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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1997
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from___________________ to ___________________________
Commission file Number 6-13502
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Tseng Labs, Inc.
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(Exact name of registrant as specified in its charter)
Utah 87-0391229
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State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
18 W. Airy St. Suite 100, Norristown, Pennsylvania 19401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act : (610) 313-9388
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Name of each exchange on
Title of each class which registered
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.005 par value per share
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(Title of class)
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_ No_____.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (see
definition in Rule 405, 17 CFR 230.405.)
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Note--If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense, the
aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this form.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
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(Applicable Only To Corporate Registrants)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.*
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DOCUMENTS INCORPORATED BY REFERENCES
List hereunder the following documents if incorporated by reference and the Part
of the Form 10- K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
None
*As of February 28, 1998, 15,088,337 common shares were outstanding. The
aggregate market value of the 15,031,125 common shares outstanding (based upon
the average of the closing price of these shares as of February 27, 1998, as
reported by NASDAQ) and held by non-affiliates was $23,486,133.
This report (including Exhibits) contains 32 pages.
The index to Exhibits starts on page 15.
PART I
Item 1. Business
Overview
Tseng Labs, Inc. ("Tseng" or the "Company") was incorporated in 1983 and, until
the sale of substantially all of its graphics development assets to ATI
Technologies, Inc. (ATI) in December 1997, was a supplier of high performance
video graphic controller chips. These chips were 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 graphics accelerator
chip. By working in connection with the personal computer's CPU, the graphic
accelerator offered significant improvement to the quality of the graphics and
improved the system's overall performance. The Company expects future revenues
and expenses from graphics operations to be minor as it supports existing
customers through third party agreements through March 1999 and offers customers
the opportunity to purchase any additional quantities of Tseng product ("last
time buy") necessary to support their ongoing product requirements, if any.
The Company is currently and will continue to explore opportunities to utilize
its cash and stock to make acquisitions of or investments in a potential
growth-stage company or growth-stage companies including but not limited to
those that are technology-based.
Strategy
The Company intends to target the acquisition of or investment in a growth-stage
company or growth-stage companies that either have an established revenue stream
or are at the late stage of product or service development and can benefit from
Tseng's business, operational and financial strength to execute their growth
oriented business plans. Businesses in a wide variety of industries will be
considered. Tseng is attempting to gain exposure to such businesses through
direct communication of its investment strategy and through relationships with
professionals that provide services to companies looking for growth capital.
Targeted candidates, depending upon their stage of development, traditionally
seek equity financing from three primary sources, namely, venture capital funds,
corporate strategic investors and public stock offerings. Each of these sources
has disadvantages for the growth company. Venture capital funds generally are
established for a limited term and their primary goal is to maximize their
financial return within a relatively short time-frame. A venture capitalist
often seeks to liquidate its investment via sale or encouraging and early
initial public stock offering, while providing little or no managerial or
operational support to the emerging company. Corporate strategic investors are
usually larger companies that invest in emerging companies in order to get
access to a promising product or technology without incurring the initial cost
of developing the new product or technology. These arrangements often involve
both financing support to the growth companies as well as an arrangement under
which the strategic investor obtains access to the products or technology of the
growth company. Initial public offerings involve significant up-front costs to
the company, may divert significant management attention from the execution of
the business plan and completion involves significant risks many of which are
out of the control of the company. Tseng believes that it offers acquisition or
investment candidates the benefits of the "traditional" financial alternatives
as well as access to experienced financial and operational managers, if
required, to help it without the related drawbacks.
Prior Operations
Prior to the sale of its graphics development assets to ATI, the Company
competed in the highly competitive and rapidly changing graphics technology
marketplace. Sales of the Company's ET6000 graphic accelerator, which was
introduced in November 1995 at Fall Comdex and began shipping in volume in the
second quarter of 1996, represented approximately 72% and 65% of the Company's
revenues in 1997 and 1996, respectively. At its introduction, the ET6000 was a
state-of-the-art 128-bit graphics and multimedia engine that integrated a 2D
graphics accelerator, high quality video processor, a revolutionary interface
into Multibank(TM) DRAM and PCI interface. Total sales of the ET6000 were
adversely impacted by both the market transition to 3D graphic accelerators and
the high-solution costs for ET6000-based solutions as the cost of MDRAM utilized
in ET6000 solutions did not keep pace with more industry-standard EDO memory
prices which were utilized in most competitor solutions. In response to the
market transition to 3D graphic accelerators, the Company attempted to develop
and introduce a 3D graphics accelerator, the ET6300. In October 1997, the
Company announced that it would not commercialize this product as it did not
expect sales of this product would return the Company to profitability. At the
same time, the Company announced it would focus on attempting to attract
strategic partners and/or merger candidates in the technology industry. This
effort resulted in the sale of the Company's graphics development assets to ATI
in December 1997.
1
The Company had distributed its graphics products to its OEM customer base
through an internal marketing and sales team located in Newtown, Pennsylvania
supported domestically by a series of independent manufacturers representatives
and internally by a sales and support office in Taipei, Taiwan with local
distributors located in Hong Kong, Japan, Korea, Singapore and Taiwan.
Manufacturers representatives located in Belgium, Germany and the United Kingdom
were also used to support European customers.
During 1997, sales to the Company's three largest customers accounted for 42% of
the Company's revenues. During 1996 and 1995, sales to the Company's two largest
customers accounted for 38%, and 37%, respectively, of the Company's revenues.
In addition, sales to unaffiliated distributors, primarily in the Far East,
accounted for 9%, 12% and 12% of total revenues for 1997, 1996 and 1995,
respectively. (See Note 8 to the Company's consolidated financial statements).
Total export sales, including those to the Far East distributors, represented
approximately 58%, 43% and 59% of revenues during 1997, 1996 and 1995,
respectively. As a significant portion of the Company's sales were export sales,
the Company has historically been 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.
The Company had maintained a staff of in-house engineers which were critical to
its ability to develop new products. Following the sale of its graphics
development assets to ATI, most of the Company's engineers accepted employment
with ATI. Total research and development expense, including the one-time charge
in 1996 discussed in Note 3 to the consolidated financial statements, was
$8,778,000, $14,561,000 and $3,440,000 in 1997, 1996 and 1995, respectively.
