1996 $ 15,984 -- 10,000 $77,187
Executive Vice 1995 $116,249 $ 4,625 80,000 $ 3,234
President 1994 $112,200 $14,925 -- $ 9,272
John A. Vigna 1996 $164,567 -- 78,000 $18,173
Executive Vice
President
David Kwok Ping Hui 1996 $171,658 -- 55,000 $ 3,334
Executive Vice 1995 $169,768 $ 6,100 90,000 $ 3,234
President 1994 $159,135 $19,925 -- $11,840
Mark H. Karsch 1996 $126,237 -- 45,000 $ 3,334
Senior Vice 1995 $121,258 $ 4,625 60,000 $ 3,234
President, 1994 $116,952 $14,925 -- $ 9,499
Chief Financial
Officer
Barbara J. Hawkins 1996 $137,067 -- 45,000 $ 3,334
Vice President, 1995 $127,321 $ 6,100 90,000 $ 3,234
Chief Admin- 1994 $123,604 $19,925 -- $ 9,821
istrative Officer
</TABLE>
(1) Represents amounts contributed by the Company for such executives under
the Company's 401(k) Profit Sharing Plan.
(2) There were no stock options granted to the named executive officers
during 1994.
(3) Pursuant to a study undertook by the Executive Compensation Committee
completed during 1995, the base salary of Mr. Tseng was increased
retroactive to January 1, 1994 to $250,000 and an additional bonus of
$71,005 was awarded for 1994.
(4) Mr. Gibbons "Other Compensation" includes $76,928 of consulting fees
paid pursuant to a consulting agreement for 1996 which was in place prior
to Mr. Gibbons rejoining the Company as Executive Vice President and Chief
Operating Officer in December 1996. The consulting agreement terminated
upon Mr. Gibbons re-commencement of employment with the Company.
(5) Mr. Vigna resigned as the Company's Executive Vice President and Chief
Operating Officer effective December 2, 1996. In connection with the
resignation, Mr. Vigna agreed to be available as an advisor to the
Company's Board of Directors for a period not to exceed 6 months from the
date of his resignation. Additional compensation payable to Mr. Vigna
during this advisory period will not exceed $90,000.
16
<PAGE>
- -------------------------------------------------------------------------------
STOCK OPTIONS
- -------------------------------------------------------------------------------
The following tables summarize options grant to, and exercises by, the Company's
Chief Executive Officer and to each of the Company's most highly compensated
executive officers other than the Chief Executive Officer during fiscal 1996,
and the value of the options held by each such person at the end of fiscal 1996.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Rates of Stock Price
Individual Grants Appreciation for Option Term (4)
------------------------------------------------------------------------------- ---------------------------------
% of Total
Number of Securities Options
underlying Granted Exercise
Options to Employees in Price Expiration
Name Granted (1) Fiscal Year ($/Sh) (2) Date (3) 5% ($) 10% ($)
- ---- ---------------------- ------------------ ------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Jack 75,000 5.6% $8.75 Jan. 15, 2006 $ 412,712 $ 1,045,893
Tseng
John J. 10,000 .8% $8.75 Jan. 15, 2006 $ 55,028 $ 139,452
Gibbons 20,000 1.5% $9.75 Aug. 19, 2006 $ 125,150 $ 317,155
John A. 78,000 5.3% $8.75 Jan. 15, 2006 $ 429,000 $ 1,088,100
Vigna
David 55,000 4.1% $8.75 Jan. 15, 2006 $ 302,656 $ 766,989
Kwok
Ping Hui
Mark H. 45,000 3.4% $8.75 Jan. 15, 2006 $ 247,627 $ 627,536
Karsch
Barbara 45,000 3.4% $8.75 Jan. 15, 2006 $ 247,627 $ 627,536
H.
Hawkins
</TABLE>
(1) Options granted in fiscal 1996, with the exception of those granted to Mr.
Gibbons, vest over a three-year period from the date of grant and become
exercisable upon vesting. Mr. Gibbons options vest in installments over a
one-year period.
(2) The exercise price on the date of grant was equal to 100% of the fair
market value on the date of grant.
(3) The options have a term of 10 years, subject to earlier termination in
certain events related to termination of employment.
(4) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price.
