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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-26824
TEGAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0370244
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2201 SOUTH MCDOWELL BLVD. 94955-6020
P.O. BOX 6020 (ZIP CODE)
PETALUMA, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (707) 763-5600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
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 reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price of the Common Stock on March 31,
1998, as reported on the Nasdaq National Market was $37,639,389. As of March 31,
1998, 10,566,038 shares of the Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders to be held on September 15, 1998, will be filed with the Commission
within 120 days after the close of the Registrant's fiscal year and are
incorporated by reference in Part III.
Total Pages Index to Exhibits appears on page
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TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 18
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 7A Quantitative and Qualitative Disclosure about Market Risk... 23
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 23
Item 11. Executive Compensation...................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 24
Item 13. Certain Relationships and Related Transactions.............. 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 24
Signatures............................................................ 42
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PART I
ITEM 1. BUSINESS
Information contained or incorporated by reference herein contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology or which constitute projected financial information. The
following contains cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements. See "-- Additional Risk Factors."
THE COMPANY
Tegal Corporation ("Tegal" or the "Company") designs, manufactures, markets
and services plasma etch systems used in the fabrication of integrated circuits
("ICs") and related devices in the thin film head, small flat panel and printer
head applications. Etching constitutes one of the principal IC and related
device production process steps and must be performed numerous times in the
production of such devices.
The Company was formed in December 1989 to acquire the operations of the
former Tegal Corporation, a division of Motorola, Inc. ("Motorola"). The
predecessor company was founded in 1972 and acquired by Motorola in 1978.
SEMICONDUCTOR INDUSTRY BACKGROUND
Growth of Semiconductor and Semiconductor Equipment Industries
The semiconductor industry has experienced significant growth in recent
years. This growth has resulted from the increasing demand for ICs from
traditional IC markets, such as personal computers, telecommunications, consumer
electronics, automotive electronics and office equipment, as well as the
recently developing markets, such as multimedia, wireless communications and
portable and network computing. As a result of this increased demand,
semiconductor device manufacturers in recent years have expended significant
amounts of capital to build new semiconductor fabrication facilities ("fabs")
and to expand existing fabs. In spite of the continuing growth in demand for
semiconductors, the industry periodically experiences periods of excess supply
and excess capacity as additions to capacity are brought online in large
increments which exceed the short-term growth in demand for ICs such as occurred
in late 1995 and continues through the date of this report.
Growth in the semiconductor industry has been driven, in large part, by
advances in semiconductor performance at a decreasing cost per function.
Increasingly advanced semiconductor processing technologies allow semiconductor
manufacturers to produce ICs with smaller features, thereby increasing
processing speed and expanding device functionality and memory capacity. As ICs
have become more complex, however, both the number and price of state of the art
process tools required to manufacture ICs have increased significantly. As a
result, the cost of semiconductor manufacturing equipment is becoming an
increasingly large part of the total cost in producing advanced ICs. Today, the
average state of the art dynamic random access memory (DRAM) fab costs from $750
million to over $1.5 billion, with semiconductor manufacturing equipment costs
representing the majority of total fab costs.
Semiconductor Production Processes
To create an IC, semiconductor wafers are subjected to a large number of
complex process steps. The three primary steps in manufacturing ICs are (1)
deposition, in which a layer of insulating or conducting material is deposited
on the wafer surface, (2) photolithography, in which the circuit pattern is
projected onto a light sensitive material (the photoresist), and (3) etch, in
which the unmasked parts of the deposited material on the wafer are selectively
removed to form the IC circuit pattern.
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Each step of the manufacturing process for ICs requires specialized
manufacturing equipment. Today, plasma etch systems are used for the great
majority of etching processes. During a plasma etch process (also known as "dry
etch"), a semiconductor wafer is exposed to a plasma composed of a reactive gas,
such as chlorine, which etches away selected portions of the layer underlying
the patterned photoresist layer.
Segmentation of the Etch Market
The Company believes that the dry etch market is becoming increasingly
segmented. Certain dry etch technologies or processes are better suited for
etching different types of materials (films) and, as a result, the dry etch
market may be segmented according to the type of film being etched. In addition,
as ICs become increasingly complex, certain etch steps required to manufacture a
state of the art IC demand leading edge (or "critical") etch performance. For
example, to produce a 64-megabit DRAM device, semiconductor manufacturers are
required to etch certain device features at dimensions as small as 0.25 micron.
Nonetheless, even in the most advanced ICs, a significant number of production
steps can be performed with a significantly less demanding (or "non-critical")
etch performance. As a result, the Company believes the etch market has also
begun to segment according to the required level of etch performance -- critical
or non-critical.
Segmentation of the Etch Market by Film
The dry etch market is generally segmented into the following market
segments, defined according to the class of film being etched: polysilicon,
oxide (dielectric) and metal. According to VLSI Research Inc., the polysilicon,
oxide and metal segments of the dry etch market represented approximately 41%,
43% and 16%, respectively, of the total sales of dry etch systems in 1997. New
films are continually being developed in each of these three market segments.
Today, the semiconductor industry is faced with the need to develop and
adopt an unprecedented number of new films as conventional materials are running
out of the physical properties needed to support continuing shrinks in die size
and to provide improved performance. Certain of these films present unique etch
production problems. For example, the use of certain new films, such as
platinum, currently being used in the development of high-density DRAM devices,
and Lead Zirconium Titanate (PZT), currently being used in the development of
non-volatile, ferroelectric random access memory (FRAM) devices, is presenting
new challenges to semiconductor manufacturers. While these new films contribute
to improved IC performance and reduced die size, their unique properties make
them particularly difficult to etch and, therefore, require more advanced etch
process technologies. Similarly, corrosion of metal etched wafers within 48 to
72 hours after completion of the etch process has been a chronic problem for
semiconductor manufacturers, regardless of the line geometries involved. The
reaction byproducts of a chlorine based metal etch process tend to redeposit on
the wafer and corrode when exposed to water in the atmosphere. Removal of these
contaminants from the wafer is essential to prevent this corrosion.
Segmentation of the Etch Market into Critical and Non-Critical Production
Steps
Over time, the disparity in relative prices for etch systems capable of
etching at non-critical versus critical dimensions has grown significantly. The
Company believes that in 1993, the cost of an eight inch wafer-capable system
ranged from approximately $500,000 to $700,000. Given the relatively modest
price differential among etchers, manufacturers of ICs and similar devices
tended to purchase one system, (the one they believed provided the most
technologically advanced solution for their particular etch requirements), to
perform all their etching. In contrast, the cost today of an eight inch capable
etch system ranges from approximately $500,000, for reliable, non-critical
etchers, to more than $2.5 million, for advanced, state of the art critical
etchers. Consequently, the Company believes it is no longer cost effective to
use state of the art etchers to perform both critical and non-critical etching.
When critical etching is required in the production process, the Company
believes that the leading purchasing factor for a semiconductor manufacturer
will continue to be, ultimately, the product's etch performance. When
non-critical etching is required in the production process, the Company believes
the leading purchasing factor for a semiconductor manufacturer will be the
overall product cost, with particular emphasis on the system's sale price. In
either case, however, the semiconductor manufacturer is driven to make a
value-oriented purchasing decision which minimizes the
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overall etch system costs, while meeting the required etch process performance.
The Company believes that a well-implemented "mix and match" purchasing
philosophy already adopted by a significant number of semiconductor
manufacturers to minimize their expenditures for photolithography equipment,
could allow a semiconductor manufacturer to realize significant etch system
savings.
BUSINESS STRATEGY
Tegal believes it currently has one of the largest installed bases of etch
equipment in the industry and that over the years it has earned a reputation as
a supplier of reliable, value-oriented etch systems. The Company's systems are
sold throughout the world to both domestic and international customers. In
fiscal 1998, approximately 61% of the Company's revenues resulted from
international sales. To support its systems sales, the Company maintains local
service and support in every major geographic market in which it has an
installed base, backed up by a spares logistics system designed to provide
delivery within 24 hours anywhere in the world.
The Company's objective is to build on its technical knowledge, experience
and reputation in the etch industry, as well as its established sales, marketing
and customer service infrastructure, to be a leading supplier of etch systems
for both the critical and non-critical segments of the etch market. To meet this
objective, the Company is implementing a business strategy incorporating the
following elements:
- Use the performance capabilities of the Company's 6500 series systems to
penetrate the IC and related device markets for critical etch of specific
applications and films where Tegal's products provide unique performance
capabilities; and
- Increase sales of its non-critical etch systems by focusing sales and
marketing on specialty applications that are addressed by the Company's
900 series non-critical etchers such as thin film heads, small flat
panels, printer heads, and the conversion from wet to dry etch
technologies.
PRODUCTS
Critical Etch Products
The Company offers several models of its 6500 series critical etch products
configured to address film types and applications desired by the customer. In
1994, Tegal introduced its 6500 series etch system for sub-0.5 micron
polysilicon etching.
In 1995, the Company introduced its emerging films 6500 series etch system
for the etching of new high k dielectrics and associated materials used in
capacitors at sub-0.5 micron, for high-density DRAM devices and FRAMs. The
Company also introduced its metal etch system for sub-0.5 micron critical
etching of five layer composite films of aluminum/copper/silicon/titanium alloys
in 1995. In 1996, the Company introduced its isolation technology 6500 series
etch system aimed at transistor isolation needs caused by increased packing
densities used in memory devices employing design rules at or below 0.35 micron.
In 1997, the Company introduced its 6500 series etchers to the thin film head
market and started etching samples on the leading edge thin film head materials.
All 6500 series models offer one and two-chamber configurations. 6500 series
systems typically range in price between $1.8 million and $2.5 million.
The Company's 6500 series systems have been engineered to provide process
flexibility and competitive throughput for wafers up to eight inches, while
minimizing cost and space requirements. A dual chamber platform design allows
for either parallel or integrated etch processes. The Company seeks to maximize
the 6500 series systems' average throughput by incorporating a process chamber
technology and system architecture designed to minimize processing down-time
required for cleaning and maintenance. Each 6500 series system has a central
wafer handling system with full cassette vacuum loadlocks, noncontact optical
wafer alignment and a vacuum transport system. Individual process module
servicing is possible without shutting down the system or other chambers.
Contamination control features in the 6500 series systems include pick and place
wafer handling with no moving parts above the wafer, four-level vacuum isolation
from the atmosphere to the etch chamber, and individual high-throughput,
turbo-pumped vacuum systems for the cassettes, wafer handling platform and each
process module. These and other features of the 6500 series are
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designed to enable a semiconductor manufacturer to reduce wafer particle
contamination to a level which the Company believes exceeds industry standards
and to improve etch results and process flexibility.
In addition, the Company's 6500 series systems incorporate a software
system which has been designed and tested to minimize the risk of the system
operator "crashing" the system or interrupting wafer fabrication and to be easy
to use. This software system incorporates a software architecture designed to
operate in multiple interface modes, including operator, maintenance engineer,
process engineer and diagnostic modes. Features include icon-based touch screen
menus for ease of use. In addition, the software provides a quick-response
interface which allows the semiconductor manufacturer access to all necessary
system information for factory automation. The system includes data archiving
and remote, real time diagnostics.
Non-Critical Etch Products
The Company first introduced its 900 series etch system in 1984 as a
critical etch tool of that era. Over the years, the Company has repositioned the
900 series system as a non-critical etch system capable of performing the
less-demanding etch steps required in the production of an IC and related
devices. In 1994, the Company introduced an eight inch wafer capable 900 series
system (capable of etching five inch to eight inch wafers) that was a scaled-up
version of its three inch to six inch wafer capable non-critical etch system.