The Company purchased substantially all of its product from one foundry. Most of
the Company's products were manufactured using a .6 micron CMOS triple level
metal process. The Company did not have a long term supply contract with its
foundry. Historically the Company conducted its business with its foundries by
written purchase orders which covered a period or range of periods. The Company
purchased its product primarily in wafer and "known good die" forms and managed
the assembly and test process. Product returns to date have not been
significant.
ET6000 and ET6300 are trademarks of Tseng Labs, Inc. Personal Computer is a
trademark of IBM Corporation. Multibank is a trademark of Mosys Corporation.
Other brands and names are properties of their respective companies.
Factors Which May Affect Results
The Company has shifted its business focus from the development and sale of
graphic accelerators to the acquisition of or investment in growth-stage
companies. The competition to identify and acquire or invest in such target
companies is intense. Many competitors for such target companies, including
venture capitalist, corporate strategic partners and investment bankers, have
more financial resources and greater experience in identifying and closing such
transitions. In addition, many growth-stage companies are not successful in
executing their business plans. Because of the uncertainties and risks involved
in attempting to negotiate strategic partnerships, investments, mergers and/or
acquisitions, no assurances can be given that the Company can identify one or
more such transactions that can be consummated on terms acceptable to the
Company, if at all. In addition, if completed, there can be no assurance that
such transactions would return the Company to profitability. In addition, the
consummation of one or more such transactions may require the Company to seek
additional capital financing. Should the Company require additional capital,
there can be no assurance that such additional financing, if required, will be
available when needed or, if available, will be on terms satisfactory to the
Company.
2
Employees
As of March 1, 1998, the Company had 7 full-time employees. Of these, 2 were
engaged in operations; 1 in customer service and support; and 4 in management,
administrative and financial positions.
Item 2. Properties
The Company currently leases 2,700 square feet for its corporate offices in
Norristown, Pennsylvania. The facility is leased pursuant to a one-year lease
with a one-year renewal option. The Company owns a building with 34,000 square
feet in an industrial and office park in Newtown, Pennsylvania which was
formerly used as its advanced research, product development facility and
principal executive offices. This facility was leased to ATI in December 1997
for an initial 3-year term, with renewal options through 2007.
Item 3. Legal Proceedings
In May 1993, two purported shareholders of the Company brought an action against
the Company and certain of its executive officers in the United States District
Court for the Eastern District of Pennsylvania, alleging that the defendants had
issued false and misleading statements concerning the Company, and thus had
violated the federal securities laws and committed common law fraud and
negligent misrepresentation. Subsequently, several other purported shareholders
filed similar actions in the same forum against the Company and certain of its
executive officers. The actions were consolidated. On July 8, 1994, pursuant to
stipulation, the Court certified a class for the federal securities law claims
and dismissed the state law claims, without prejudice. On August 21, 1995, the
Company filed a motion for summary judgment seeking to dismiss the action in its
entirety. On March 19, 1996, the Court ruled on the Company's motion and
dismissed the action in its entirety. The plaintiff's filed an appeal of the
summary judgment with the United States Court of Appeals for the Third Circuit
which, on January 28, 1997, affirmed the summary judgment order dismissing the
action in its entirety. The Company had recorded the expense of defending these
claims on an as incurred basis.
In addition to the complaint discussed above, the Company is involved in certain
legal actions and claims arising in the ordinary course of business. Management,
after discussion with legal counsel, believes that the outcome of such
litigation and claims will not have a material adverse effect on the Company's
financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
3
PART II
Item 5. Market for the Company's Common Equity and Related Stockholders Matters
The Company's Common Stock is traded over-the counter under the symbol "TSNG".
There were approximately 1,062 holders of record of the Company's Common Stock
as of February 28, 1998. 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
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High Low
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
1997:
First Quarter $ 4.63 $ 2.94
Second Quarter 4.25 2.63
Third Quarter 4.94 3.00
Fourth Quarter 3.88 1.25
On March 24, 1998, the closing bid price in the over-the-counter market of the
Company's Common Stock, as reported by the National Quotation Bureau was $1.88.
The high and low closing bid prices of the Company's Common Stock between
January 1, 1998 and March 24 , 1998 were $1.88 and $1.25, respectively.
The Company has not paid a dividend since 1995. The Company does not anticipate
paying cash dividends in the foreseeable future and currently intends to retain
its cash for use in attempting to acquire or invest in a growth-stage company or
growth-stage companies.
4
Item 6. Selected Financial Data
Year Ended December 31
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(In thousands, except per share amounts)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $8,015 $26,231 $37,115 $79,418 $75,526
Net income (loss) (11,429) (13,965) 477 9,272 10,782
Basic and diluted net income (loss) per share (.60) (.73) .03 .49 .56
Working capital 25,719 36,268 47,155 50,431 49,214
Total assets 31,418 51,539 64,671 65,819 64,434
Long-term debt -- -- -- -- --
Shareholders' equity 28,320 45,228 58,395 59,861 56,674
Cash dividends per share -- -- .10 .20 .10
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 1997 were $8,015,000, a 69% decrease from 1996 levels. The decrease
is due to lower unit shipments and selling prices for the Company's ET6000-based
products, which began shipping in volume in the second quarter of 1996. Volume
and selling prices were adversely affected during 1997 by both the market
transition to 3D graphics accelerators and high solution costs for ET6000
solutions which adversely impacted sales of ET6000-based solutions in a very
cost-competitive 2D graphics marketplace. The ET6000 was designed to use 5 volt
MDRAM and the cost of the MDRAM did not keep pace with more industry-standard
EDO memory prices. In response to the market transition to 3D graphics
accelerators, the Company expended significant resources to complete development
of its first 3D graphics product, the ET6300, which was designed to work with
3.3 volt MDRAM. On October 21, 1997, the Company announced that it would not
commercialize the ET6300 in light of problems with the price and availability of
3.3 volt MDRAM as sales of this product would not return the Company to
profitability. In addition, the Company announced that in consideration of the
lead time and research and development costs required to produce new graphics
products, the Company would cease development efforts on future products and
attempt to continue to complete 3D and multimedia technologies under development
to attempt to attract strategic partners and/or merger candidates in the
technology industry. In connection with the decision to cease developing new
graphics products and attempt to position the Company to attract a strategic
partner, the Company retained the services of Broadview Associates, reduced its
workforce to personnel needed for this effort and recorded a pretax
restructuring charge of approximately $2,031,000. In December 1997, the Company
sold its graphics development assets to ATI and, in connection with the sale,
recorded a one-time pretax loss on the sale of approximately $3,698,000. In
connection with the October 21, 1997 announcement, the Company also announced
that it would explore opportunities to utilize its cash and stock to make
acquisitions of or investments in a potential growth-stage company or companies
including but not limited to those that are technology-based. This effort is
currently ongoing. Because of the uncertainties and risks involved in attempting
to negotiate strategic partnerships, investments, mergers and/or acquisitions,
no assurances can be given that the Company can identify one or more such
transactions that can be consummated on terms acceptable to the Company, if at
all. In addition, if completed, there can be no assurance that such transactions
would return the Company to profitability.