17
<PAGE>
AGGREGATED OPTION EXERCISES IN 1996
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
1996 Year End 1996 Year-End (1)
Shares -------------------------------- ------------------------------
Acquired
on Value Exer- Unexer- Exer- Unexer-
Name Exercise Realized (1) cisable cisable cisable cisable
- ------------- ------------- --------------- --------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jack Tseng - $ - 150,000 75,000 $ - $ -
John J. - $ - 180,000 $ - $ -
Gibbons 10,000
John A. - $ - 105,000 - $ - $ -
Vigna
David Kwok 20,000 $ 107,500 180,000 55,000 $ - $ -
Ping Hui
Mark H. 10,000 $ 51,250 165,000 45,000 $ - $ -
Karsch
Barbara J. - $ - 180,000 45,000 $ - $ -
Hawkins
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date or year-end, as the case may be, minus the
exercise price.
</TABLE>
18
<PAGE>
Compensation Pursuant to Plans
The Company has adopted three Stock Option Plans (the 1984, 1991 and 1995 Stock
Option Plans) (the "Plans"). The 1995 Plan provides for the grant of stock
options to purchase up to 3,000,000 shares of the Company's Common Stock. The
1991 and 1984 Stock Option Plans provide for the grant of stock options to
purchase an aggregate of 3,000,000 shares of the Company's Common Stock.
Eligible participants under the Plans include officers and other key employees
and consultants, as defined in the Plans.
Effective with the approval of the 1995 Plan, all three plans are administered
by a Committee composed of non-employee directors. The 1991 and 1984 Plans had
been administered by two Stock Option Committees. One Committee was composed of
non-employee directors with respect to principal officers of the Company (as the
term "officer" is defined in Rule 166-1(f) under the Securities Exchange Act of
1934, as amended), while the Committee with respect to non-principal officers
was comprised of three directors who are also officers of the Company.
Under the 1995 and 1991 Stock Option Plans, the Company may grant non-qualified
stock options, incentive stock options or a combination thereof. The 1984 Stock
Option Plan provides only for the granting of non-qualified stock options. The
option exercise price for both incentive and non-qualified stock options granted
under the Plans may not be less than the fair market value of the Common Stock
on the date the stock option is granted. To date, all grants under the Plans
have been non-qualified stock options. Participants who receive non-qualified
stock options will be deemed to receive taxable income at ordinary income rates
upon exercise for the difference between the exercise price and the fair market
value of the Company's Common Stock at the date of exercise.
At December 31, 1996, the Company had outstanding options to purchase an
aggregate of 2,532,800 shares of Common Stock at exercise prices ranging from
$3.00 to $13.75 per share, with a weighted average price per share exercise
price of $7.42. A total of 1,717,493 shares of Common Stock are available for
future issuance under the Plans.
Non-Employee Director Compensation
Directors who are not employees receive an annual retainer of $20,000 plus
reimbursement for out-of-pocket expenses. The Company also has a stock option
plan for non-employee directors ("Directors Plan") under which the outside
directors are granted options at fair market value to purchase Common Stock.
Directors receive options to purchase 20,000 shares of Common Stock upon their
initial election to the Board and additional options for every two years of
service on the Board. The options vest 50% at grant and 50% on the first
anniversary of grant. At December 31, 1996, a maximum of 40,000 additional
options may be granted under the plan. At December 31, 1996, 127,500 options
were outstanding under the plan at an average exercise price of $10.33 per
share. There were no options exercised by outside directors in 1996 and 1995.
19
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table lists as of February 28, 1997 the number of shares of the
Company's Common Stock beneficially owned by all persons known to the Company to
be beneficial owners of more than 5% of the Company's Common Stock, by all
directors and key personnel of the Company as a group, and the percentage of all
outstanding shares held by such persons:
Amount
Name of Beneficial Owner (1) Beneficially Owned Percentage
- --------------------------- ------------------ ----------
Jack and Fay Tseng 5,553,812 (2) (3) (4) 27.5%
Officers, Directors and Key Personnel 6,542,857 (4) (5) 32.3%
as a group (10 persons)
(1) The address of all persons listed in this table is c/o 6 Terry Drive,
Newtown, Pennsylvania 18940.
(2) Shares are owned by Mr. and Mrs. Tseng as joint tenants.
(3) Includes 1,140,000 shares owned by Mr. and Mrs. Tseng's minor children as
to which they disclaim beneficial ownership.
(4) Includes 175,000 shares subject to options exercisable on or within 60 days
after March 31, 1997.
(5) Includes 1,155,833 shares subject to stock options exercisable on or within
60 days after March 31, 1997.