The 900 series non-critical etch systems are aimed at pad, zero layer,
non-selective nitride, backside, planarization and small flat panel display
applications and thin film etch applications used in the manufacture of
read-write heads for the disk drive industry. The Company's 900 series systems
typically sell for a price of $350,000 to $600,000.
The 900 series systems incorporate a single diode process chamber on a
non-loadlocked modular platform for reliability and ease of maintenance, which
the Company believes results in higher average throughput and lower operating
costs. Continued improvements in both reliability and performance have enabled
the Company to offer the 900 series systems as a solution for non-critical
applications involving line widths of 0.8 micron and greater.
CUSTOMERS
The Company sells its systems to semiconductor and related electronic
device component manufacturers throughout the world. Major customers over the
last three fiscal years have included the following:
ABB Semiconductor AG Matsushita SGS-Thomson Microelectronics
Austria Mikro Systeme Micrel Semiconductor Shanghai Belling
International Motorola Siemens
Bosch NEC Siliconix
EMM Northern Telecom Sony
Hyundai Read Rite Toshiba
International Rectifier -- Rohm VLSI Technology
Hex Fet America Samsung Winbond
LG Semiconductor Seiko Epson
Linear Technology SEL
Of these 26 customers, 14 ordered one or more systems from the Company in
fiscal 1998. The composition of the Company's top five customers has changed
from year to year, but net system sales to the Company's top five customers in
each of fiscal 1998, 1997 and 1996 accounted for 61.2%, 46.7% and 48.6%,
respectively, of the Company's total net system sales. Motorola, Samsung, Read
Rite and Hyundai represented 18.2%, 12.2%, 11.2% and 10.3%, respectively, of the
Company's net system sales in fiscal 1998. Winbond, Hyundai and Motorola
represented 16.8%, 13.6% and 10.2%, respectively, of the Company's net system
sales in fiscal 1997. Sony and Motorola represented 16.3% and 14.9%,
respectively, of the Company's net system sales in fiscal 1996. Other than the
above customers, no single customer represented more than 10% of the Company's
net system sales in fiscal 1998, 1997 or 1996. Although the composition of the
group comprising the Company's largest customers may vary from year to year, the
loss of a significant customer or any reduction in orders by any significant
customer, including reductions due to market, economic or
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competitive conditions in the semiconductor and related device manufacturing
industry, may have a material adverse effect on the Company.
BACKLOG
The Company schedules production of its systems based upon order backlog
and customer commitments. The Company includes in its backlog only orders for
which written authorizations have been accepted and shipment dates within the
next 12 months have been assigned. As of March 31, 1998 and 1997 the Company's
order backlog was approximately $3.4 million and $8.3 million, respectively.
Systems orders are subject to cancellation by the customer, but with substantial
penalties other than in the case of orders for evaluation systems or for systems
which have not yet incurred production costs. Orders may be subject to
rescheduling with limited or no penalty. Some orders are received for systems to
be shipped in the same quarter as the order is received. As a result, the
Company's backlog at any particular date is not necessarily indicative of actual
sales for any succeeding period.
MARKETING, SALES AND SERVICE
The Company sells its systems worldwide through a network of 14 direct
sales representatives and 16 independent sales representatives in 17 sales
offices located throughout the world. In the United States, the Company markets
its systems through direct sales personnel located in its Petaluma, California
headquarters, two regional sales offices and through two independent sales
representatives. In addition, the Company provides field service and
applications engineers out of three regional offices and its Petaluma
headquarters in order to ensure dedicated technical and field process support
throughout the United States on short notice.
The Company maintains sales, service, and process support capabilities in
Japan, Taiwan, Germany and the United Kingdom service/support operations in
Austria, China, France and Italy. In addition to its international direct sales
and support organizations, the Company markets its systems through independent
sales representatives in China, Israel, Italy, Korea and Singapore.
International sales, which consist of export sales from the United States
either directly to the end user or to one of the Company's foreign subsidiaries,
accounted for 61.3%, 69.0% and 63.2% of total revenue for fiscal 1998, 1997 and
1996, respectively. The Company generally sells its systems on 30-to-60 day
credit terms to its domestic and European customers. Customers in Pacific Rim
countries, other than Japan, are generally required to deliver a letter of
credit payable in U.S. dollars upon system shipment. Sales to other
international customers, including Japan, are either billed in local currency or
U.S. dollars. The Company anticipates that international sales will continue to
account for a significant portion of revenue in the foreseeable future.
International sales are subject to certain risks, including the imposition of
government controls, fluctuations in the U.S. dollar (which could increase the
sales price in local currencies of the Company's systems in foreign markets),
changes in export license and other regulatory requirements, tariffs and other
market barriers, political and economic instability, potential hostilities,
restrictions on the export or import of technology, difficulties in accounts
receivable collection, difficulties in managing distributors or representatives,
difficulties in staffing and managing international operations and potentially
adverse tax consequences. There can be no assurance that any of these factors
will not have a material adverse effect on the Company.
The Company generally warrants its new systems for 12 months and its
refurbished systems for six months from shipment. Installation is included in
the price of the system. The Company's field process engineers provide customers
with call-out repair and maintenance services for a fee. Customers may also
enter into repair and maintenance service contracts covering the Company's
systems. The Company trains customers' service engineers to perform routine
service for a fee and provides telephone consultation services generally free of
charge.
The sales cycles for the Company's systems vary depending upon whether the
system is an initial design-in, reorder or used equipment. Initial design-in
sales cycles are typically 12 to 18 months, particularly for 6500 series
systems. In contrast, reorder sales cycles are typically four to six months, and
used system sales cycles are generally one to three months. The initial
design-in sales cycle begins with the generation of a sales lead, which is
followed by qualification of the lead, an analysis of the customer's particular
applications needs and
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problems, one or more presentations to the customer (frequently including
extensive participation by the Company's senior management), two to three wafer
sample demonstrations, followed by customer testing of the results and extensive
negotiations regarding the equipment's process and reliability specifications.
Initial design-in sales cycles are monitored by senior management for correct
strategy approach and prioritization. The Company may, in some instances, need
to provide the customer with an evaluation critical etch system for three to six
months prior to the receipt of a firm purchase order.
RESEARCH AND DEVELOPMENT
The market for semiconductor capital equipment is characterized by rapid
technological change. The Company believes that continued and timely development
of new systems and enhancements to existing systems is necessary for it to
maintain its competitive position. Accordingly, the Company devotes a
significant portion of its personnel and financial resources to research and
development programs and seeks to maintain close relationships with its
customers in order to be responsive to their system needs.
The Company's research and development encompasses the following areas:
plasma technology, process characterization and development, material sciences
applicable to the etch environment, system design and architecture,
electro-mechanical design and software engineering. Management emphasizes
advanced plasma and reactor chamber modeling capabilities in order to accelerate
bringing advanced chamber designs to market. The Company employs
multi-discipline teams to facilitate short engineering cycle times and rapid
product development.
As of March 31, 1998, the Company had 65 full-time employees dedicated to
equipment design engineering, process support and research and development.
Research and development expenses for fiscal 1998, 1997 and 1996 were $11.0
million, $10.5 million and $10.0 million, respectively, and represented 26.6%,
18.3% and 16.1% of total revenue, respectively. Such expenditures were used for
the development of new systems and processes, continued enhancement and
customization of existing systems, etching customer samples in the Company's
demonstration labs and providing process engineering support at customer sites.
MANUFACTURING
The Company's etch systems are produced at its headquarters in Petaluma,
California. The Company's manufacturing activities consist of assembling and
testing components and sub-assemblies which are then integrated into finished
systems. The Company has structured its production facility to be driven either
by orders or by forecasts and has adopted a modular system architecture to
increase assembly efficiency and design flexibility. The Company has also
implemented "just-in-time" manufacturing techniques in its assembly processes.
The Company believes that improvements in manufacturing processes have allowed
the Company to reduce significantly its non-critical system manufacturing cycle
times. Non-critical system manufacturing cycle times, which typically took
nearly three months in 1990, now take approximately 14 days. The Company's cycle
times for its critical etch products are currently two to three months. The
Company seeks to improve these cycle times as the Company continues to
manufacture its 6500 series systems.
The Company procures certain components and sub-assemblies included in its
systems from a limited group of suppliers, and occasionally from a single source
supplier. In particular, the Company is dependent upon MECS Corporation
("MECS"), a robotic equipment supplier, as the sole source for the robotic arm
used in all of its 6500 series systems. The Company currently has no existing
supply contract with MECS, and the Company currently purchases all robotic
assemblies from MECS on a purchase order basis. Disruption or termination of
certain of these sources, including its robotic sub-assembly source, could have
an adverse effect on the Company's operations. While the Company believes that
alternative sources could be obtained and qualified to supply these components
or sub-assemblies, a prolonged inability to obtain such components or
sub-assemblies, receipt of defective components or sub-assemblies, as well as
difficulties or delays in shifting to alternative sources, could have a material
adverse effect on the Company's operating results and could damage customer
relationships.
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ENVIRONMENTAL MATTERS
The Company is subject to a variety of governmental regulations related to
the use, storage, handling, discharge or disposal of toxic, volatile or
otherwise hazardous chemicals used in the manufacturing process. The Company
believes that it is currently in compliance in all material respects with these
regulations and that it has obtained all necessary environmental permits to
conduct its business, which permits generally relate to the discharge of
hazardous wastes. Nevertheless, the failure to comply with present or future
regulations could result in fines being imposed on the Company, suspension of
production, alteration of the Company's manufacturing processes, or cessation of
operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur other expenses to comply with environmental
regulations. Any failure by the Company to control the use, disposal or storage
of, or adequately restrict the discharge of, hazardous substances could subject
the Company to future liabilities.
COMPETITION
The semiconductor capital equipment industry is highly competitive. The
Company believes that the principal competitive factor in the critical segment
of the etch industry is technical performance of the system, followed closely by
the existence of customer relationships, the overall system price, the ability
to provide service and technical support on a global basis and other related
cost factors. The Company believes that the principal competitive factor in the
non-critical segment of the etch industry is system price, followed closely by
the technical performance of the system, the existence of established customer
relationships, the ability to provide service and technical support on a global
basis and other related cost factors.
The Company believes that to be competitive, it will require significant
financial resources in order to offer a broad range of systems, to maintain
customer service and support centers worldwide and to invest in research and
development. Many of the Company's existing and potential competitors,
including, among others, Applied Materials, Inc., Lam Research Corporation,
Hitachi Ltd. and Tokyo Electron Limited, have substantially greater financial
resources, more extensive engineering, manufacturing, marketing and customer
service and support capabilities, larger installed bases of current generation
etch and other production equipment and broader process equipment offerings as
well as greater name recognition than the Company. The Company expects its
competitors to continue to improve the design and performance of their current
systems and processes and to introduce new systems and processes with improved
price and performance characteristics. No assurance can be given that the
Company will be able to compete successfully in the United States or worldwide.
INTELLECTUAL PROPERTY
The Company holds an exclusive license to 25 United States patents,
including its dual frequency tri-electrode control system, and 28 corresponding
foreign patents covering various aspects of its systems. The Company holds a
patent for its etch-rinse-strip-rinse process sequence directly, which process
has been designed to address the post-etch corrosion problems faced by
semiconductor manufacturers. The Company has also applied for eight additional
United States patents and 16 additional foreign patents. The Company believes
that the duration of such patents generally exceed the life cycles of the
technologies disclosed and claimed therein. The Company believes that although
the patents it has exclusively licensed or holds directly will be of value, they
will not determine the Company's success, which depends principally upon its
engineering, marketing, service and manufacturing skills. However, in the
absence of patent protection, the Company may be vulnerable to competitors who
attempt to imitate the Company's systems or processes and manufacturing
techniques and processes. In addition, other companies and inventors may receive
patents that contain claims applicable to the Company's systems and processes.