Revenues for 1996 were $26,231,000, a 29% decrease from 1995 levels. The
decrease was 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
5
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.
Cost of sales as a percentage of sales was 77% in 1997, 96% in 1996 and 78% in
1995, respectively. The decrease in costs as a percentage of revenues in 1997 is
due both to a one-time charge in 1996 of $2,354,000 for reserves for 2D graphics
inventory and purchase commitments and the increase in ET6000 revenues as a
percentage of total revenues in 1997. Despite pricing pressures on ET6000 sales,
margins on ET6000 sales were higher than on sales of the Company's older
W32-based product line which contributed significantly to sales in the first
half of 1996. ET6000 products were subject to severe pricing pressures in both
1997 and 1996 due to the competitive graphics market as a whole, high solution
cost of ET6000 solutions as 5 volt MDRAM prices did not keep pace with EDO
prices in either year and the transition to 3D graphics accelerators which
accelerated in the fourth quarter of 1996. The increase in costs as a percentage
of revenue in 1996 when compared to 1995 is due to the one-time charge of
$2,354,000 discussed above, pricing pressures on the ET6000 due to the high
solution costs of ET6000 based solutions as MDRAM price reductions did not keep
pace with EDO price reductions in 1996, and pricing pressures on the Company's
older W32-based product line which reached maturation in the rapidly changing
graphics market.
Research and development expense in 1997 was $8,778,000, a 40% decrease from the
$14,561,000 incurred in 1996. The 1996 expense includes a one-time charge of
$8,660,000 related primarily to the write-off of investments and commitments in
technologies related primarily to 2D graphics and related multimedia products.
Excluding this one-time charge, research expenditures increased during 1997 by
49%. This increase was due to additional personnel and consulting costs to
support development of the ET6300. As explained above, in October 1997, the
Company announced it would not commercialize the ET6300 and stopped development
of new graphics products. In December, the Company sold its graphics development
assets to ATI. As the Company is no longer in the business of developing
graphics products, unless and until the Company completes an investment or
acquisition in a Company which may be involved in development activities, it
does not expect to incur significant research and development costs in 1998.
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 the one-time charge of $8,660,000
discussed above.
Selling, general and administrative expenses were $4,749,000, $9,239,000 and
$6,328,000 in 1997, 1996 and 1995, respectively. The decrease in 1997 is due
primarily to reductions in non-research personnel costs and lower selling and
marketing expenditures. Included in expense for 1996 was approximately
$1,838,000 of one-time charges related primarily to the write-down of an
investment in a multimedia company and its refocus on 3D graphics. As a result
of the sale of the graphics development assets to ATI in December 1997, the
Company's operating expense level as it enters 1998 is substantially below 1997
historical operating levels. The increase in 1996 is due primarily to increased
investments in personnel to enhance the Company's operations, marketing and
sales efforts and the one-time charge of $1,838,000 referred to above.
The Company's effective income tax rate was a benefit of 28% and 34.6% in 1997
and 1996 and an expense of 17.6% in 1995. The primary reason for the reduced
benefit recorded in 1997 is that the Company recorded a valuation allowance in
1997 as realization of deferred tax assets is not assured at December 31, 1997.
The primary reason for the decrease in 1996 was lower pretax income.
Inflation is not expected to have an significant adverse impact on the Company's
operations.
6
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its requirements results
primarily from cash on hand, investment and rental income, operating cash flow
generated from the last time buy program and the potential availability of
additional debt and equity financing. The Company believes that these sources
are sufficient to fund current working capital requirements as it wraps up its
graphics operations and continues to seek to use its assets and stock to acquire
or invest in a growth-stage company or companies. As a result of the Company's
sale of its graphics development assets to ATI, unless and until the Company
completes an investment or acquisition of a Company with significant research,
sales and marketing or administrative expenses, it expects that such expenses
during 1998 will be significantly below historical levels. There can be no
assurance that the Company's existing sources of liquidity will be sufficient to
complete one or more such transactions on terms acceptable to the Company, if at
all. Should the Company be required to seek additional capital to complete one
or more such transactions, there can be no assurance that such additional
financing, if required, will be available when needed or, if available, will be
on satisfactory terms.
Total working capital was $25,719,000 and $36,268,000 at December 31, 1997 and
1996, respectively. The Company's cash and short-term investments decreased to
$22,751,000 at December 1997 from $22,912,000 at December 31, 1996. The slight
decrease is due to cash used to fund operations and the purchase of 4,200,000
shares of common stock for $5,200,000 from the Company's former president and
chief executive officer, offset by cash generated from the sale of the Company's
graphics development assets to ATI.
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 15.
Item 9. Disagreements with Accountants
None
7
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company as of March 24, 1998 are set
forth below:
Name Age Position
- ---- --- --------
John J. Gibbons 59 President, Chief Executive
Officer and Director
Mark H. Karsch 42 Senior Vice President, Chief Financial
Officer and Director
Barbara J. Hawkins 53 Vice President and Chief
Administrative Officer
Mark Dorfman 54 Director
Christopher F. Sutphin 61 Director
Mr. Gibbons has been the Company's President and Chief Executive Officer since
November 1997. From December 1996 until November 1997, Mr. Gibbons was 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 a 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 and Chairman since November 1997.
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.
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 had 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.