Item 13. Certain Relationships and Related Transactions
The Company had participated in two rounds of financing and has invested
$1,000,000 in a minority interest in preferred stock of a start-up multimedia
product company. The Company has also advanced this entity $359,000 in the form
of a secured loan. In connection with an additional round of financing, which
closed in the first quarter of 1997, the Company agreed to significant dilution
in its ownership percentage and to forgive 50% of the secured note, the balance
of which will be repaid early in 1997. The write-down of this investment and
impact of the debt forgiveness is included in the one-time charge described in
Note 3 to the consolidated financial statements. The Company had been carrying
this investment at cost. This entity is in the start-up stage and is incurring
operating losses. Sales to this entity were approximately $364,000 and $180,000
in 1996 and 1995, respectively.
20
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as part of this report: Page
(1) Consolidated Financial Statements
Report of Independent Public Accountants F-1
Consolidated Balance Sheets--December 31, 1996 and 1995 F-2
Consolidated Statements of Income-
Years Ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Shareholders' Equity-
Years Ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows-
Years Ended December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedule
Schedule II-- Valuation and Qualifying Accounts S-1
(3) Exhibits
*3-a. Articles of Incorporation of Registrant, as amended
*3-b. By-Laws of Registrant, as amended
* 4. Specimen of Common Stock Certificate
9. None
**10-a. Lease Agreement dated January 8, 1987, among Jeyan Boulton,
John Boulton and Tseng Labs, Inc.
**10-b. Tseng Labs, Inc. Nonqualified Stock Option Plan
**10-c. Agreement for Acquisition of Stock and Plan of Reorganization
dated May 1, 1986, among Telan Corporation et al. and Tseng
Labs, Inc., John J. Gibbons et.al
**10-d. Volume Sales Agreement dated August 1, 1986, between Tseng
Labs, Inc. and NEC Home Electronics (U.S.A.) Inc.
***10-e. Tseng Labs, Inc. 1991 Stock Option Plan
***10-f. Tseng Labs, Inc. 1991 Special Directors Stock Option Plan
**** 10-g. Tseng Labs, Inc. 1995 Stock Option Plan
21
<PAGE>
Page
11. See Note 2 of Notes to Consolidated Financial Statements
12. Inapplicable
13. Inapplicable
18. None
19. None
22. The Company wholly owns Tseng International Labs, Inc. a
Nevada corporation, and Tseng International Labs, Inc.,
a Delaware corporation.
23. Inapplicable
24. Inapplicable
24.1 Consent of Independent Public Accountants S-2
25. Inapplicable
28. None
29. Inapplicable
- ---------------
* Exhibit incorporated by reference to Exhibit of the same number filed
with the Registrant's Registration Statement on Form 10.
** Exhibit incorporated by reference to Exhibit of the same number filed
with Registrant's Form 10-K for year ended December 31, 1986.
*** Exhibit incorporated by reference to Exhibit of the same number filed
with Registrant's Form 10-K for year ended December 31, 1991.
**** Exhibit incorporated by reference to Exhibit of the same number filed
with Registrant's Form 10-K for year ended December 31, 1995.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1996.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By:/s/JACK TSENG
--------------------
Jack Tseng, President
Dated March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/JACK TSENG President and Director March 28, 1997
- ------------- (PrincipalExecutive Officer
Jack Tseng
/s/JOHN J. GIBBONS Vice Chairman and Director March 28, 1997
- ------------------
John J. Gibbons
/s/DAVID KWOK PING HUI Executive Vice President March 28, 1997
- ---------------------- and Director
David Kwok Ping Hui
/s/MARK H. KARSCH Chief Financial Officer March 28, 1997
- ----------------- and Director
Mark H. Karsch
/s/BARBARA J. HAWKINS Vice President (Principal March 28, 1997
- --------------------- Accounting Officer)
Barbara J. Hawkins
/s/MARK DORFMAN Director March 28, 1997
- ---------------------
Mark Dorfman
/s/CHRISTOPHER F. SUTPHIN Director March 28, 1997
- -------------------------
Christopher F. Sutphin
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tseng Labs, Inc:
We have audited the accompanying consolidated balances sheets of Tseng Labs,
Inc. (a Utah corporation) and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tseng Labs, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at Item
14 is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
February 8, 1997
F-1
<PAGE>
TSENG LABS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31
------------------------
ASSETS 1996 1995
- ------
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 7,996 $ 9,004
Short-term investments 14,916 30,210
Accounts receivable, net of allowance for
doubtful accounts of $168 and
$678 respectively 5,165 5,924
Inventories 2,369 3,408
Note receivable 4,441 803
Recoverable income taxes 5,824 646
Prepaid expenses and other 877 1,125
----------- -----------
Total current assets 41,588 51,120
----------- -----------
PLANT AND EQUIPMENT:
Land and buildings 2,972 2,715
Equipment 11,400 8,721
Furniture and fixtures 719 586