The sale of the Company's systems covered by such patents could require licenses
that may not be available on acceptable terms, if at all. The Company also
relies on trade secrets and other proprietary technology that it seeks to
protect, in part, through confidentiality agreements with employees, vendors,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by others.
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The original version of the system software for the Company's 6500 series
systems was jointly developed by the Company and Realtime Performance, Inc., a
third party software vendor. Tegal holds a perpetual, non-exclusive, nonroyalty
bearing license to use and enhance this software. The enhanced version of the
software currently used on the Company's 6500 series systems has undergone
multiple releases of the original software, and such enhancements were developed
exclusively by the Company. Neither the software vendor nor any other party has
any right to use the Company's current release of the system software.
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, there can be no
assurance that the Company will be able to protect its technology adequately or
that competitors will not be able to develop similar technology independently.
There can be no assurance that any patent applications that the Company may file
will be issued or that foreign intellectual property laws will protect the
Company's intellectual property rights. There can be no assurance that any
patent licensed by or issued to the Company will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide competitive
advantages to the Company. Furthermore, there can be no assurance that others
will not independently develop similar systems, duplicate the Company's systems
or design around the patents licensed by or issued to the Company.
On March 31, 1998, the Company filed a suit in the United States District
Court in the Eastern District of Virginia against Tokyo Electron Limited and
several of its U.S. subsidiaries (collectively, "TEL") alleging that TEL's
current generation of etch equipment infringes certain of the Company's patents.
The Company is seeking, among other things, injunctive relief barring TEL from
importing or selling such products. No assurance can be given as to the outcome
of such legal proceedings or as to the effect of any such outcome on the
Company.
On June 10, 1996, Lucent Technologies Inc. ("Lucent") filed a claim with
the United States District Court for the Northern District of California
alleging patent infringement by Austria Mikro Systeme International AG and AMS
Austria Mikro Systeme International, Inc. ("AMS") for the sale of integrated
circuits manufactured with the Company's dry plasma etch systems. On March 7,
1995, the Company executed an indemnification agreement with AMS, covering
certain uses of select equipment sold to AMS. Lucent and AMS have settled the
U.S. claim and AMS is now seeking indemnification from the Company through an
arbitration proceeding with respect to the U.S. claim. The Company has been
informed that Lucent has filed a claim for patent infringement in Germany
against AMS for the sale of integrated circuits manufactured with the Company's
dry plasma etch systems. AMS has requested indemnification for the German
matter. The Company believes that the claims made by AMS are without merit and
that the ultimate outcome of such claims is unlikely to have a material adverse
effect on the Company. No assurance can be given, however, as to the outcome of
such legal proceedings or as to the effect of any such outcome on the Company's
results of operations or financial condition.
As is typical in the semiconductor industry, the Company has received
notices from time to time from third parties alleging infringement claims. In
July 1991, the Company was advised by General Signal Corporation ("GSC") that
the Company may need a license under certain U.S. patents owned by GSC relating
to "cluster tool" equipment. The Company's 6500 series systems are generally
configured with multiple process chambers and, therefore, may be deemed "cluster
tool" equipment. A number of companies which were contacted by GSC with regard
to licensing these patents formed an ad-hoc committee to investigate the
validity of the GSC patents. As a result of such investigation, in November 1992
the committee members, including the Company, jointly notified GSC that they
believe the subject patents are invalid and that, accordingly, no license is
necessary. In the fall of 1994, GSC filed suit against Applied Materials, a non-
member of the ad-hoc investigative committee, alleging infringement of such
patents. To date, GSC has taken no action against the Company in connection with
the licensing of these patents. There can be no assurance that GSC will not take
any such action in the future or, if any such action is taken, as to the outcome
of such action.
Although there are currently no other pending claims or lawsuits by or
against the Company regarding possible infringement claims, there can be no
assurance that infringement claims by other third parties, or claims for
indemnification resulting from infringement claims, will not be asserted in the
future or that such
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assertions, if proven to be true, will not materially adversely affect the
Company. In the future, additional litigation may be necessary to enforce
patents issued or exclusively licensed to the Company, to protect trade secrets
or know-how exclusively licensed to or owned by the Company or to defend the
Company against claimed infringement of the rights of others and to determine
the scope and validity of the proprietary rights of others. Existing litigation
and any future litigation could result in substantial cost and diversion of
effort by the Company, which by itself could have a material adverse effect on
the Company's financial condition and operating results. Further, adverse
determinations in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent the
Company from manufacturing or selling its systems, any of which could have a
material adverse effect on the Company. In addition, there can be no assurance
that a license under a third party's intellectual property rights will be
available on reasonable terms, if at all.
EMPLOYEES
As of March 31, 1998, the Company had a total of 263 employees consisting
of 248 full-time permanent employees and 15 temporary or contract personnel,
including 65 in engineering, research and development, 47 in manufacturing, 115
in marketing, sales and customer service and support and 36 in executive and
administrative positions. Many of the Company's employees are highly skilled,
and the Company's success will depend in part upon its ability to attract,
retain and develop such employees. Skilled employees, especially employees with
extensive technological backgrounds, are currently in great demand. There can be
no assurance that the Company will be able to attract or retain the skilled
employees which may be necessary to continue its research and development,
manufacturing or marketing programs. The loss of any such persons, as well as
the failure to recruit additional key personnel in a timely manner, could have a
material adverse effect on the Company.
None of the Company's employees are represented by a labor union or covered
by a collective bargaining agreement. The Company considers its employee
relations to be good.
ADDITIONAL RISK FACTORS
Dependence on Recently Introduced Systems for Critical Etch Markets
The Company's 6500 series systems, its generation of critical etch systems,
have been designed for sub-0.35 micron critical etch applications in emerging
films, polysilicon and metal which the Company believes to be the leading edge
of critical etch applications. The Company's 6500 series systems which have been
installed are currently being used primarily for research and development
activities or in pilot production. For the 6500 series systems to achieve market
acceptance, the Company's customers must utilize these systems for volume
production. Achieving market acceptance of the Company's 6500 series systems is
very important to the Company's future financial results.
Because new product development commitments must be made well in advance of
sales, new product decisions must anticipate both the future requirements for
etch processes needed by semiconductor manufacturers and the equipment required
to address such applications. There can be no assurance that the market for
critical etch emerging film, polysilicon or metal etch systems will develop as
quickly or to the degree the Company expects. There can be no assurance whether
or when the 6500 series systems will achieve market acceptance. In addition, the
selling cycles of these new systems are typically lengthy.
In connection with the development and production of the 6500 series, the
Company has increased its operating expenses and is likely to invest in
increased inventory levels in the future. The failure to complete the commercial
introduction of this generation of systems in a timely manner could result in,
among other things, an increase in operating expenses and inventory obsolescence
without corresponding sales, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
If the 6500 series does not achieve significant sales or volume production
due to a lack of customer acceptance, inability to correct technical,
manufacturing or other difficulties which may develop with this
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series, or for any other reason, the Company's business, financial condition and
results of operations would be materially adversely affected.
Impediments to Customer Acceptance
A substantial investment is required to install and integrate capital
equipment into a semiconductor production line. The Company believes that once a
device manufacturer has selected a particular vendor's capital equipment, that
manufacturer generally relies upon that vendor's equipment for that specific
production line application and, to the extent possible, subsequent generations
of that vendor's systems. Accordingly, it may be extremely difficult to achieve
significant sales to a particular customer once another vendor's capital
equipment has been selected by that customer unless there are compelling reasons
to do so, such as significant performance or cost advantages. In addition,
certain of the Company's competitors may seek to sell, as an attractively priced
package, etch equipment together with other process equipment, such as
deposition equipment. Furthermore, some semiconductor manufacturers have already
made initial buying decisions for the next generation of sub-0.35 micron etch
requirements. Any failure to gain access and achieve sales to new customers will
adversely affect the successful commercial acceptance of the Company's 6500
series systems and would have a material adverse effect on the Company.
In addition, the Company believes that its future long term success also
depends on its ability to increase sales of its etch systems, particularly its
generation 6500 series, to Japanese semiconductor manufacturers. The Japanese
semiconductor market represents a substantial percentage of the worldwide market
and may pose additional challenges to penetrate successfully. The Company
believes that it must invest substantial resources in order to increase its
penetration of the Japanese semiconductor market and that, even with such
investments, there can be no assurance that it will be successful in increasing
its penetration of this market.
Fluctuations in Quarterly Operating Results
The Company's revenue and operating results have fluctuated and are likely
to continue to fluctuate significantly from quarter to quarter, and there can be
no assurance as to future profitability.
The Company's 900 series etch systems typically sell for prices ranging
between $350,000 and $600,000, while prices of the Company's 6500 series
critical etch systems typically range between $1.8 million and $2.5 million. To
the extent the Company is successful in selling its 6500 series systems, the
sale of a small number of these systems will probably account for a substantial
portion of revenue in future quarters, and a transaction for a single system
could have a substantial impact on revenue and gross margin for a given quarter.
The Company's backlog at the beginning of each quarter does not normally
include all systems sales needed to achieve planned revenue for the quarter.
Consequently, the Company depends on obtaining orders for shipment within a
particular quarter to achieve its revenue objectives for that period. Because
the Company builds a portion of its systems according to forecast, the absence
of significant backlog for an extended period of time could hinder the Company's
ability to plan expense, production and inventory levels, which could materially
adversely affect its operating results. Furthermore, a substantial portion of
the Company's net revenue has historically been realized near the end of the
quarter. Accordingly, the failure to receive anticipated orders or delays in
shipments near the end of a quarter, due, for example, to unanticipated customer
delays, cancellations or manufacturing difficulties, may cause quarterly net
revenue to fall significantly short of the Company's objectives, which could
materially adversely affect the Company's operating results.
The timing of new systems and technology announcements and releases by the
Company and others may also contribute to fluctuations in quarterly operating
results, including cases in which new systems or technology offerings cause
customers to defer ordering systems from the Company's existing product lines.
The Company's revenue and operating results may also fluctuate due to the timing
and mix of systems sold, the volume of service provided and spare parts
delivered in a particular quarter and changes in pricing by the Company, its
competitors or suppliers. The impact of these and other factors on the Company's
revenue and operating results in any future periods are, and will continue to
be, difficult for the Company to forecast.
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The need for continued investment in research and development, for capital
equipment requirements and for extensive ongoing customer service and support
capability worldwide result in significant fixed costs which will be difficult
to reduce in the event that the Company does not meet its sales objectives. The
Company's expense levels are based, in part, on expectations of future revenue.
If revenue in a particular quarter does not meet expectations, fixed operating
expenses will adversely affect results of operations. A variety of factors
influence the level of revenue in a particular quarter. Those factors include
the timing and mix of systems sales, the introduction or announcement of new
systems by the Company or the Company's competitors, management decisions to
commence or discontinue product lines, the Company's ability to design,
introduce and manufacture new systems on a timely basis, the timing of research
and development expenditures and expenses attendant to the further development
of marketing, process support and service capabilities, specific economic
conditions in the semiconductor industry or major global semiconductor markets,
general economic conditions and exchange rate fluctuations. The impact of these
and other factors on the Company's revenue and operating results in any future
periods are, and will continue to be, difficult for the Company to forecast.
Cyclicality of the Semiconductor Industry
The Company's business depends upon the capital expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and systems utilizing integrated circuits.