8
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 1997, 1996 and 1995, respectively.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
------------------------- --------------------------
All Other
Name and Compensation
Principal Position Year Salary Bonus(2) Options (1)(3)(4)(5)(6)(7)
-------- ------------ -------------- ---------- ---------------------
Jack Tseng 1997 $ 205,769 -- 75,000 $73,366
President 1996 $ 246,635 -- 75,000 $76,497
1995 $ 296,085 $ 71,005 150,000 $78,339
John J. Gibbons 1997 $ 127,508 $ 25,749 155,000 $ 3,325
Executive Vice 1996 $ 15,984 -- 10,000 $77,187
President 1995 $ 116,249 $ 4,625 80,000 $ 3,234
John A. Vigna 1996 $ 164,567 -- 78,000 $18,173
Executive Vice President
David Kwok Ping Hui 1997 $ 174,001 $ 749 55,000 $ 3,298
Executive Vice 1996 $ 171,658 -- 55,000 $ 3,334
President 1995 $ 169,768 $ 6,100 90,000 $ 3,234
Mark H. Karsch 1997 $ 130,678 $ 10,749 75,000 $ 3,225
Senior Vice President, 1996 $ 126,237 -- 45,000 $ 3,334
Chief Financial Officer 1995 $ 121,258 $ 4,625 60,000 $ 3,234
Barbara J. Hawkins 1997 $ 143,331 $ 749 45,000 $ 3,225
Vice President, 1996 $ 137,067 -- 45,000 $ 3,334
Chief Administrative Officer 1995 $ 127,321 $ 6,100 90,000 $ 3,234
(1) Represents amounts contributed by the Company for such executives under
the Company's 401(k) Profit Sharing Plan.
(2) 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.
(3) Mr. Tseng's "Other Compensation" includes the present value of the
interest free use of funds to fund a split dollar insurance policy of
$70,041, $75,105 and $76,897 in 1997, 1996 and 1995, respectively, through
Mr. Tseng's assumed retirement age of 62. This loan was repaid in January
1998.
(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 was $87,500.
(6) Mr. Tseng resigned as the Company's President and as a Director of the
Company effective October 31, 1997. In connection with his resignation,
Mr. Tseng will receive severance payments for a period of 30 months from
the date of his resignation. Additional compensation payable to Mr. Tseng
during this period will aggregate $625,000.
(7) Mr. Hui resigned as the Company's Executive Vice President and as a
Director of the Company effective December 26, 1997. In connection with
his resignation, Mr. Hui will receive payments for a period of 22 months
from the date of his resignation. Additional compensation payable to Mr.
Hui during this period will aggregate $319,000.
9
STOCK OPTIONS
The following tables summarize options grant to, and exercises by, the Company's
Chief Executive Officer and to each of the Company's most highly compensated
executive officers other than the Chief Executive Officer during fiscal 1997,
and the value of the options held by each such person at the end of fiscal 1997.
OPTIONS GRANTED IN LAST FISCAL YEAR
Potential Realizable Value at
Assumed Rates of Stock Price
Individual Grants Appreciation for Option Term (4)
--------------------------------------------------------------------------- ---------------------------------
% of Total
Number of Securities Options
underlying Granted Exercise
Options to Employees in Price Expiration
Name Granted (1) Fiscal Year ($/Sh) (2) Date (3) 5% ($) 10% ($)
- ---- -------------------- ---------------- ------------- --------------- --------------- --------------
Jack Tseng 75,000 17.0% $2.94 Aug. 4, 2000 $ 138,671 $ 351,420
John J. Gibbons 55,000 12.5% $2.94 Mar. 31, 2007 $ 101,692 $ 357,708
100,000 22.7% $1.38 Dec. 21, 2007 $ 86,778 $ 219,936
David Kwok Ping Hui 55,000 12.5% $2.94 Jan. 24, 2000 $ 101,692 $ 357,708
Mark H. Karsch 45,000 10.2% $2.94 Mar. 31, 2007 $ 83,203 $ 210,852
30,000 6.8% $1.38 Dec. 21, 2007 $ 26,036 $ 65,981
Barbara J. Hawkins 45,000 10.2% $2.94 Mar. 31, 2007 $ 83,203 $ 210,852
(1) Options granted in fiscal 1997, with the exception of the 100,000 share
grant to Mr. Gibbons and the 30,000 share grant to Mr. Karsch, vest on the
first anniversary of the date of the grant. The 100,000 and 30,000 share
grants to Messrs. Gibbons and Karsch vested immediately upon grant.
(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. Messrs. Tseng's and
Hui's employment with Tseng terminated during 1997.
(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.
10
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares 1997 Year-End 1997 Year-End (1)
Acquired
on Value Exer- Unexer- Exer- Unexer-
Name Exercise Realized (1) cisable cisable cisable cisable
- ------------- ------------- --------------- --------------- ------------- -------------- ------------
Jack Tseng - $ - 153,612 - $ - $ -
John J. Gibbons - $ - 262,500 55,000 $ 37,500 $ -
John A. Vigna - $ - 105,000 - $ - $ -
David Kwok Ping Hui - $ - 175,123 - $ - $ -
Mark H. Karsch - $ - 190,714 71,786 $ 11,250 $ -
Barbara J. Hawkins - $ - 175,500 72,000 $ - $ -
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date or year-end, as the case may be, minus the
exercise price.
11
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. 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.
In March 1997, the Company canceled and reissued 1,094,600 options held by
non-officers which had been outstanding under the Plans. In April 1997, the
Company allowed its officers (as the term "officer" is defined in Rule 166-1(f)
under the Securities Exchange Act of 1934, as amended), to exchange 1,065,000
options with an average exercise price of $8.77 per share for 937,500 options
with an average exercise price of $2.94 per share.
At December 31, 1997, the Company had outstanding options to purchase an
aggregate of 1,958,485 shares of Common Stock at exercise prices ranging from
$1.38 to $10.38 per share, with a weighted average per share exercise price of
$3.43. A total of 2,263,308 shares of Common Stock are available for future
issuance under the Plans.