----------- -----------
15,091 12,022
Less accumulated depreciation (5,758) (4,326)
----------- -----------
Net plant and equipment 9,333 7,696
----------- -----------
DEFERRED COSTS, net - 3,817
----------- -----------
OTHER ASSETS 618 2,038
----------- -----------
$ 51,539 $ 64,671
=========== ===========
<PAGE>
December 31
------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- ------------------------------------ ---------- -----------
CURRENT LIABILITIES:
Accounts payable $ 2,098 $ 2,834
Accrued expenses 3,222 1,131
---------- -----------
Total current liabilities 5,320 3,965
---------- -----------
DEFERRED INCOME TAXES 991 2,311
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, $.005 par value
authorized 50,000,000 shares:
issued 19,604,087 shares
in 1996 and 19,483,487
shares in 1995 98 97
Additional paid-in-capital 11,113 10,316
Retained earnings 38,660 52,625
---------- -----------
49,871 63,038
Less-Treasury stock at cost,
519,250 shares (4,643) (4,643)
---------- -----------
Total shareholders' equity 45,228 58,395
========== ===========
$ 51,539 $ 64,671
========== ===========
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
TSENG LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amount)
Year Ended December 31
-------------------------------------
1996 1995 1994
----------- ---------- ----------
NET SALES $ 26,231 $ 37,115 $ 79,418
COST OF SALES (Note 3) 25,255 28,930 57,541
----------- ---------- ----------
Gross Profit 976 8,185 21,877
RESEARCH AND DEVELOPMENT (Note 3) 14,561 3,440 1,922
SELLING, GENERAL AND
ADMINISTRATIVE (Note 3) 9,239 6,328 6,761
----------- ---------- ----------
Operating income (loss) (22,824) (1,583) 13,194
INTEREST INCOME 1,487 2,162 1,241
----------- ---------- ----------
Income (loss) before income taxes (21,337) 579 14,435
INCOME TAX (BENEFIT) (7,372) 102 5,163
----------- ---------- ----------
NET INCOME (LOSS) $ (13,965) $ 477 $ 9,272
=========== ========== ==========
NET INCOME (LOSS) PER SHARE $ (.73) $ .03 $ .49
=========== ========== ==========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 19,020 18,983 19,090
=========== ========== ==========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
TSENG LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock
........................... Additional Total
Par Paid-in Retained Treasury Shareholders'
Shares Value Capital Earnings Stock Equity
------------ ------------ ------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 19,433,487 $ 97 $ 9,978 $ 48,589 $ (1,990) $ 56,674
Exercise of stock options 2,500 - 18 - - 18
Tax benefit from exercise of
nonqualified stock options - - 1 - - 1
Cash dividends, $.20 per common share - - - (3,822) - (3,822)
Purchase of treasury stock - - - - (2,282) (2,282)
Net income - - - 9,272 - 9,272
------------ ------------ ------------- ------------ ------------ ----------------
BALANCE, DECEMBER 31, 1994 19,435,987 97 9,997 54,039 (4,272) 59,861
Exercise of stock options 47,500 - 292 - - 292
Tax benefit from exercise of
nonqualified stock options - - 27 - 27
Cash dividends, $.10 per common share - - - (1,891) (1,891)
Purchase of treasury stock - - - - (371) (371)
-
Net income - - - 477 477
------------ ------------ ------------- ------------ ------------ ----------------
BALANCE, DECEMBER 31, 1995 19,483,487 97 10,316 52,625 (4,643) 58,395
Exercise of stock options 120,600 1 630 631
- -
Tax benefit from exercise of
nonqualified stock options - - 167 - - 167
Net loss - - (13,965) - (13,965)
============ ============ ============= ============ ============ ================
BALANCE, DECEMBER 31, 1996 19,604,087 $ 98 $ 11,113 $ 38,660 $ (4,643) $ 45,228
============ ============ ============= ============ ============ ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
TSENG LABS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (13,965) $ 477 $ 9,272
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization 2,455 2,889 2,100
Deferred income taxes (1,320) 64 460
Deferred costs write-off 5,718 - -
(Increase) decrease in--
Accounts receivable 759 4,667 3,952
Inventories 1,205 378 144
Recoverable income taxes (5,178) (646) -
Prepaid expenses and other 248 (678) 464
Other assets 1,421 (570) (710)
Increase (decrease) in--
Accounts payable (736) (304) (2,523)
Accrued expenses 2,091 558 261
------------- ------------- --------------
Net cash provided by (used in) operating activities (7,302) 6,835 13,420
------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (3,069) (2,211) (2,118)
Increase in deferred costs (2,924) (1,982) (1,702)
Decrease (increase) in short-term investments 15,294 (28,810) (1,400)
Increase in note receivable (3,638) - -
------------- ------------- --------------
Net cash provided by (used in) investing activities 5,663 (33,003) (5,220)
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 631 292 19
Dividends paid - (1,891) (3,822)
Purchase of treasury stock - (371) (2,282)
------------- ------------- --------------
Net cash provided by (used in) financing activities 631 (1,970) (6,085)
------------- ------------- --------------
Net (decrease) increase in cash and cash equivalents (1,008) (28,138) 2,115