The semiconductor industry is highly cyclical and historically has experienced
periodic downturns, which often have had a material adverse effect on the
semiconductor industry's demand for semiconductor capital equipment, including
etch systems manufactured by the Company. The semiconductor industry is
currently experiencing such a slowdown. The current and prior semiconductor
industry downturns have adversely affected the Company's revenue, gross margins
and results of operations. In addition, the need for continued investment in
research and development, substantial capital equipment requirements, and
extensive ongoing customer service and support requirements worldwide will
continue to limit the Company's ability to reduce expenses in response to any
such downturn or slowdown. The Company's revenue, gross margin and results of
operations may continue to be materially adversely affected by the current
slowdown or by future downturns or slowdowns in the rate of capital investment
in the semiconductor industry. Moreover, although the semiconductor industry may
experience growth that causes significant growth in the semiconductor capital
equipment industry, there can be no assurance that such growth can be sustained
or that the Company will be positioned to benefit from such growth.
Domestic and International Economic Conditions
The Company's business is subject to general economic conditions, both in
the United States and abroad. A significant decline in economic conditions in
any significant geographic area could have a material adverse effect on the
Company. For example, there is currently an economic crisis in Asia, which has
led to weak demand for the Company's products in certain Asian
economies -- notably Korea and Japan. Furthermore, current price cutting by U.S.
personal computer manufacturers are putting pressure on semiconductor
manufacturers to contain spending on capital equipment. The Company anticipates
that such economic events may continue to adversely affect the Company's results
of operations, and a further decline of economic conditions could, in the
future, affect demand for the Company's products, which could have a material
adverse effect on the Company's sales and operating results.
Rapid Technological Change; Importance of Timely Product Introduction
The semiconductor manufacturing industry is subject to rapid technological
change and new system introductions and enhancements. The Company believes that
its future success depends on its ability to continue to enhance its existing
systems and their process capabilities, and to develop and manufacture in a
timely manner new systems with improved process capabilities. The industry also
is subject to fundamental changes in equipment requirements, such as the prior
shift from six inch wafer equipment to eight inch wafer equipment and the
anticipated shift from eight inch wafer equipment to twelve inch wafer
equipment.
The Company must manage system transitions successfully, as introductions
of new systems could adversely affect sales of existing systems, including its
6500 series. There can be no assurance that the
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Company will be successful in the introduction and volume manufacture of new
systems or that the Company will be able to develop and introduce, in a timely
manner, new systems or enhancements to its existing systems and processes which
satisfy customer needs or achieve market acceptance. The failure of the Company
to accomplish any of the above would adversely affect the Company's business,
financial condition and results of operations. In addition, the Company may
incur substantial unanticipated costs to ensure product functionality and
reliability early in its products' life cycles. If new products have quality or
reliability problems, the Company could experience reduced orders, delays in
collecting accounts receivable, higher manufacturing costs, and additional
service and warranty expenses, any of which could have a material adverse effect
on the Company's business, financial condition and operating results.
Lengthy Sales Cycle
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to add new manufacturing capacity or to
expand existing manufacturing capacity, both of which typically involve a
significant capital commitment. The Company often experiences delays in
finalizing system sales following initial system qualification while the
customer evaluates and receives approvals for the purchase of the Company's
systems and completes a new or expanded facility. Due to these and other
factors, the Company's systems typically have a lengthy sales cycle (often 12 to
18 months in the case of critical etch systems) during which the Company may
expend substantial funds and management effort. Lengthy sales cycles subject the
Company to a number of significant risks, including inventory obsolescence and
fluctuations in operating results over which the Company has little or no
control.
Future Capital Needs
The development, manufacture and marketing of etch systems are highly
capital intensive. In order to be competitive, the Company must continue to make
significant expenditures for, among other things, capital equipment and the
manufacture of evaluation and demonstration unit inventory for its 6500 series
etch systems. The Company expects that its existing cash balances, anticipated
cash flow from operations and funds available under its existing lines of credit
will satisfy its financing requirements for the next twelve months. To the
extent that such financial resources are insufficient to fund the Company's
activities, additional funds will be required. There can be no assurance that
additional financing will be available on reasonable terms or at all. To the
extent that additional capital is raised through the sale of additional equity
or convertible debt securities, the issuance of such securities could result in
additional dilution to the Company's stockholders.
Dependence on Key Employees
The future success of the Company is dependent, in part, on its ability to
retain certain key personnel. Many of these key personnel would be difficult to
replace. The Company also needs to attract additional skilled personnel in all
areas of its business to grow. The competition for these personnel is intense,
and the loss of any such persons, as well as the failure to recruit additional
key personnel in a timely manner, could have a material adverse effect on the
Company's business, financial condition and operating results. There can be no
assurance that the Company will be able to retain its existing personnel or
attract additional qualified employees in the future.
Customer Concentration
Although the composition of the group comprising the Company's largest
customers may vary from year to year, the loss of a significant customer or any
reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the semiconductor manufacturing
industry, may have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's ability to increase
its sales in the future will depend, in part, upon its ability to obtain orders
from new customers as well as the financial condition and success of its
existing customers and the general economy of which there can be no assurance.
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Additional Risks Associated with International Sales and Operations
Sales of the Company's systems in certain countries are billed in local
currency, and the Company has two lines of credit denominated in Japanese Yen.
The Company generally attempts to offset a portion of its U.S. dollar
denominated balance sheet exposures subject to foreign exchange rate
remeasurement each period held by its foreign subsidiaries whose books are
denominated in currencies other than U.S. dollars by purchasing currency options
and forward currency contracts for future delivery. There can be no assurance
that the Company's future results of operations will not be adversely affected
by foreign currency fluctuations. In addition, the laws of certain countries in
which the Company's products are sold may not provide the Company's products and
intellectual property rights with the same degree of protection as the laws of
the United States.
Control by Existing Stockholders
The Company's principal stockholders and the Company's executive officers
and directors beneficially owned approximately 56.0% of the Company's
outstanding shares of common stock as of March 31, 1998. Accordingly, these
stockholders are able to elect all of the Company's directors and to determine
the outcome of corporate actions requiring stockholder approval, such as mergers
and acquisitions, regardless of how other stockholders of the Company may vote.
Such a high level of ownership by such persons or entities may have a
significant effect in delaying, deferring or preventing a change in control of
the Company and may adversely affect the voting and other rights of holders of
common stock. In addition to the foregoing, the ability of the Company's Board
of Directors to issue preferred stock without further stockholder approval or to
exercise the anti-takeover provisions of its Shareholder Rights Plan in the
event of an unsolicited attempt to assume control of the Company could have the
effect of delaying, deferring or preventing a change in control of the Company.
See "-- Recent Development."
Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's operating
results, sales of the Company's common stock into the market place, failure to
meet or changes in analysts' expectations, natural disasters, outbreaks of
hostilities, general conditions in the semiconductor industry or the worldwide
economy, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in patents or other
intellectual property rights and developments in the Company's relationships
with its customers and suppliers could cause the price of the Company's common
stock to fluctuate, perhaps substantially. In addition, in recent years the
stock market in general, and the market for shares of small capitalization
stocks in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. There
can be no assurance that the market price of the Company's common stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance. See "-- Recent Development."
Year 2000 Compliance
The Company utilizes a significant number of computer software programs and
operating systems across its entire organization. To the extent that the
Company's software applications contain source code that is unable to interpret
appropriately the upcoming calendar year "2000" and beyond, some level of
modification or replacement of such applications will be necessary. The Company
is working to identify its applications that are not "Year 2000" compliant and
plans to modify or replace such applications, as necessary. Given information
known at this time about the Company's systems that are non-compliant, coupled
with the Company's ongoing, normal course-of-business efforts to upgrade or
replace critical systems, as necessary, management does not expect Year 2000
compliance costs to have any material adverse impact on the Company. Any costs
related to the Company's Year 2000 compliance efforts will be expensed as
incurred. No assurance can be given, however, that all of the Company's systems
will be Year 2000 compliant or that compliance costs or the impact of the
Company's failure to achieve substantial Year 2000 compliance will not have a
material adverse effect on the Company.
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RECENT DEVELOPMENT
The Company is a party to an Amended and Restated Information and
Registration Rights Agreement dated as of March 31, 1990, as amended (the
"Registration Rights Agreement"), with the holders of certain of its securities
issued prior the Company's initial public offering in October 1995. One of these
holders, Benefit Capital Management Corporation ("Benefit"), as Investment
Manager for The Prudential Insurance Company of America, Separate Account No.
VCA-GA-5298, has exercised its rights under the Registration Rights Agreement to
demand registration of the sale or other transfer ("disposition") of 1,745,813
shares (the "Benefit Shares") of the Company's common stock, pursuant to a
registration statement on Form S-3 (the "Registration Statement"). The
Registration Statement was filed with the Securities and Exchange Commission on
May 8, 1998. As of March 31, 1998, the Benefit Shares represented approximately
16.5% of the issued and outstanding shares of the Company's common stock.
Under the terms of the Registration Rights Agreement, the Company is
required to keep the Registration Statement effective until the earlier of 120
days from effectiveness of the Registration Statement or until Benefit has
completed the distribution of the Benefit Shares as described in the
Registration Statement. There is no limit to the number of times that Benefit
may demand registration of the Benefit Shares.
ITEM 2. PROPERTIES
The Company maintains its headquarters, encompassing its executive office,
manufacturing, engineering, research and development operations, in one leased
120,000 square foot facility in Petaluma, California. The Company currently
occupies 90,000 square feet of this building, with the remaining portion sublet
or being offered for sublet. The lease expires in March 2004. Other than certain
large pieces of capital equipment leased by the Company, the Company owns
substantially all of the machinery and equipment used in its facilities. The
Company believes that its existing facilities are adequate to meet its
requirements for several years.
The Company leases sales, service and process support space in Phoenix,
Arizona; Sunnyvale, California; Austin, Texas; Manassas, Virginia; Paris,
France; Munich, Germany; Kawasaki, Japan; Catania, Italy; Seoul, Korea and Hsin
Chu City, Taiwan. The Company also leases space for administrative offices in
Heemstede, The Netherlands.
ITEM 3. LEGAL PROCEEDINGS
Except as provided in Item 1. Business -- Intellectual Property, there are
no material legal proceedings pending to which the Company is a party.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended March 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers and directors of the Company as of March 31, 1998:
NAME AGE POSITION
---- --- --------
Robert V. Hery........... 56 Chairman of the Board and Director
Michael L. Parodi........ 49 President, Chief Executive Officer and Director
David Curtis............. 44 Vice President, Finance and Administration, Chief
Financial Officer, Secretary and Treasurer
Stephen P. DeOrnellas.... 43 Vice President, Technology and Corporate Development
and Chief Technical Officer
Diane M. Fennell......... 53 Vice President, Marketing and Customer Applications
Support
George B. Landreth....... 43 Vice President, Product Development
James D. McKibben........ 47 Vice President, Worldwide Sales and Marketing
Mark L. Siegel........... 59 Vice President, Worldwide Customer Support and
Operations
Robert V. Hery has been a Director of the Company since 1990 and assumed
the additional roles of President and Chief Executive Officer of the Company in
January 1991 and the Chairman of the Board in March 1995. Effective as of
December 17, 1997, Mr. Hery resigned as the President and Chief Executive
Officer of the Company. Mr. Hery remains Chairman of the Board of Directors of
the Company. From 1987 to 1990, Mr. Hery was President and Chief Executive
Officer of AMOT Controls Corporation, an international manufacturer of machinery
control components used in explosive and hazardous areas. From 1985 to 1987, Mr.
Hery served as Vice President and General Manager of KLA Instruments Corporation
("KLA"), a manufacturer of semiconductor capital equipment, where he started the
Wafer Inspection Systems Division. From 1984 to 1985, Mr. Hery was a consultant
to high-technology start-ups as Acting Chief Executive Officer and marketing
troubleshooter. From 1983 to 1984, he served as Vice President of Marketing and
New Business Development, and prior to that, from 1979 to 1983, he served as
Vice President of Operations, responsible for product development,
manufacturing, quality and cost control functions of MAI Basic Four, a
manufacturer of minicomputer equipment. From 1975 to 1979, Mr. Hery was Vice
President of Research and Product Development for Dataproducts Corporation, a
manufacturer of computer peripherals equipment. From 1965 to 1975, Mr. Hery held
various management positions in product development with NCR Corporation and the
communications division of Motorola.
