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.
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,
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.
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.
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.
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
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
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.
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.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
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.
Item 6.
Item 6. Selected Financial Data
Item 7.
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
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
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.
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.
Item 9. Disagreements with Accountants
None
PART III
Item 10.
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
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.
Item 11.
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
(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.
- ------------------------------------------------------------------------------- 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
(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.
AGGREGATED OPTION EXERCISES IN 1996
AND YEAR-END OPTION VALUES
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.
Item 12.
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.
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.
Item 14.
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
Consolidated Balance Sheets--December 31, 1996 and 1995
Consolidated Statements of Income- Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity- Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows- Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(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
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.
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
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
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 =========== ===========
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.
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.
TSENG LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
The accompanying notes are an integral part of these statements.
TSENG LABS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
The accompanying notes are an integral part of these statements.
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
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.
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.
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.
A summary of stock option activity related to these plans is as follows:
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.
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.
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)
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)
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)
SCHEDULE II
TSENG LABS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
S-1
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