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,004 37,142 35,027
------------- ------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,996 $ 9,004 $ 37,142
============= ============= ==============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 20 $ 707 $ 3,502
============= ============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
TSENG LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND:
Tseng Labs, Inc. is a developer of custom semiconductor devices and
board level enhancement products that expand the graphics
capabilities and performance of IBM and IBM-compatible personal
computers. The Company's primary operations are located in the United
States. The Company sells its products primarily to computer systems
manufacturers (OEMs), video subsystem and video add-in board
manufacturers in the United States, Europe and Asia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Tseng
Labs, Inc. and its wholly owned subsidiaries (the Company). All
significant intercompany transactions and balances have been
eliminated. The preparation of financial statements in conformity
with generally accepted accounting principals requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities, contingent liabilities, revenues and expenses
during a reporting period. The Company operates in very competitive
and rapidly changing markets. Actual results could differ from
management estimates.
Inventories
Inventories, which consist of materials, labor and overhead, are
stated at the lower of weighted average cost or market and consist of
the following ( in thousands):
December 31
--------------------------
1996 1995
---- ----
Purchased parts $ 769 $ 662
Finished goods 1,600 2,746
------- --------
$2,369 $ 3,408
======= =======
Plant and Equipment
Plant and equipment are stated at cost. Depreciation is computed
using the straight-line method over the following estimated useful lives:
Building 25 years
Equipment 5-7 years
Furniture and Fixtures 10 years
Depreciation expense was $1,432,000, $1,080,000, and $862,000 in
1996, 1995, and 1994, respectively.
Deferred Costs
Research and development costs incurred in developing the Company's
proprietary chips are charged to expense as incurred until
technological feasibility has been established. Thereafter, all costs
incurred in refining and testing the chips are capitalized. These
deferred costs are amortized on a product-by-product basis over the
F-6
<PAGE>
estimated revenue stream of the related product. Management
periodically evaluates whether factors indicate that there is an
impairment of the deferred costs and, accordingly, the carrying value
is adjusted to reflect such impairment, if any. In the fourth quarter
of 1996, the Company determined that its investment and future
commitments of $8,660,000 related primarily to its current generation
2D graphics and multimedia products was not recoverable over the
revenue stream of future 2D graphics products. Accordingly, the
entire balance was written-off. During 1995, the Company wrote-off
approximately $307,000 of deferred costs which were identified as not
recoverable over the revenue stream of future generation products.
Amortization of deferred costs was $1,023,000 in 1996, $1,451,000 in
1995, and $1,238,000 in 1994.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the treasury stock
method based on the weighted average number of common stock and
common stock equivalents outstanding during each year.
Cash and Short-Term Investments
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents for
the purpose of determining cash flows.
The Company adopted Statement of Financial Accounting Standard No.
115 "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115) effective January 1, 1994. Management
determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance
sheet date. As of December 31, 1996 and 1995, all of the Company's
short-term investments were U.S. Government securities which have
been classified as hold to maturity and reflected at amortized cost
in the accompanying balance sheets. The estimated fair value of each
investment approximated cost at both December 31, 1996 and 1995.
There was no cumulative effect as a result of adopting SFAS No.
115 in 1994.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of cash equivalents,
short-term investments and accounts and notes receivable. By policy,
the Company places its short-term investments only with high-quality
financial institutions and, other than U.S. Government Treasury
instruments, limits the amounts invested in any one institution or
type of investment. Substantially all of the Company's accounts
receivable are derived from sales to manufacturers of computer
systems, subsystems and value-added resellers. The Company performs
ongoing credit evaluations of its customers' financial condition.
Approximately 43%, 59%, and 43% of the Company's sales in 1996, 1995
and 1994, respectively, were export sales. To date, substantially all
such sales have been in U.S. dollars. To reduce credit risk, the
Company generally requires international customers to furnish letters
of credit. Historically, the Company has not incurred material
credit-related losses.