Michael L. Parodi joined the Company as Director, President and Chief
Executive Officer in December 1997. From 1991 to 1996, Mr. Parodi was Chairman
of the Board, President and Chief Executive Officer of Semiconductor Systems,
Inc. ("SSI"), a manufacturer of photolithography processing equipment sold to
the semiconductor and thin film head markets until SSI was merged with FSI
International ("FSI"). Mr. Parodi remained with FSI as Executive Vice President
and General Manager of SSI from the time of the merger to December 1997,
integrating SSI into FSI. In 1990, Mr. Parodi led the acquisition of SSI from
General Signal Corporation. Prior to 1990, Mr. Parodi held various senior
engineering and operations management positions with General Signal Corporation,
Signetics Corporation, Raytheon Company, Fairchild Semiconductor Corporation and
National Semiconductor Corporation. Mr. Parodi currently is a member of the
Semiconductor Equipment and Materials International and the U.S. Display
Consortium Boards of Directors.
David Curtis joined the Company in August 1991 as Vice President of Finance
and Administration and Chief Financial Officer and from May 1995 until June
1996, he assumed the additional role of Vice President of Operations. Prior to
joining the Company, Mr. Curtis served as Chief Financial Officer of AMOT
Controls Corporation from 1988 until 1991. Prior to 1991, he held consulting
positions with Pittiglio Rabin Todd and
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McGrath, an operations consulting firm specializing in implementing planning and
control processes in rapidly growing technology companies and with Arthur
Andersen & Co.'s systems consulting division.
Stephen P. DeOrnellas joined the Company in July 1990 as Vice President of
Marketing and Technology, served as Vice President of Process Technology from
April 1995 until June 1996, at which time he was appointed Vice President,
Technology and Corporate Development and Chief Technical Officer. From 1989 to
1990 he was Vice President of Marketing for the Wafer Inspection Systems
Division of KLA. From 1981 to 1989 he held a variety of product development and
marketing management positions, including Vice President Marketing from 1987 to
1989, Vice President of Process Engineering from 1983 to 1987, and Senior
Process Engineer from 1981 to 1983, with Lam Research Corporation where he had
responsibility for the development and introduction of the Lam Autoetch and
Rainbow product lines.
Diane M. Fennell joined the Company in January 1997 as Vice President,
Marketing and Customer Applications Support. From 1995 to 1996, Ms. Fennell was
Group Manager of Product Management for Unit Instruments responsible for
introducing several new products. From 1991 to 1995, she owned and operated
Fennell Associates, Inc., a sales representative organization representing
multiple lines of semiconductor capital equipment and capital equipment
components to the semiconductor and capital equipment industries. From 1987 to
1991, Ms. Fennell held product marketing and sales support management positions
with LAM Research Corporation. Prior to 1987, she held several process
engineering and lab manager positions with Applied Materials, Inc., Temescal,
Signetics Corporation and Texas Instruments.
George B. Landreth joined the Company in November 1992 as Manager of
Mechanical Engineering where he was responsible for directing the development of
the Company's 6500 series critical etch systems platform. From June 1996 until
April 1997 he served as Director of Program Development, at which time he was
promoted to Vice President, Product Development. Prior to joining the Company,
Mr. Landreth held product development engineering management and design
engineering positions with KLA, Silicon Valley Group, Inc., Optoscan
Corporation, Eaton Corporation, Siltec Corporation and Peterbilt Motors.
James D. McKibben joined the Company in June 1996 as Vice President,
Worldwide Sales. From July 1996 until January 1997 he assumed the additional
role of Vice President, Marketing and Customer Applications Support. Since
September 1997, he has re-assumed the additional role of Vice President,
Marketing. Prior to joining the Company, from 1995 to 1996 and from 1988 to
1992, Mr. McKibben was Vice President, Marketing, Sales and Customer Support for
MRS Technology, Inc., a lithography equipment manufacturer for flat panel
displays. From 1993 to 1995, he served as Director of Marketing and Sales for
SSI. From 1992 to 1993, he was Regional Manager for Kulicke and Soffa
Industries, Inc., a maker of wire bonders and other back-end assembly equipment
for the IC industry. Prior to 1988, Mr. McKibben held several sales and service
management positions with Wild/Lietz, Inc., GCA Corporation and J.T. Baker
Chemical Company.
Mark L. Siegel joined the Company in June 1996 as Vice President,
Operations. In April 1997, he assumed the additional role of Vice President of
Worldwide Customer Support responsible for the Company's field service, spare
parts and refurbished systems businesses. From 1991 to 1996 he was Vice
President, Operations at Megatest Corporation up through its merger with
Teradyne Corporation. From 1989 to 1991 he served as President of SSI, a unit of
General Signal. From 1987 to 1989 he served as Vice President and General
Manager for VLSI Technology, Inc.'s ASIC Memory Division and from 1984 to 1987,
was Vice President and General Manager of Signetics Corporation's Application
Specific Products Division. Prior to 1984, Mr. Siegel held several senior
management positions with, Motorola, Xerox and Univac.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Since October 19, 1995, Tegal's common stock has been traded on the Nasdaq
National Market System under the symbol TGAL. The following table sets forth the
range of high and low sales prices for the Company's common stock for the
periods indicated since the Company's initial public offering on October 19,
1995.
HIGH LOW
---- ---
FISCAL YEAR 1996
Third Quarter........................................... 13 7/8 9 1/4
Fourth Quarter.......................................... 10 1/2 6 7/8
FISCAL YEAR 1997
First Quarter........................................... 11 1/8 6 3/8
Second Quarter.......................................... 8 4 5/8
Third Quarter........................................... 6 5/8 4 1/2
Fourth Quarter.......................................... 9 1/8 4 3/4
FISCAL YEAR 1998
First Quarter........................................... 8 3/4 5
Second Quarter.......................................... 10 1/4 6
Third Quarter........................................... 11 1/2 4
Fourth Quarter.......................................... 7 1/2 4
The approximate number of record holders of the Company's common stock as
of March 31, 1998 was 136. Tegal has not paid any cash dividends since its
inception and does not anticipate paying cash dividends in the foreseeable
future. Further, the Company's domestic lines of credit restrict the declaration
and payment of cash dividends.
18
20
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
-------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue.................................. $41,472 $57,423 $62,046 $ 44,645 $ 38,022
Gross profit............................. 17,095 25,901 28,577 20,583 16,508
Operating income (loss).................. (6,673) 3,180 6,572 1,376 (1,072)
Income (loss) before income taxes........ (5,545) 4,180 6,186 949 (1,501)
Net income (loss)........................ (5,545) 3,140 5,566 828 (1,501)
Net income (loss) per share:(1)
Basic................................. (0.53) 0.31 1.14 (0.05) (5.67)
Diluted............................... (0.53) 0.29 0.64 (0.05) (5.67)
Shares used in per share computation:
Basic................................. 10,380 10,124 4,506 502 357
Diluted............................... 10,380 10,764 8,760 502 357
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $25,660 $30,323 $23,283 $ 2,351 $ 3,462
Working capital.......................... 39,574 45,392 41,726 11,432 11,297
Total assets............................. 55,146 63,524 64,672 33,744 27,468
Short-term notes payable to banks and
others................................ 285 252 243 8,164 3,947
Long-term obligations.................... 101 301 356 4,338 3,749
Redeemable preferred stock............... 0 0 0 21,695 22,382
Stockholders' equity (deficit)........... 44,804 50,542 47,626 (11,633) (12,018)
- ---------------
(1) The Company adopted Statement of Accounting Standard No. 128 ("FAS 128"),
Earnings Per Share ("EPS"), which was issued in February 1997. FAS 128
requires presentation of both basic and diluted EPS on the income statement.
For all periods presented, basic EPS is computed by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS is computed using the
weighted average number of common and potential common stock equivalent
shares outstanding during the period, except when antidilutive. In computing
diluted EPS, the average stock price for the period is used in determining
the number of shares assumed to be purchased from the exercise of stock
options.
19
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information contained herein contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, which can
be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology or which constitute projected
financial information. The following contains cautionary statements identifying
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the years
indicated as a percentage of revenue:
MARCH 31,
-----------------------
1998 1997 1996
----- ----- -----
Revenue............................................. 100.0% 100.0% 100.0%
Cost of sales....................................... 58.8 54.9 53.9
----- ----- -----
Gross profit........................................ 41.2 45.1 46.1
Operating expenses:
Research and development.......................... 26.6 18.3 16.1
Sales and marketing............................... 14.7 10.8 10.7
General and administrative........................ 16.0 10.5 8.7
----- ----- -----
Total operating expenses.................. 57.3 39.6 35.5
----- ----- -----
Operating income.................................... (16.1) 5.5 10.6
Other income (expense), net......................... 2.7 1.7 (0.6)
----- ----- -----
Income before income taxes.......................... (13.4) 7.2 10.0
Provision for income taxes.......................... 0.0 1.7 1.0
----- ----- -----
Net income................................ (13.4)% 5.5% 9.0%
===== ===== =====
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
The Company's revenue is derived from sales of new and refurbished systems,
spare parts and non-warranty service. Revenue declined 27.7 percent in fiscal
1998 from fiscal 1997 (to $41.5 million from $57.4 million). Revenue declined
7.4 percent in fiscal 1997 from fiscal 1996 (to $57.4 million from $62.0
million). The revenue decline in fiscal 1998 as compared to fiscal 1997 and the
decline in backlog from $8.3 million as of March 31, 1997 to $3.4 million as of
March 31, 1998 were principally attributable to a decline in the number of 900
and 6500 series etch systems sold as the semiconductor industry further
curtailed its capital equipment expenditures in the face of a continued industry
slowdown. The Company believes that sales of its 6500 series systems were
adversely affected in its fourth quarter by the Asian financial crisis which
became apparent in the fall of 1997. The revenue decline in fiscal 1997 as
compared to fiscal 1996 was principally attributable to a decline in the number
of 900 series etch systems sold as the semiconductor industry curtailed its
capital equipment expenditures for capacity expansion in the face of an
industry-wide over-supply of manufacturing capacity. The Company's sales of
spare parts also declined in fiscal 1997 over fiscal 1996, which the Company
believes was primarily caused by customers depleting their supplies of spare
parts during the industry slowdown. Revenues derived from the sale of the
Company's 6500 series critical etch systems increased as a result of both
increased unit sales and higher average selling prices in fiscal 1997, partially
offsetting the declines experienced in 900 series etch systems and spare parts
sales. International sales accounted for approximately 61, 69 and 63 percent of
total revenue in fiscal 1998, 1997 and 1996, respectively. The Company expects
that international sales will continue to account for a significant portion of
its revenue.
20
22
Gross Profit
The Company's gross profit as a percentage of revenue declined to 41.2
percent in fiscal 1998 from 45.1 percent in fiscal 1997 and 46.1 percent in
fiscal 1996. The gross margin decline in fiscal 1998 as compared to fiscal 1997
was principally attributable to a decline in gross margins in the service
business as the Company invested in additional field service engineering support
for its major 6500 series systems customers that was above and beyond
contractually required installation and warranty support. The Company believes
that such investments are required to support customer's decisions to reorder
its 6500 series systems in the future. The one percent decline in gross profit
as a percentage of revenue in fiscal 1997 as compared to fiscal 1996 was
principally attributable to a change in product mix in which sales of
non-critical etch systems and spare parts, which carry higher gross margins,
declined and sales of the Company's 6500 series systems, which continue to carry
lower start-up related gross margins, increased.