Non-Employee Director Compensation
Directors who are not employees receive a base annual retainer of $20,000 plus
reimbursement for out-of-pocket expenses. During 1997, the outside directors
each received an additional $10,000 in directors fees due to a significant
increase in number of meetings held during 1997. No additional fees were paid in
1996 or 1995. 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. The
Directors plan also provides that the Board may modify the number of shares
subject to automatic grant, permits the Board to make other grants to
non-employee directors and grants the Board flexibility with respect to vesting
and acceleration of vesting of outstanding options. During 1997, the Board made
discretionary grants of options to purchase 10,000 shares of Common Stock to
each non-employee director at fair market value on the date of the grant. At
December 31, 1997, a maximum of 127,500 additional options may be granted under
the plan. At December 31, 1997, 140,000 options were outstanding under the plan
at an average exercise price of $5.98 per share. There were no options exercised
by outside directors in 1997, 1996 and 1995.
12
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of March 24, 1998, as to
shares of the Company's Common Stock beneficially owned by: (i) each shareholder
known to beneficially own more than 5% of the Company's Common Stock, (ii) each
director, (iii) each of the Company's executive officers named in the Summary
Compensation Table, included in Item 11 "Executive Compensation," and (iv) all
directors and executive officers of the Company as a group. Except as otherwise
noted, each person named below, either alone or together with such person's
family, had sole voting power and investment power with respect to the shares
listed next to such person's name.
Number of Shares Percent of
Name of Beneficial Owner (1) Beneficially Owned Common Stock
- ----------------------------------- --------------------- ------------------
John J. Gibbons..................... 337,512 (2) 2.1%
Mark H. Karsch...................... 249,307 (3) 1.5%
Christopher F. Sutphin.............. 110,000 (4) *
Mark Dorfman........................ 47,000 (5) *
Directors and executive officers as
a group (7 persons)............... 1,257,565 (6) 7.7%
Jack Tseng.......................... 1,527,612 (7) 9.3%
- -------------------
*less than 1%
(1) The address for all persons listed in this table, with the exception of
Mr. Tseng, is c/o Tseng Labs, Inc., 18 W. Airy Street, Suite 100,
Norristown, Pennsylvania 19401. The address for Mr. Tseng is 6029 Atkinson
Road, New Hope, Pennsylvania 18938.
(2) Includes 317,500 shares underlying options exercisable within 60 days of
March 31, 1998.
(3) Includes 249,107 shares underlying options exercisable within 60 days of
March 31, 1998.
(4) Includes 80,000 shares underlying options exercisable within 60 days of
March 31, 1998.
(5) Includes 40,000 shares underlying options exercisable within 60 days of
March 31, 1998.
(6) Includes a total of 1,200,353 shares underlying options either currently
exercisable or exercisable within 60 days of March 31, 1998.
(7) Shares are owned by Mr. Tseng and his wife as joint tenants. Includes
240,000 shares owned by Mr. and Mrs. Tseng's minor children, as to which Mr.
and Mrs. Tseng disclaim beneficial ownership. Includes 153,612 shares
issuable upon exercise of options within 60 days of March 31, 1998 which
were granted to Mr. Tseng while he served as the Company's President.
Item 13. Certain Relationships and Related Transactions
In November 1997, Jack Tseng, the Company's former president and chief executive
officer, resigned effective October 31, 1997. Included in the restructuring
charge recorded by the Company in the fourth quarter of 1997 (see Note 3 to the
consolidated financial statements), is a one-time charge of approximately
$700,000 related to this resignation.
Subsequent to the resignation discussed above, in December 1997, the Company
repurchased 4,000,000 shares of stock from the Company's former chief executive
officer and his family for $5,200,000. The repurchased shares are recorded as
treasury stock in the Company's December 31, 1997 balance sheet.
13
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as part of this report: Page
-----
(1) Consolidated Financial Statements
Report of Independent Public Accountants F-1
Consolidated Balance Sheets--December 31, 1997 and 1996 F-2
Consolidated Statements of Operations-
Years Ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Shareholders' Equity-
Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows-
Years Ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts S-1
(3) Exhibits
*3-a. Articles of Incorporation of Registrant, as amended
*3-b. By-Laws of Registrant, as amended
* 4. Specimen of Common Stock Certificate
9. None
**10-a. Lease Agreement dated January 8, 1987, among Jeyan Boulton,
John Boulton and Tseng Labs, Inc.
**10-b. Tseng Labs, Inc. Nonqualified Stock Option Plan
**10-c. Agreement for Acquisition of Stock and Plan of Reorganization
dated May 1, 1986, among Telan Corporation et al. and Tseng Labs,
Inc., John J. Gibbons et al.
**10-d. Volume Sales Agreement dated August 1, 1986, between Tseng Labs,
Inc. and NEC Home Electronics (U.S.A.) Inc.
***10-e. Tseng Labs, Inc. 1991 Stock Option Plan
***10-f. Tseng Labs, Inc. 1991 Special Directors Stock Option Plan
****10-g. Tseng Labs, Inc. 1995 Stock Option Plan
*****10-h. Severance Agreement between Tseng Labs, Inc. and Jack Tseng dated
November 11, 1997
******10-i. Asset Purchase Agreement between Tseng Labs, Inc. and ATI
Research, Inc. dated as of December 16, 1997.
14
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.
***** File incorporated by reference to Exhibit of same number filed with
Registrant's Form 10-Q for quarter ended September 30, 1997.
****** File incorporated by reference to Exhibit 10 filed with the
Registrant's Form 8-K dated December 16, 1997.
Exhibits and Form 8-K
- ---------------------
(a) Exhibits
Number Exhibit
-------- -------
10.1 Asset Purchase Agreement between Tseng Labs, Inc. and
ATI Research, Inc. Dated as of December 16, 1997.
(b) Reports on Form 8-K
The Company filed a Current report on Form 8-K, dated December 16, 1997,
reporting under Item 2 the sale of its graphics development assets to ATI
Research, Inc. The Company also reported under Item 5, the repurchase of
4.2 million shares of its common stock from Jack Tseng, its former
president and chief executive officer.
15
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/JOHN J. GIBBONS
------------------
John J. Gibbons, Chief Executive Officer
Dated March 27, 1998
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/JOHN J. GIBBONS Chief Executive Officer and March 27, 1998
- ------------------ Director
John J. Gibbons
/s/MARK H. KARSCH Chief Financial Officer and March 27, 1998
- ----------------- Director
Mark H. Karsch
/s/BARBARA J. HAWKINS Vice President (Principal March 27, 1998
- --------------------- Accounting Officer)
Barbara J. Hawkins
/s/MARK DORFMAN
- --------------- Director March 27, 1998
Mark Dorfman
/s/CHRISTOPHER F. SUTPHIN
- ------------------------- Director March 27, 1998
Christopher F. Sutphin
16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tseng Labs, Inc:
We have audited the accompanying consolidated balance sheets of Tseng Labs, Inc.