Revenue Recognition
Revenue is recognized upon product shipment. Accruals for estimated
sales returns and allowances are recorded at the time of sale.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-7
<PAGE>
Recently Issued Financial Standards
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets to be Disposed of" (SFAS No. 121)
which establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used for long-lived assets and
certain intangibles to be disposed of. The Company adopted SFAS No.
121 effective January 1, 1996. The adoption did not have a material
effect on the Company's financial condition or results of operation.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.123, "Accounting for
Stock-Based Compensation"(SFAS No. 123). SFAS No. 123 established
financial and reporting standards for stock-based employee
compensation plans. This statement also applies to transactions in
which an entity issues its equity securities to acquire goods or
services from non-employees. The Company has adopted the disclosure
requirement of this statement (see Note 7).
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
3. ONE-TIME CHARGES:
In the fourth quarter of 1996, the Company announced its intention to
focus its efforts on 3D graphics products and in connection therewith
recorded one-time charges of $13,899,000 or $.48 per share. The
charges related primarily to inventory reserves on 2D graphics
products and purchase commitments ($2,354,000), pricing adjustments
made to certain customers due to significant ET6000 price reductions
in the fourth quarter ($1,047,000), the write-off of investments and
commitments in technologies related primarily to 2D graphics and
multimedia products ($8,660,000), the write-down of an investment in
a multimedia company ($1,180,000) and other costs related primarily
to this refocus ($658,000).
In the fourth quarter of 1995, the Company recorded a charge to cost
of sales of approximately $735,000 related to a potential decline in
the market value of certain older technology-based inventory.
4. LINE OF CREDIT:
The Company has an unsecured $2,500,000 demand line of credit with a
bank. The line bears interest at prime and places limits on, among
other things, additional long-term debt, payment of dividends and
capital expenditures. There were no borrowings under the line in 1996
and 1995.
5. NOTE RECEIVABLE:
In April 1996, the Company amended and expanded a secured loan
agreement with the entity that designed, manufactures and markets
Multibank DRAM (MDRAM). Under the expanded agreement, the Company
advanced this entity $6,500,000 in the form of a secured, interest
bearing note. The balance of the note is due in installments through
April 1997. The Company has the right, at its option, to convert a
portion of the outstanding note into equity at valuations specified
in the agreement.
F-8
<PAGE>
6. INCOME TAXES:
The provision (benefit) for income taxes is comprised of the
following (in thousands):
Federal- 1996 1995 1994
---- ---- ----
Current $ (6,042) $ 12 $ 4,167
Deferred (1,320) 64 388
--------- -------- --------
$ (7,362) 76 4,555
--------- -------- --------
State-
Current (10) 26 536
Deferred - - 72
--------- -------- --------
(10) 26 608
--------- -------- --------
$ (7,372) $ 102 $ 5,163
========= ======== ========
Income tax expense differs from the amount currently payable because
certain revenues and expenses are reported in different periods for
financial reporting and tax purposes. The principal differences
involve the timing of deducting software development costs and
different methods used in computing financial statement and tax
depreciation.
A reconciliation of the statutory federal income tax rate to the
Company's effective tax rate follows:
1996 1995 1994
---- ---- ----
Federal statutory rate (34.0%) 34.0% 35.0%
State income taxes, net
of federal benefit - 3.0 2.7
Tax credits utilized (.6%) (23.0) (1.8)
Other - 3.6 ( .1)
------- ----- ------
(34.6%) 17.6% 35.8%
======= ===== ======
The Company's deferred tax assets, both individually and in the
aggregate, are not material at December 31, 1996 and 1995.
7. STOCK OPTION PLANS:
During 1995, the Company adopted the 1995 stock option plan which
permits the issuance of either incentive or nonqualified stock
options to employees and nonqualified options to key consultants. A
maximum of 3,000,000 shares of common stock has been reserved for
issuance under this plan. The Company also has two additional
nonqualified stock option plans (the 1991 and 1984 stock option
plans) under which a maximum of 3,000,000 shares of common stock have
been reserved for issuance. Options under all three plans must be
granted at a price not less than 100% of the fair market value of the
common stock on the date of grant. Options granted under the plans
become exercisable as determined by the Stock Option Committees of
the Board of Directors at the time of the grant and may have terms
extending to 10 years.