The Company's gross profit as a percentage of revenue has been, and will
continue to be, affected by a variety of factors, including the mix and average
selling prices of systems sold and the costs to manufacture, service and support
new product introductions and enhancements. Gross margins for the Company's new
systems are typically lower than those of its more mature products due to the
inefficiencies associated with the start-up of manufacturing operations, smaller
vendor discounts due to lower order volumes and increased service installation
and warranty support. As a result of such factors and an anticipation that the
semiconductor industry slowdown will continue for several more quarters, the
Company does not expect that its gross margin for fiscal 1999 is likely to
improve over the fiscal 1998 level.
Research and Development
Research and development expenses consist primarily of salaries, prototype
material and other costs associated with the Company's research and product
development efforts. In absolute dollars, research and development expenses
increased to $11.0 million in fiscal 1998 from $10.5 million in fiscal 1997 and
$10.0 million in fiscal 1996. Research and development as a percentage of
revenue increased to 26.6 percent in fiscal 1998 from 18.3 percent in fiscal
1997 and 16.1 percent in fiscal 1996, as the Company continued to enhance and
support its new 6500 series systems in spite of the overall revenue decline in
both fiscal years. The absolute dollar increase in fiscal 1998 and 1997 expenses
over fiscal 1996 expenses was attributable to the hiring of additional personnel
in the applications engineering customer support area and increased spending on
prototype material for product enhancement programs. The Company anticipates
that fiscal 1999 research and development expenses in absolute dollars will
continue at or increase slightly from fiscal 1998 levels to permit the Company
to support new product applications at its new 6500 series customer
installations and to further enhance that product line.
Sales and Marketing
Sales and marketing expenses primarily consist of salaries, commissions,
trade show promotion and advertising expenses. In absolute dollars, sales and
marketing expenses declined to $6.1 million in fiscal 1998 from $6.2 million in
fiscal 1997 and $6.6 million in fiscal 1996. As a percentage of revenue, sales
and marketing expenses increased to 14.7 percent in fiscal 1998 from 10.8
percent in fiscal 1997 and 1996. The decline in sales and marketing expenses in
fiscal 1998 and fiscal 1997 over fiscal 1996 was principally due to declines in
systems sales volumes, resulting in lower commission spending and to reduced
spending on advertising. The Company expects to maintain or increase slightly
its absolute dollar spending on sales and marketing in fiscal 1999 to fund
public relations, advertising and sales literature expenses.
General and Administrative
General and administrative expenses consist of salaries, legal, accounting
and related administrative services and expenses associated with general
management, finance, information systems, human resources and investor relations
activities. General and administrative expenses in absolute dollars increased to
$6.6 million in fiscal 1998 from $6.0 million in fiscal 1997 and $5.4 million in
fiscal 1996. As a percentage of revenues, general and administrative expenses
increased to 16.0 percent in fiscal 1998 from 10.5 percent in
21
23
fiscal 1997 and 8.7 percent in fiscal 1996. The increase in general and
administrative expenses in fiscal 1998 over fiscal 1997 was primarily
attributable to the Company incurring additional legal fees and expenses in
connection with its patent disputes with AMS and TEL. The increase in general
and administrative expenses in fiscal 1997 over fiscal 1996 was attributable to
the Company incurring the expenses of being a public company for the full year
of fiscal 1997 that only partially impacted fiscal year 1996. In addition, the
Company incurred approximately $0.2 million in the first quarter of fiscal 1997
to complete the business system upgrade begun in late fiscal 1996. The Company
anticipates that its general and administrative expenses for fiscal 1999 will be
significantly higher than fiscal 1998 spending due primarily to additional legal
costs associated with its intellectual property.
Other Income (Expense), Net
Other income (expense), net, consists principally of interest income,
interest expense, and gains and losses on foreign exchange and the sale of fixed
assets. The Company recorded net non-operating income of $1.1 million and $1.0
million in fiscal 1998 and 1997, respectively. Net non-operating expenses of
$0.4 million were recorded in fiscal 1996. In fiscal 1998 and 1997, net
non-operating income was primarily attributable to interest income on
outstanding cash balances. In fiscal 1996, such expenses reflected interest
expenses incurred on loan balances outstanding until the Company's initial
public offering ("IPO") in the middle of fiscal 1996 and foreign exchange losses
offset, in part, by interest income on the unused portion of the proceeds from
the public offering.
Provision for Income Taxes
The Company's effective tax rate was 0.0 percent, 25.0 percent and 10.0
percent in fiscal 1998, 1997 and 1996, respectively. Effective tax rates for
fiscal 1996 and 1997 were materially lower than the statutory tax rate due to
extensive operating loss carryforwards generated in prior years.
Liquidity and Capital Resources
For fiscal 1998, the Company financed its operations from available cash
balances. In fiscal 1997, the Company financed its operations through cash
generated from operations. In fiscal 1996, the Company financed its operations
through bank borrowings and net proceeds from its IPO.
Net cash used in operations was $2.1 million in fiscal 1998, due
principally to a net loss of $3.1 million after adjusting for depreciation, a
decline in accrued expenses and an increase in inventories offset, in part, by a
decline in accounts receivable. Net cash provided by operations was $9.1 million
in fiscal 1997, due principally to net income in the period net of non-cash
depreciation expense totaling $5.5 million and a decrease in accounts receivable
and inventories offset, in part, by a decrease in accounts payable. Operating
activities generated approximately $0.2 million in cash flow for fiscal 1996.
Approximately $5.4 million of net cash was generated from net income plus
depreciation, senior term loan accretion, purchase credit redemptions and
accounts receivable reserve accruals, which was almost entirely offset by
increases in working capital due to the Company's increased sales volume in that
year. Included in net cash from operations were purchase credits for preferred
stock redemptions of $0, $1.6 million and $1.9 million in fiscal 1998, 1997 and
1996, respectively. Such credits apply to prior financing from Motorola which
has been fully repaid.
Net capital expenditures totaled $1.3 million, $1.4 million and $2.1
million in fiscal 1998, 1997 and 1996, respectively. Capital expenditures in all
three years were incurred principally for demonstration equipment, leasehold
improvements and to acquire design tools, analytical equipment and computers.
Net cash provided by financing activities totaled $0.1 million for fiscal
1998, due principally to proceeds from the exercise of employee stock options
and the Company's stock purchase plan offset, in part, by the repayment of
borrowings under the Company's two Japanese promissory note borrowing
facilities. Net cash used in financing activities for fiscal 1997 were
immaterial. Net cash provided by financing activities totaled $23.3 million in
fiscal 1996, due principally to the sale of the Company's common stock from its
IPO that year.
22
24
As of March 31, 1998, the Company had approximately $25.7 million of cash
and cash equivalents. In addition to cash and cash equivalents, the Company's
other principal sources of liquidity consisted of unused portions of several
bank borrowing facilities. At March 31, 1998, the Company had an aggregate
borrowing capacity of $20.0 million available under a domestic line of credit
secured by substantially all of the Company's assets. The facility is available
until August 15, 1998. In addition to the foregoing facility, as of March 31,
1998, the Company's Japanese subsidiary had available a 562 million Yen
(approximately $4.2 million at exchange rates prevailing on March 31, 1998)
unused portion of two Japanese bank lines of credit totaling 600 million Yen
(approximately $4.5 million at exchange rates prevailing on March 31, 1998)
secured by Japanese customer promissory notes held by such subsidiary in advance
of payment on customers' accounts receivable.
The Company believes that anticipated cash flow from operations, funds
available under its lines of credit and existing cash and cash equivalent
balances will be sufficient to meet the Company's cash requirements for the next
twelve months.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto appear on this Form
10-K according to the following Index of Consolidated Financial Statements:
PAGE
----
Consolidated Balance Sheets as of March 31, 1998 and
1997...................................................... 26
Consolidated Statements of Operations for the years ended
March 31, 1998, 1997 and 1996............................. 27
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended March 31, 1998, 1997 and 1996......... 28
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996............................. 29
Notes to Consolidated Financial Statements.................. 30
Independent Accountants' Report............................. 40
Independent Auditors' Report................................ 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement under the caption
"Election of Directors."
23
25
The information required by this Item relating to the Company's executive
officers is included under the caption "Executive Officers of the Registrant" in
Part I, Item 4, of this Form 10-K Report.
The information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the Company's
Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the captions "Principal Stockholders" and
"Ownership of Stock by Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements
See Index to Consolidated Financial Statements on page 23 of this Form
10-K.
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included herein:
PAGE
----
Schedule II -- Valuation and Qualifying Accounts............ S-1
Independent Accountants' Report on Schedule................. S-2
Independent Auditors' Report on Schedule.................... S-3
Schedules other than those listed above have been omitted since they are
either not required, not applicable, or the required information is shown in
the consolidated financial statements or related notes.
(3) Exhibits
The following exhibits are referenced or included in this report:
EXHIBIT DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibits 3(i).1 and 3(i).2
included in Registrant's Registration Statement on Form S-1
(File No. 33-84702) declared effective by the Securities and
Exchange Commission on October 18, 1995)
3.2 By-laws of Registrant (incorporated by reference to Exhibit
3(ii) included in Registrant's Registration Statement on
Form S-1 (File No. 33-84702) declared effective by the
Securities and Exchange Commission on October 18, 1995)
*4.1 Form of Certificate For Common Stock
*4.2 Information and Registration Rights Agreement between the
Registrant and the investors listed on Schedule A thereto
dated December 19, 1989, as amended to date
*10.1 Amended and Restated Equity Incentive Plan
24
26
EXHIBIT DESCRIPTION
- ------- -----------
*10.2 1990 Stock Option Plan
*10.4 Employee Qualified Stock Purchase Plan
*10.5 Stock Option Plan for Outside Directors
*10.6 Amended and Restated Agreement of Purchase and Sale between
the Registrant, Nazem & Company III, L.P. and Motorola, Inc.
dated December 18, 1989
*10.7 Restructuring Agreement between the Registrant and Motorola,
Inc. Dated October 31, 1991
*10.8 Conversion Agreement between the Registrant and Motorola,
Inc. dated August 31, 1994 and amendment thereto dated
August 8, 1995
10.10 Employment Agreement between the Registrant and Stephen P.
DeOrnellas dated December 16, 1997
*10.11 Lease dated August 15, 1986, as amended, between the
Registrant and South McDowell Investments
*10.12 Technology License Agreement between the Registrant and
Motorola, Inc. dated December 19, 1989
10.14 Security and Loan Agreement between the Registrant, Imperial
Bank and Sanwa Bank dated as of August 15, 1997
*10.15 Supplemental Source Code License Agreement with the
Registrant and Realtime Performance, Inc. dated as of
November 1, 1991
*10.16 Incentive Stock Option Agreement between the Registrant and
Robert V. Hery dated as of September 28, 1993
10.18 Employment Agreement between Registrant and Michael L.
Parodi dated as of December 17, 1997
*21 List of Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
23.2 Consent of Independent Auditors
24.1 Power of Attorney (included on page 42 of this Report)
27.1 Financial Data Schedule for the year ended March 31, 1998
27.2 Financial Data Schedule - Six Months Ended September 30,
1997
27.3 Financial Data Schedule - Three Months Ended June 31, 1997
27.4 Financial Data Schedule - Year Ended March 31, 1997
27.5 Financial Data Schedule - Nine Months Ended December 31,
1996
27.6 Financial Data Schedule - Six Months Ended September 30,
1996
27.7 Financial Data Schedule - Three Months Ended June 30, 1996
27.8 Financial Data Schedule - Year Ended March 31, 1996
- ---------------
* Incorporated by reference to identically numbered exhibits included in
Registrant's Registration Statement on Form S-1 (File No. 33-84702) declared
effective by the Securities and Exchange Commission on October 18, 1995.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the Company's fourth quarter ended
March 31, 1998. On May 8, 1998, the Company filed a Form 8-K announcing the
filing of a registration statement on Form S-3 to register shares of the
Company's Common Stock beneficially owned by a stockholder of the Company. The
selling stockholder exercised its demand registration rights pursuant to a
certain registration rights agreement with the Company.