(a Utah corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, 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 6, 1998
F-1
TSENG LABS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31
------------------------
ASSETS 1997 1996
- ------ ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 19,178 $ 7,996
Short-term investments 3,573 14,916
Accounts receivable, net of allowance for
doubtful accounts of $389 and
$168, respectively 1,294 5,165
Inventories 33 2,369
Recoverable income taxes 3,588 5,824
Note receivable - 4,441
Other receivables 1,004 -
Prepaid expenses and other 147 877
---------- ----------
Total current assets 28,817 41,588
---------- ----------
PLANT AND EQUIPMENT:
Land and buildings (Note 1) 3,125 2,972
Equipment 92 11,400
Furniture and fixtures 19 719
---------- ----------
3,236 15,091
Less-Accumulated depreciation (677) (5,758)
---------- ----------
Net plant and equipment 2,559 9,333
---------- ----------
OTHER ASSETS 42 618
---------- ----------
$ 31,418 $ 51,539
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 309 $ 2,098
Accrued expenses 2,789 3,222
---------- ---------
Total current liabilities 3,098 5,320
---------- ---------
DEFERRED INCOME TAXES - 991
---------- ---------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Common stock, $.005 par value
authorized 50,000,000 shares:
issued 19,632,587 shares
in 1997 and 19,604,087
shares in 1996 98 98
Additional paid-in-capital 11,009 11,113
Retained earnings 27,231 38,660
-------- --------
38,338 49,871
Less-Treasury stock at cost, 4,544,250 and
519,250 shares, respectively (10,018) (4,643)
-------- --------
Total shareholders' equity 28,320 45,228
======== ========
$ 31,418 $ 51,539
======== ========
The accompanying notes are an integral part of these statements.
F-2
TSENG LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31
-------------------------------------
1997 1996 1995
----------- ---------- ----------
NET SALES $ 8,015 $ 26,231 $ 37,115
COST OF SALES 6,172 25,255 28,930
--------- --------- ---------
Gross Profit 1,843 976 8,185
RESEARCH AND DEVELOPMENT 8,778 14,561 3,440
SELLING, GENERAL AND ADMINISTRATIVE 4,749 9,239 6,328
LOSS ON SALE OF GRAPHICS OPERATIONS (Note 1) 3,698 - -
RESTRUCTURING EXPENSE (Note 3) 2,031 - -
--------- --------- ---------
Operating loss (17,413) (22,824) (1,583)
INTEREST INCOME 1,534 1,487 2,162
--------- --------- ---------
Income (loss) before income taxes (15,879) (21,337) 579
INCOME TAX PROVISION (BENEFIT) (4,450) (7,372) 102
--------- --------- ---------
NET INCOME (LOSS) $ (11,429) $ (13,965) $ 477
========= ========= =========
BASIC AND DILUTED NET INCOME (LOSS)
PER SHARE $ (.60) $ (.73) $ .03
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 18,975 19,020 18,941
========= ========= =========
The accompanying notes are an integral part of these statements.
F-3
TSENG LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
Common Stock
-------------------------
Additional Total
Par Paid-in Retained Treasury Shareholders'
Shares Value Capital Earnings Stock Equity
----------- ---------- ----------- ----------- ----------- -------------
BALANCE, JANUARY 1, 1995 19,435,987 $ 97 $ 9,997 $ 54,039 $ (4,272) $ 59,861
Exercise of stock options 47,500 - 292 - - 292
Tax benefit from exercise of
nonqualified stock options - - 27 - 27
Cash dividends, $.10 per common share - - - (1,891) - (1,891)
Purchase of treasury stock - - - - (371) (371)
Net income - - - 477 - 477
---------- ------ --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 19,483,487 97 10,316 52,625 (4,643) 58,395
Exercise of stock options 120,600 1 630 - - 631
Tax benefit from exercise of
nonqualified stock options - - 167 - - 167
Net loss - - - (13,965) - (13,965)
---------- ------ --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 19,604,087 98 11,113 38,660 (4,643) 45,228
Exercise of stock options 28,500 - 83 - - 83
Tax benefit from exercise of
nonqualified stock options - - (187) (187)
Purchase of treasury stock - - - (5,375) (5,375)
Net loss - - (11,429) - (11,429)
---------- ------ --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 19,632,587 $ 98 $ 11,009 $ 27,231 $ (10,018) $ 28,320
========== ====== ========= ========= ========= =========
The accompanying notes are an integral part of these statements.
F-4
TSENG LABS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31
-------------------------------------------------
1997 1996 1995
------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (11,429) $ (13,965) $ 477
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization 1,985 2,455 2,889
Loss on sale of graphics operations 3,698 - -
Deferred income taxes (991) (1,320) 64
Deferred costs write-off - 5,718 -
(Increase) decrease in--
Accounts receivable, net 3,871 759 4,667
Inventories 2,336 1,205 378
Recoverable income taxes 2,236 (5,178) (646)
Prepaid expenses and other 730 248 (678)
Other receivables (1,004) - -
Other assets 576 1,421 (570)
Increase (decrease) in--
Accounts payable (1,789) (736) (304)
Accrued expenses (433) 2,091 558
--------- ---------- --------
Net cash provided by (used in) operating activities (214) (7,302) 6,835
--------- ----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (1,119) (3,069) (2,211)
Proceeds from sale of graphics operations, net 2,023 - -
Increase in deferred costs - (2,924) (1,982)
Net sale (purchase) of short-term investments 11,343 15,294 (28,810)
Decrease (increase) in note receivable 4,441 (3,638) -
-------- ---------- ---------
Net cash provided by (used in) investing activities 16,688 5,663 (33,003)
-------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 83 631 292
Dividends paid - - (1,891)
Purchase of treasury stock (5,375) - (371)
-------- ---------- ---------
Net cash provided by (used in) financing activities (5,292) 631 (1,970)
-------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 11,182 (1,008) (28,138)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,996 9,004 37,142
-------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 19,178 $ 7,996 $ 9,004
======== ========== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ - $ 20 $ 707
======== ========== ========
The accompanying notes are an integral part of these statements.