F-9
<PAGE>
A summary of stock option activity related to these plans is as
follows:
<TABLE>
<CAPTION>
Aggregate
Outstanding Options Number Price Range Price
----------- ----------------- ------------
<S> <C> <C> <C>
Balance, January 1, 1994 718,000 $ 2.66-18.13 $ 7,750,831
Granted 64,400 6.63-10.75 526,743
Exercised (2,500) 7.38-11.88 (17,413)
Canceled (29,000) 10.63-14.50 (371,000)
----------- ----------------- ------------
Balance, December 31, 1994 750,900 2.66-18.13 7,889,151
Granted 1,231,200 5.63-9.13 8,783,000
Exercised (47,500) 3.00-5.63 (261,937)
Canceled (275,000) 5.63-18.13 (3,312,092)
----------- ----------------- ------------
Balance, December 31, 1995 1,659,600 3.00-13.75 13,098,122
Granted 1,308,550 5.75-10.50 9,015,994
Exercised (109,600) 2.66-6.63 (562,825)
Canceled (325,750) 5.75-10.50 (2,754,769)
----------- ----------------- ------------
Balance, December 31, 1996 2,532,800 $ 3.00-13.75 $18,796,522
----------- ----------------- ------------
</TABLE>
As of December 31, 1996, a maximum of 1,582,000 and 135,493
additional options may be granted under the 1995 and 1991 plans,
respectively. No additional options may be granted under the 1984
plan. There were 995,750 options with an average exercise price of
$8.23 per share exercisable at December 31, 1996. The options expire
on various dates through 2006.
In July 1991, the Board of Directors adopted the Special Directors
Stock Option Plan, under which outside directors are granted options
at fair market value to purchase common stock. Directors receive
options upon their initial election to the Board and additional
options for every two years of service on the Board. The options vest
50% at grant and 50% on the first anniversary of grant. A maximum of
200,000 shares have been reserved for grant under the plan. As of
December 31, 1996, a maximum of 40,000 additional options may be
granted under this plan. At December 31, 1996, 127,500 options were
outstanding under the plan at an average exercise price of $10.33 per
share. There were no options exercised in 1996, 1995 and 1994 by
outside directors.
The Company applies Accounting Principal Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and the related
interpretations in accounting for its stock option plans. The
disclosure requirement of FASB Statement No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") was adopted by the Company in
1996. Had compensation cost for the Company's stock option plans been
determined based upon the fair value of the options at the date of
grant, as prescribed under SFAS 123, the Company's net income (loss)
would have been reduced to the following pro forma amounts:
Year Ended December 31
..................................
1996 1995
---- ----
Net income (loss), as reported $ (13,965,000) $ 477,000
Pro forma loss $ (15,967,000) $ (35,000)
The fair value of the options granted during 1996 and 1995 has been
calculated using the Black-Scholes option pricing model with the
following assumptions: dividend yield - 0.0%, volatility - 70.%,
risk-free interest rate - 6.0%, an expected life of 4 years.
F-10
<PAGE>
8. COMMITMENTS AND CONTINGENCIES:
The Company purchases all of its video graphics chips from
independent foundries. During 1996, the Company purchased
substantially all its video graphics chips from one foundry. The use
of third parties to manufacture, package and test the Company's
products involves a number of significant risks including, but not
limited to, the absence of adequate capacity to produce the Company's
products, unavailability of, or interruptions in access to the
process technologies necessary to manufacture the Company's products,
the absence of guaranteed manufacturing capacity and reduced control
over delivery schedules, manufacturing yields and costs. The Company
has various purchase commitments, including commitments to its
foundries, for materials and supplies used in the ordinary course of
business. In connection with the Company's focus on developing 3D
graphics products discussed in Note 3, the Company recorded a reserve
on future purchase commitments for 2D graphics products of
approximately $490,000 in the fourth quarter of 1996.
In May 1993, two purported shareholders of the Company brought an
action against the Company and certain of its executive officers in
the United States District Court for the Eastern District of
Pennsylvania, alleging that the defendants had issued false and
misleading statements concerning the Company, and thus had violated
the federal securities laws and committed common law fraud and
negligent misrepresentation. Subsequently, several other purported
shareholders filed similar actions in the same forum against the
Company and certain of its executive officers. The actions have been
consolidated. On July 8, 1994, pursuant to stipulation, the Court
certified a class for the federal securities law claims and dismissed
the state law claims, without prejudice. On August 21, 1995, the
Company filed a motion for summary judgment seeking to dismiss the
action in its entirety. On March 19, 1996, the Court ruled on the
Company's motion and dismissed the action in its entirety. The
plaintiff's filed an appeal of the summary judgment with the United
States Court of Appeals for the Third Circuit which, on January 28,
1997, affirmed the summary judgment order dismissing the action in
its entirety. The Company had recorded the expense of defending these
claims on an as incurred basis.
In addition to the complaints discussed above, the Company is
involved in certain legal actions and claims arising in the ordinary
course of business. Management, after discussion with legal counsel,
believes that the outcome of such litigation and claims will not have
a material adverse effect on the Company's financial position.