25
27
TEGAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
------------------
1998 1997
------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $25,660 $30,323
Accounts receivable, less allowance for doubtful accounts 7,482 12,322
of $542 and $764.......................................
Inventory................................................. 14,424 13,154
Prepaid expenses and other current assets................. 2,249 2,274
------- -------
Total current assets.............................. 49,815 58,073
Property and equipment, net................................. 4,982 5,298
Other assets, net........................................... 349 153
------- -------
$55,146 $63,524
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 285 $ 252
Accounts payable.......................................... 2,691 3,442
Accrued expenses and other current liabilities............ 7,265 8,987
------- -------
Total current liabilities......................... 10,241 12,681
Long term portion of capital lease obligations.............. 101 301
------- -------
Total liabilities................................. 10,342 12,982
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.01 par value; 5,000,000 shares -- --
authorized.............................................
Common stock; $0.01 par value; 35,000,000 shares 106 103
authorized; 10,566,038 and 10,279,721 shares issued and
outstanding............................................
Additional paid-in capital................................ 55,177 54,821
Cumulative translation adjustment......................... (529) 23
Accumulated deficit....................................... (9,950) (4,405)
------- -------
Total stockholders' equity........................ 44,804 50,542
------- -------
$55,146 $63,524
======= =======
See accompanying notes to consolidated financial statements.
26
28
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
Revenue..................................................... $41,472 $57,423 $62,046
Cost of sales............................................... 24,377 31,522 33,469
------- ------- -------
Gross profit...................................... 17,095 25,901 28,577
------- ------- -------
Operating expenses:
Research and development.................................. 11,048 10,531 10,000
Sales and marketing....................................... 6,107 6,182 6,622
General and administrative................................ 6,613 6,008 5,383
------- ------- -------
Total operating expenses.......................... 23,768 22,721 22,005
------- ------- -------
Operating income.................................. (6,673) 3,180 6,572
Other income (expenses), net................................ 1,128 1,000 (386)
------- ------- -------
Income before income taxes........................ (5,545) 4,180 6,186
Provision for income taxes.................................. -- 1,040 620
------- ------- -------
Net income (loss)................................. $(5,545) $ 3,140 $ 5,566
======= ======= =======
Net income (loss) per share:
Basic............................................. $ (.54) $ .31 $ 1.14
Diluted........................................... $ (.54) $ .29 $ .64
Shares used in per share computation:
Basic............................................. 10,364 10,124 4,506
Diluted........................................... 10,364 10,764 8,760
See accompanying notes to consolidated financial statements.
27
29
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------- PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENTS DEFICIT EQUITY (DEFICIT)
---------- ------ ---------- ------------ ----------- ----------------
Balances at March 31, 1995.... 650,780 $ 7 $ 123 $ 939 $(12,702) $(11,633)
Common stock issued under
option and stock purchase
plans.................... 358,245 3 124 -- -- 127
Net proceeds from IPO....... 3,179,300 32 34,153 -- -- 34,185
Contribution of paid-in
capital through
conversion of Motorola
preferred stock.......... -- -- 891 -- -- 891
Conversion of redeemable
preferred stock to common
stock at IPO............. 5,876,079 59 19,164 -- -- 19,223
Cumulative translation
adjustment............... -- -- -- (324) -- (324)
Accretion of Series B
preferred stock.......... -- -- -- -- (409) (409)
Net income.................. -- -- -- -- 5,566 5,566
---------- ---- ------- ----- -------- --------
Balances at March 31, 1996.... 10,064,404 101 54,455 615 (7,545) 47,626
Common stock issued under
option and stock purchase
plans.................... 215,317 2 366 -- -- 368
Cumulative translation
adjustment............... -- -- -- (592) -- (592)
Net income.................. -- -- -- -- 3,140 3,140
---------- ---- ------- ----- -------- --------
Balances at March 31, 1997.... 10,279,721 103 54,821 23 (4,405) 50,542
Common stock issued under
option and stock purchase
plans.................... 286,317 3 356 -- -- 359
Cumulative translation
adjustment............... -- -- -- (552) -- (552)
Net income (loss)........... -- -- -- -- (5,545) (5,545)
---------- ---- ------- ----- -------- --------
Balances at March 31, 1998.... 10,566,038 $106 $55,177 $(529) $ (9,950) $ 44,804
========== ==== ======= ===== ======== ========
See accompanying notes to consolidated financial statements.
28
30
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
Cash flows from operating activities:
Net income (loss)......................................... $(5,545) $ 3,140 $ 5,566
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred tax asset................................... -- (638) (900)
Depreciation and amortization........................ 2,299 2,349 1,435
Accretion of senior term loan........................ -- -- 303
Purchase credit for preferred stock redemptions...... -- (1,587) (1,857)
Allowance for doubtful accounts and sales return
allowances........................................ (222) 311 (22)
Changes in operating assets and liabilities:
Accounts receivable............................... 5,062 3,559 (1,540)
Inventory......................................... (1,952) 3,967 (6,509)
Prepaid expenses and other current assets......... (171) 435 207
Accounts payable and other current liabilities.... (2,343) (2,467) 3,474
------- ------- -------
Net cash provided by (used in) operating
activities................................... (2,872) 9,069 157
------- ------- -------
Cash flows used in investing activities for the purchases of
property and equipment.................................... (1,283) (1,427) (2,067)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 359 368 34,312
Borrowings under (repayments of) notes payable............ 33 9 (7,922)
Repayment of capital lease financing...................... (348) (386) (224)
Repayment of long-term debt............................... -- -- (3,000)
------- ------- -------
Net cash provided by (used in) financing
activities................................... 44 (9) 23,166
------- ------- -------
Effect of exchange rates on cash and cash equivalents....... (552) (593) (324)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (4,663) 7,040 20,932
Cash and cash equivalents at beginning of year.............. 30,323 23,283 2,351
------- ------- -------
Cash and cash equivalents at end of year.................... $25,660 $30,323 $23,283
======= ======= =======
Supplemental disclosures of cash paid during the year:
Interest.................................................. $ 68 $ 118 $ 605
======= ======= =======
Income taxes.............................................. $ -- $ 1,727 $ 45
======= ======= =======
Supplemental disclosure of noncash investing and financing
activities:
Accretion of Series B preferred stock..................... $ -- $ -- $ 409
======= ======= =======
Transfer of demo lab equipment from inventory to fixed
assets................................................. $ 682 $ 127 $ 2,230
======= ======= =======
See accompanying notes to consolidated financial statements.
29
31
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Tegal Corporation (the "Company") designs, manufactures, markets, and
services plasma etch systems used in the fabrication of integrated circuits
("ICs") and related devices in the thin film head, small flat panel and printer
head applications. Etching constitutes one of the principal IC and related
device production process steps and must be performed numerous times in the
production of such devices.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. Intercompany transactions and balances are
eliminated in consolidation. Accounts denominated in foreign currencies are
translated using the foreign currencies as the functional currencies. Assets and
liabilities of foreign operations are translated to U.S. dollars at current
rates of exchange and revenues and expenses are translated using weighted
average rates. Gains and losses from foreign currency translation are included
as a separate component of other income (expense).
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles. This
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could vary
from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments having a maturity
of three months or less on the date of purchase to be cash equivalents.
At March 31, 1998 and 1997, all of the Company's investments are classified
as cash equivalents on the balance sheet. The investment portfolio at March 31,
1998 and 1997 is comprised of money market funds. At March 31, 1998 and 1997,
the fair value of the Company's investments approximated cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including
accounts receivable, approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of temporary cash investments and
accounts receivable. Substantially all of the Company's temporary investments
are invested in money market funds. The Company's accounts receivable are
derived primarily from sales to customers located in the U.S., Europe, and the
Far East. The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company maintains reserves for potential
credit losses. Write-offs during the periods presented have been insignificant.
As of March 31, 1998, two customers accounted for approximately 24% and 16% of
the accounts receivable balance. As of March 31, 1997, two customers accounted
for approximately 22% and 14% of the accounts receivable balance.
30
32
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
INVENTORY
Inventory is stated at the lower of cost or market, with cost being
determined under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets,
ranging from three to seven years. Leasehold improvements are stated at cost and
are amortized using the straight-line method over the shorter of the estimated
useful life of the improvements or the lease term.
FOREIGN EXCHANGE HEDGING
At March 31, 1998, the Company had forward exchange contracts maturing at
various dates throughout fiscal 1999 to exchange 62,000 Yen into $473 and 14,000
New Taiwanese Dollars (NTD) into $425 which also represented the fair value of
these instruments at March 31, 1998. The Company uses hedge accounting to
account for these contracts as they are a hedge against currency exposures
related to firm sales commitments. The counterparties to these contracts consist
of U.S. financial institutions.
The Company enters into foreign exchange options to hedge partially net
accounts receivable or payable U.S. dollar positions on the books of its
subsidiaries which are subject to periodic remeasurement. Foreign exchange
options permit, but do not require, the Company to exchange currencies at a
future date with another party at a contracted exchange rate. The expense of the
premiums paid for such options is amortized on a straight-line basis over the
term of the option (generally two to three months in duration) as a foreign
currency expense. Gains on the options that offset any losses on the underlying
balance sheet exposures are recognized as a foreign exchange gain over the term
of the options. To date, foreign currency gains on foreign exchange options have
been immaterial, and the only expenses incurred have been the premium cost of
the options. At March 31, 1998, the Company had no foreign exchange options
outstanding.
REVENUE RECOGNITION
Product revenue is recognized generally upon shipment, except in Japan
where revenue is generally recognized upon delivery. A provision for
installation costs and estimated future warranty costs is recorded at the time
revenue is recognized. Service revenue is recognized on a monthly basis as
billed, unless services are paid for in advance according to service contracts,
in which case revenue is deferred and recognized over the service period using
the straight-line method.
EARNINGS PER SHARE
The Company adopted Statement of Accounting Standard No. 128 ("FAS 128"),
Earnings Per Share ("EPS"), which was issued in February 1997. FAS 128 requires
presentation of both basic and diluted EPS on the income statement. For all
periods presented, basic EPS is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS is computed using the weighted average number of
common and potential common stock equivalent shares outstanding during the
period, except when antidilutive. In computing diluted EPS, the average stock
price for the period is used in determining the number of shares assumed to be
purchased from the exercise of stock options.
31
33
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. The Company's policy is
to grant options with an exercise price equal to the closing market price of the
Company's stock on the grant date. Accordingly, no compensation cost for stock
option grants has been recognized in the Company's statements of operations. The
Company provides additional pro forma disclosures as required under Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" (see Note 7).
NOTE 2. BALANCE SHEET AND INCOME STATEMENT DETAIL
Inventory consisted of:
MARCH 31,
------------------
1998 1997
------- -------
Raw materials............................................ $ 2,050 $ 3,988
Work in process.......................................... 2,053 2,126
Finished goods and spares................................ 10,321 7,040
------- -------
$14,424 $13,154
======= =======
Property and equipment consisted of:
MARCH 31,
------------------
1998 1997
------- -------
Machinery and equipment.................................. $ 7,990 $ 7,090
Demo lab equipment....................................... 3,216 2,542
Leasehold improvements................................... 2,818 2,452
------- -------
14,024 12,084
Less accumulated depreciation and amortization........... (9,042) (6,786)
------- -------
$ 4,982 $ 5,298
======= =======
Machinery and equipment at March 31, 1998 and 1997 includes approximately
$1,388 and $1,370, respectively, of assets under leases that have been
capitalized. Accumulated depreciation for such equipment approximated $1,045 and
$700, respectively.