F-5
TSENG LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND:
Tseng Labs, Inc. was 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 were
located in the United States. The Company sold its products primarily to
computer systems manufacturers (OEMs), video subsystem and video add-in board
manufacturers in the United States, Europe and Asia. In December 1997, the
Company sold its graphics design assets to ATI Technologies Inc. (ATI) for
approximately $3,000,000 in cash, and the assumption of certain employee
incentive payments. The Company received approximately $2,500,000 of the
proceeds in cash with the remaining $500,000 in escrow for distribution in June
1998, pending resolution of certain items specified in the purchase agreement.
The sale resulted in the Company recording a one-time pretax charge of
approximately $3,698,000. In connection with the purchase of the Company's
graphic design assets, ATI received certain rights in the Company's intellectual
property and entered into a three-year lease for the Company's former offices
and design center, with renewal options through 2007. Annual rent during the
initial 3-year term of the lease is approximately $330,000 plus assumption of
specified operating and maintenance expenses on the facility.
The Company will continue to support existing products primarily through third
party support agreements through March 1999 and has commenced a "last-time" buy
program for its customer base. The Company expects future revenues from its
graphics operations to be minor.
The Company is currently and will continue to explore opportunities to utilize
its cash and stock to make acquisitions of or investments in a growth-stage
company or companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Use of Estimates
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 has historically operated 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
-------------------------------
1997 1996
---- ----
Purchased parts $ 10 $ 769
Finished goods 23 1,600
----- ------
$ 33 $2,369
===== ======
F-6
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 3-7 years
Furniture and Fixtures 10 years
Depreciation expense was $1,985,000, $1,432,000, and $1,080,000 in 1997, 1996,
and 1995, 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 1997, due to the volatility of
the graphics market and difficulty in estimating future revenue streams, all
refining and testing costs were charged to expense as incurred. 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, and
$1,451,000 in 1995, respectively.
Net Income (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" effective December 15, 1997 (SFAS No.128). Under SFAS No.
128, basic net income (loss) per share is calculated by dividing net income by
the weighted average number of shares of common stock outstanding during each
period. Diluted net income (loss) per share is calculated by dividing net income
by the weighted average number of shares of common stock outstanding each
period, adjusted for the dilutive effect of common stock equivalents, which
consist of stock options, using the treasury stock method.
The impact of the assumed exercise of outstanding employee options increased the
assumed shares outstanding for purposes of calculating diluted earnings per
share by approximately 42,000 shares (less than 1%) in 1995. The assumed
exercise of employee stock options was anti-dilutive in both 1997 and 1996. The
effect of this accounting change did not have a material impact on 1996 and 1995
reported earnings per share.
F-7
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.
In accordance with Statement of Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity Securities", 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, 1997 and 1996, 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 December 31, 1997 and 1996.
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 58%, 43%, and
59% of the Company's sales in 1997, 1996, and 1995, 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 (loss)
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 6).
F-8
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 131, "Disclosure About Segments of an Enterprise and
Related Information." This statement establishes additional standards for
segment reporting in the financial statements and is effective for fiscal years
beginning after December 15, 1997. Management believes that SFAS No. 131 will
not have an effect on the Company's financial reporting.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
3. ONE-TIME CHARGES:
In the fourth quarter of 1997 and prior to the sale of its graphics development
assets to ATI (see Note 1), the Company announced and implemented a
restructuring program involving the resignation of its former president and
chief executive officer, a reduction in staff to those essential to support
existing customers and further development of 3D and multimedia technologies
under development, and the adoption of an acquisition/divestiture strategy. In
connection with this restructuring, the Company recorded one-time pretax charges
totaling $2,031,000 relating primarily to severance benefits for the terminated
employees.
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
pretax charges of $13,899,000. 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. 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 (approximately
$4,441,000) was repaid during the first quarter of 1997.
F-9
5. INCOME TAXES:
The provision (benefit) for income taxes is comprised of the following (in
thousands):
1997 1996 1995
---- ---- ----
Federal-
Current $ (3,459) $ (6,042) $ 12
Deferred (991) (1,320) 64
-------- -------- --------
(4,450) (7,362) 76
-------- -------- --------
State-
Current - (10) 26
Deferred - - -
-------- -------- --------
- (10) 26
-------- -------- --------
$ (4,450) $ (7,372) $ 102
======== ======== ========
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 valuation reserves, 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 is as follows:
1997 1996 1995
---- ---- ----
Federal statutory rate (34.0%) (34.0%) 34.0%
State income taxes, net
of federal benefit - - 3.0
Increase in valuation
allowance 6.0 - -
Tax credits utilized - (.6) (23.0)
Other - - 3.6
------- ------ ------
(28.0%) (34.6%) 17.6%
======= ====== =======
The Company has U.S. net operating loss carryforwards and research and
development credit carryforwards of approximately $543,000 and $398,000
respectively, which will be available to offset regular taxable U.S. income
during the carryforward period (through 2012). U.S. tax laws impose limitations
on the use of net operating loss carryforwards following certain changes in
ownership. If such a change were to occur with respect to the Company, the
limitation could reduce the amount of benefits that would be available to offset
future taxable income each year. Deferred tax assets consist of the following at
December 31, 1997:
1997
-------
Net operating loss carryforwards $ 185
Tax credit carryforwards 398
Restructuring reserves not currently deductible 551
Inventory 204
Other reserves not currently deductible 492
-------
Total deferred tax asset 1,830
Less - valuation allowance (1,830)
=======
Net deferred tax asset $ --
=======
The Company has provided a full valuation allowance on its deferred tax assets
due to uncertainty surrounding their realization. The Company's deferred tax
assets, both individually and in the aggregate, were not material at December
31, 1996 and 1995.