9. EXPORT SALES AND MAJOR CUSTOMERS:
The Company's primary operations are located in the United States.
The Company sells its products primarily into the personal computer
market in the United States, Europe and Asia. Sales into the Asian
market are primarily through six unaffiliated distributors. Total
export sales, including sales to the distributors discussed above,
were 43%, 59%, and 43% of the Company's sales in 1996, 1995 and 1994,
respectively. As a significant portion of the Company's sales are
export sales, the Company is subject to the risks of conducting
business internationally, including unexpected changes in regulatory
requirements, fluctuations in the US dollar which could increase the
sales price in local currencies of the Company's products in foreign
markets, tariffs, and other barriers and restrictions and the burden
of complying with a wide variety of foreign laws.
Two customers accounted for 38% and 37% of revenues in 1996 and 1995,
respectively. One customer accounted for 42% of revenues in 1994.
10. RELATED-PARTY TRANSACTIONS:
The Company had participated in two rounds of financing and has
invested $1,000,000 in a minority interest in preferred stock of a
start-up multimedia product company. The Company has also advanced
this entity $359,000 in the form of a secured loan. In connection
with an additional round of financing, which closed in the first
quarter of 1997, the Company agreed to significant dilution in its
ownership percentage and to forgive 50% of the secured note, the
balance of which will be repaid early in 1997. The write-down of this
investment and impact of the debt forgiveness is included in the
one-time charge described in Note 3. This entity is in the start-up
stage and is incurring operating losses. Sales to this entity were
approximately $364,000 and $180,000 in 1996 and 1995, respectively.
F-11
<PAGE>
The Company entered into a split-dollar insurance agreement with a
trust established by Jack Tseng pursuant to which the Company will
advance fund the premium costs of a whole life insurance policy that
pays a death benefit to the trust of not less than $10 million upon
the death of Jack Tseng. The premium advances are secured by a note
and collateral assignment agreement with respect to the death benefit
payable thereunder. Upon surrender of the policy by Mr. Tseng or
payment of the death benefit thereunder, the Company is entitled to
repayment of the cumulative premiums previously advanced by the
Company, with all remaining payments made to the Tseng trust. Total
premium advances through December 31, 1996 were $381,000.
11. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1996 and 1995 are as follows:
Quarter
----------------------------------------
First Second Third Fourth
----- ------ ----- ------
(In thousands, except per share amounts)
1996
Net sales $ 4,107 $ 6,744 $ 12,360 $ 3,020
Cost of sales 3,830 5,515 9,694 6,216
Net (loss) (1,417) (1,031) (463) (11,054)
Net income (loss) per
share (.07) (.5) (.02) (.58)
1995
Net sales $11,482 $ 9,498 $ 8,880 $ 7,255
Cost of sales 8,036 7,309 6,973 6,612
Net income (loss) 1,056 304 100 (983)
Net income (loss) per
share .06 .02 .01 (.05)
F-12
<PAGE>
SCHEDULE II
TSENG LABS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(In thousands)
Balance, Charges Deductions Balance,
Beginning to from End of
of Year Expense Recoveries Reserve Year
--------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
December 31, 1996:
Reserve for
doubtful accounts $ 678 $ 154 $ --- $ (664) $ 168
----- ----- ---------- ------- -----
December 31, 1995:
Reserve for
doubtful accounts $ 861 $ 363 $ --- $ (546) $ 678
----- ----- --------- -------- -----
December 31, 1994:
Reserve for
doubtful accounts $ 625 $ 871 $ --- $ (635) $ 861
----- ----- --------- -------- -----
</TABLE>
S-1
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the
Company's previously filed Form S-8 Registration Statements, file
numbers 33-44112 and 33-44113, both dated November 18, 1991.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
March 28, 1997
S-2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,996
<SECURITIES> 14,916
<RECEIVABLES> 5,333
<ALLOWANCES> 168
<INVENTORY> 2,369
<CURRENT-ASSETS> 41,588
<PP&E> 15,091
<DEPRECIATION> (5,758)
<TOTAL-ASSETS> 51,539
<CURRENT-LIABILITIES> 5,320
<BONDS> 0
0
0
<COMMON> 98
<OTHER-SE> 45,130
<TOTAL-LIABILITY-AND-EQUITY> 51,539
<SALES> 26,231
<TOTAL-REVENUES> 26,231
<CGS> 25,255
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,487
<INCOME-PRETAX> (21,337)
<INCOME-TAX> (7,372)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,965)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> 0
</TABLE>