F-10
6. STOCK OPTION PLANS:
The Company's 1995 stock option plan 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 Committee 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:
Aggregate
Outstanding Options Number Price Range Price
- -------------------------- -------------- ---------------- ------------
Balance, January 1, 1995 750,900 $2.66-18.13 $ 7,889,151
Granted 1,231,200 5.63-9.13 8,783,000
Exercised (47,500) 3.00-5.63 (261,937)
Canceled (275,000) 5.63-18.13 (3,312,092)
------------ ------------- -----------
Balance, December 31, 1995 1,659,600 3.00-13.75 13,098,122
Granted 1,308,550 5.75-10.50 9,015,994
Exercised (109,600) 2.66-6.63 (562,825)
Canceled (325,750) 5.75-10.50 (2,754,769)
------------ ------------- -----------
Balance, December 31, 1996 2,532,800 3.00-13.75 18,796,522
Granted 2,473,100 2.94-3.75 7,067,362
Exercised (28,500) 2.94-3.00 (83,844)
Canceled (3,018,915) 2.94-13.75 (19,056,412)
------------ ------------- -----------
Balance, December 31, 1997 1,958,485 $1.38-10.375 $ 6,723,628
------------ ------------- -----------
As of December 31, 1997, a maximum of 1,980,992, 281,490 and 826 additional
options may be granted under the 1995, 1991 and 1984 plans, respectively. There
were 1,705,167 options with an average exercise price of $ 3.51 per share
exercisable at December 31, 1997. The options expire on various dates through
2007.
In March 1997, the Company canceled and reissued 1,094,600 options held by
non-officers which had been outstanding under the plans. The options had an
average price of $6.08 per share. The re-issue price was $2.94 per share. In
April 1997, the Company allowed its officers to exchange 1,065,000 options with
an average exercise price of $8.77 per share for 937,500 options with an average
exercise price of $2.94 per share.
The Company's 1991 Special Directors Stock Option Plan, as amended and restated
in 1997, provides that outside 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. The Directors Plan also provides that the Board may modify the number of
shares subject to automatic grant, permits the Board to make other grants to
non-employee directors and grants the Board flexibility with respect to vesting
and acceleration of vesting of outstanding options. A maximum of 300,000 shares
have been reserved for grant under the plan. As of December 31, 1997, a maximum
of 127,500 additional options may be granted under this plan. At December 31,
1997, 140,000 options were outstanding under the plan at an average exercise
price of $5.98 per share. No options were exercised by the outside directors in
1997, 1996 or 1995.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and the related interpretations in accounting for
its stock option plans. 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 FASB Statement
No. 123, the Company's net income (loss) would have been reduced to the
following pro forma amounts:
F-11
Year Ended December 31
1997 1996 1995
---- ---- ----
Net income (loss)-
As reported $(11,429,000) $(13,965,000) $ 477,000
Pro forma $(13,557,000) $(15,967,000) $ (35,000)
Basic and diluted net income
(loss) per share
As reported $ (.60) $ (.73) $.03
Pro forma $ (.73) $ (.84) $ -
The fair value of the options granted during 1997, 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%, and an expected life of 2-4 years.
7. COMMITMENTS AND CONTINGENCIES:
The Company purchased all of its video graphics chips from independent
foundries. During 1997 and 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 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.
8. EXPORT SALES AND MAJOR CUSTOMERS:
The Company's primary operations are located in the United States. The Company
sold its products primarily into the personal computer market in the United
States, Europe and Asia. Sales into the Asian market were primarily through six
unaffiliated distributors. Total export sales, including sales to the
distributors discussed above, were 58%, 43%, and 59% of the Company's sales in
1997, 1996 and 1995, respectively. As a significant portion of the Company's
sales are export sales, the Company has been 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.
F-12
Three customers accounted for 42% of revenues in 1997. Two customers accounted
for 38% and 37% of revenues in 1996 and 1995, respectively.
9. RELATED-PARTY TRANSACTIONS:
In November 1997, Jack Tseng, the Company's former president and chief executive
officer, resigned effective October 31, 1997. Included in the restructuring
charge recorded by the Company in the fourth quarter of 1997 (see Note 3), is a
one-time charge of approximately $700,000 related to this resignation.
Subsequent to the resignation discussed above, in December 1997, the Company
repurchased 4,000,000 shares of stock from the Company's former Chief Executive
Officer and his family for $5,200,000. The repurchased shares are recorded as
treasury stock in the accompanying balance sheet.
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 was repaid during 1997. The write-down of this investment and impact of
the debt forgiveness is included in the one-time charge for 1996 described in
Note 3. Sales to this entity were approximately $47,000, $364,000 and $180,000
in 1997, 1996 and 1995, respectively.
The Company had entered into a split-dollar insurance agreement with a trust
established by Jack Tseng pursuant to which the Company advance funded 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 Mr. Tseng. The premium
advances are secured by a note and a collateral assignment agreement with
respect to the death benefit payable thereunder. This agreement was terminated
in November 1997 and the total premium advances ($504,000 at December 31, 1997)
were repaid to the Company in January 1998. The premium advances at December 31,
1997 are included in other receivables in the accompanying balance sheet.
10. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1997 and 1996 are as follows:
Quarter
----------------------------------------
First Second Third Fourth
----- ------ ----- ------
(In thousands, except per share amounts)
1997
- ----
Net Sales $ 2,600 $ 2,461 $ 1,919 $ 1,035
Cost of sales 1,938 1,907 1,521 806
Net loss (1,752) (1,695) (1,959) (6,023)
Basic and diluted net loss per share (.09) (.09) (.10) (.32)
1996
- ----
Net sales $ 4,107 $ 6,744 $ 12,360 $ 3,020
Cost of sales 3,830 5,515 9,694 6,216
Net loss (1,417) (1,031) (463) (11,054)
Basic and diluted net loss per share (.07) (.05) (.02) (.58)
F-13
SCHEDULE II
TSENG LABS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance, Charges Deductions Balance,
Beginning to from End of
of Year Expense Recoveries Reserve Year
--------- ------- ---------- ---------- --------
December 31, 1997:
Reserve for
doubtful accounts $ 168 $ 276 $ 2 $ (57) $ 389
----- ----- ----- ------ -----
December 31, 1996:
Reserve for
doubtful accounts $ 678 $ 154 $ -- $ (664) $ 168
----- ----- ----- ------ -----
December 31, 1995:
Reserve for
doubtful accounts $ 861 $ 363 $ -- $ (546) $ 678
----- ----- ----- ------ -----
S-1