A summary of accrued expenses and other current liabilities follows:
MARCH 31,
------------------
1998 1997
------- -------
Accrued compensation costs............................... $ 1,591 $ 1,554
Income taxes payable..................................... 996 1,221
Product warranty......................................... 2,256 2,251
Other.................................................... 2,422 3,961
------- -------
$ 7,265 $ 8,987
======= =======
32
34
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
Other income (expenses), net, consisted of the following:
YEAR ENDED MARCH 31,
-------------------------
1998 1997 1996
------ ------ -----
Interest income................................... $1,329 $1,250 $ 526
Interest expense.................................. (68) (118) (870)
Foreign currency exchange gain (loss), net........ (138) (186) (383)
Other............................................. 5 54 341
------ ------ -----
$1,128 $1,000 $(386)
====== ====== =====
NOTE 3. EARNINGS PER SHARE
FAS 128 requires the reconciliation of the numerators and the denominators
of the basic and diluted per share computation as follows:
1998 1997 1996
---------------------------- --------------------------- ---------------------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------ ------ --------- ------ ------ ---------
Net income (loss):......... $(5,545) $3,140 $5,566
Less accretion of Series
B Preferred Stock........ (409)
Basic EPS:
Net income available to
common stockholders......
------- ------ ------
$(5,545) 10,364 $(0.54) $3,140 10,124 $0.31 $5,157 4,506 $1.14
------- ====== ------ ===== ------ =====
Effects of dilutive
securities:
Stock Options............ 640 826
Preferred Stock.......... 409 3,428
Diluted EPS:
------- ------ ------ ------ ------ -----
Net income (loss)........ $(5,545) 10,364 $(0.54) $3,140 10,764 $0.29 $5,566 8,760 $0.64
------- ------ ====== ------ ------ ===== ------ ----- =====
Options to purchase 2,036,000 shares of common stock were outstanding at
March 31, 1998, but were not included in the computation of diluted EPS as the
Company was in a loss situation and to do so would have been antidilutive.
Options to purchase 53,000 and 310,000 were outstanding at March 31, 1997 and
1996, respectively, but were not included in the computation of diluted EPS as
their average exercise price was higher than the average market price of the
stock.
NOTE 4. NOTES PAYABLE TO BANKS AND OTHERS
The Company has a line of credit totaling $20,000 with two U.S. banks. The
line bears interest at prime (8.50 percent as of March 31, 1998), is secured by
a blanket security in all of the Company's assets, and is available until August
15, 1998. No amount was outstanding on this line of credit at March 31, 1998 and
1997. The line of credit restricts the declaration and payment of cash dividends
and includes, among other terms and conditions, requirements that the Company
maintain certain financial ratios and covenants. The Company was in compliance
with such covenants as of March 31, 1998 and 1997.
The Company's Japanese subsidiary has two lines of credit available for
300,000 Yen each (approximately $4,504 at exchange rates prevailing as of March
31, 1998), bearing interest at .0125 percent, in excess of Japanese prime (1.625
percent as of March 31, 1998). Both lines of credit are available until November
33
35
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
1998, and are secured by Japanese customer promissory notes provided in advance
of payment. Outstanding balances on these lines in U.S. dollars as of March 31,
1998 and 1997, were $285 and $252, respectively.
NOTE 5. INCOME TAXES
The components of income before income taxes are as follows:
YEAR ENDED MARCH 31,
---------------------------
1998 1997 1996
------- ------ ------
Domestic........................................ $(6,760) $3,400 $4,173
Foreign......................................... 1,215 780 2,013
------- ------ ------
$(5,545) $4,180 $6,186
======= ====== ======
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31,
---------------------------
1998 1997 1996
------- ------ ------
Current:
U.S. federal.................................. $ (939) $1,143 $1,100
State and local............................... -- 432 200
Foreign....................................... -- 103 220
------- ------ ------
(939) 1,678 1,520
------- ------ ------
Deferred:
U.S. federal.................................. 939 (589) (900)
State and local............................... -- (49) --
------- ------ ------
939 (638) (900)
------- ------ ------
Total................................. $ -- $1,040 $ 620
======= ====== ======
The income tax provision differs from the amount computed by applying the
statutory U.S. federal income tax rate as follows:
YEAR ENDED MARCH 31,
---------------------------
1998 1997 1996
------- ------ ------
Income tax provision at U.S. statutory rate..... $(1,885) $1,424 $2,103
State taxes net of federal benefit.............. (323) 254 132
Utilization of foreign losses................... (633) -- --
Reversal of deferred tax assets previously
reserved...................................... -- (178) --
Utilization of net operating losses............. 1,621 -- --
Increase (reduction) in valuation allowance..... 1,161 (460) (1,700)
Other........................................... 59 -- 85
------- ------ ------
Income tax expense............................ $ -- $1,040 $ 620
======= ====== ======
34
36
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
The components of deferred taxes are as follows:
MARCH 31,
------------------
1998 1997
------- -------
Revenue recognized for tax and deferred for book......... $ 378 $ 556
Non-deductible accruals and reserves..................... 2,702 2,910
Foreign net operating loss carryforward.................. 968 1,601
Credits.................................................. 1,550 --
Uniform cap adjustment................................... 130 330
Other.................................................... (26) 83
------- -------
5,702 5,480
Valuation allowance...................................... (5,463) (4,302)
------- -------
Net deferred tax asset......................... $ 239 $ 1,178
======= =======
The Company has recorded net deferred tax assets of approximately $239 and
$1,178 at March 31, 1998 and 1997, respectively. Management's evaluation of the
recoverability of the Company's deferred tax is based upon the Company's ability
to carry back temporary differences for future tax deductions against previously
taxed income.
At March 31, 1998, the Company has operating loss carryforwards in foreign
jurisdictions amounting to approximately $2,400, which begin to expire on March
31, 1999.
NOTE 6. LEASE COMMITMENTS
The Company has several noncancelable operating leases and capital leases,
primarily for general office, production, and warehouse facilities, that expire
over the next five years. Future minimum lease payments under these leases are
as follows:
YEAR ENDED MARCH 31,
----------------------------------
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
1999............................................. $223 $1,846
2000............................................. 66 1,799
2001............................................. 32 1,718
2002............................................. 3 34
2003............................................. -- --
---- ------
Total minimum lease payments..................... $324 $5,397
======
Less amount representing interest................ (31)
----
$293
====
The above schedule of minimum payments excludes minimum annual sublease
rentals payable to the Company totaling $391 through January 31, 2001, under
operating subleases. In addition, most leases provide for the Company to pay
real estate taxes and other maintenance expenses. Rent expense for operating
leases was $1,949, $2,406, and $2,613 during the years ended March 31, 1998,
1997, and 1996, respectively.
35
37
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 7. EMPLOYEE BENEFIT PLANS
Equity Incentive Plan
Pursuant to the Amended and Restated Equity Incentive Plan ("Equity
Incentive Plan"), options and stock purchase rights to purchase 3,500,000 shares
of common stock may be granted to management and consultants. The exercise price
of options and the purchase price of stock purchase rights generally is the fair
value of the Company's common stock on the date of grant. At the date of
issuance of the stock options, all options are exercisable; however the Company
has the right to repurchase any stock acquired pursuant to the exercise of stock
options upon termination of employment or consulting agreement at the original
exercise price for up to four years from the date the options were granted, with
the repurchase rights ratably expiring over that period of time. Incentive stock
options are exercisable for up to 10 years from the grant date of the option.
Nonqualified stock options are exercisable for up to 15 years from the grant
date of the option. As of March 31, 1998, 612,303 shares were available for
issuance under the Equity Incentive Plan.
1990 Stock Option Plan
Pursuant to the terms of the Company's 1990 Stock Option Plan ("Option
Plan"), options and stock purchase rights to purchase 550,000 shares of common
stock may be granted to employees of the Company or its affiliates. Incentive
stock options are exercisable for a period of up to 10 years from the date of
grant of the option and nonqualified stock options are exercisable for a period
of up to 10 years and 2 days from the date of grant of the option. At the date
of issuance of the stock options, all options are exercisable; however, the
Company has the right to repurchase any stock acquired pursuant to the exercise
of stock options upon termination of employment at the original exercise price
for up to four years from the date the options were granted, with the repurchase
rights ratably expiring over that period of time. As of March 31, 1998, 56,788
shares were available for issuance under the Option Plan.
Directors Stock Option Plan
Pursuant to the terms of the Stock Option Plan for Outside Directors
("Directors Plan"), up to 300,000 shares of common stock may be granted to
Directors. Under the Directors Plan, each Outside Director who was a member of
the Board at the date of the Company's initial public offering ("IPO") received
30,000 shares, of which 10,000 shares vested immediately and the right to
purchase the remaining 20,000 shares vesting over the next three years in equal
annual installments on the anniversary of such effective date. Any shares
granted subsequent to the date of the IPO will vest annually over four years,
contingent upon continued service as a director. As of March 31, 1998, 180,000
shares were available for issuance under the Directors Plan.
The following table summarizes the Company's stock option activity for the
three plans described above and weighted average exercise price within each
transaction type for each of the years ended March 31, 1998, 1997, and 1996
(number of shares in thousands):
1998 1997 1996
--------------- --------------- ---------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding at beginning of
year.................................... 1,413 $4.36 1,163 $4.90 996 $0.40
Options canceled.......................... (101) 6.07 (183) 9.52 (65) 0.27
Options granted........................... 942 6.01 595 5.50 590 10.25
Options exercised......................... (219) 0.47 (162) 0.33 (358) 0.36
------ ----- ----- ----- ----- -----
Options outstanding March 31.............. 2,036 $5.46 1,413 $4.36 1,163 $4.90
====== ===== ===== ===== ===== =====
36
38
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
At March 31, 1998, the repurchase right associated with 542,534 of the
options outstanding had elapsed.
Significant option groups outstanding at March 31, 1998, and related
weighted average exercise price of options granted for which the Company no
longer has the right to repurchase and contractual life information are as
follows (share information in thousands):
OPTIONS NO LONGER
SHARES SUBJECT TO
OUTSTANDING REPURCHASE RIGHTS
-------------- ------------------ REMAINING
EXERCISE PRICE RANGE # PRICE # PRICE LIFE (YEARS)
- --------------------- ----- ------ ------ --------- ------------
$.24 - $.53 229 $ .49 221 $ .48 5.58
$4.25 - $5.50 1,104 4.77 152 5.23 9.67
$6.13 - $6.25 129 6.20 25 6.25 11.43
$6.88 - $8.75 507 8.14 92 6.97 11.42
$12.00 67 12.00 53 12.00 8.13
As described in Note 1, the Company has adopted the disclosure provisions
as required by SFAS 123. Accordingly, no compensation cost has been recognized
in the Company's statements of operations as all options were granted at an
exercise price equal to the market value of the Company's common stock at the
date of grant.
As required by SFAS 123 for pro forma disclosure purposes only, the Company
has calculated the estimated grant date fair value using the Black-Scholes
model. The Black-Scholes model, as well as other currently accepted option
valuation models, was developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the calculated grant date fair value.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for the Company's stock option awards:
1998 1997
------- -------
Expected life (years)..................................... 4 years 4 years
Risk-free interest rate................................... 6.16% 6.07%
Volatility................................................ 60% 60%
Dividend yield............................................ 0% 0%
The weighted average estimated grant date fair value, as defined by SFAS
123, for options granted during 1998 and 1997 was $2.66 and $3.67 per option,
respectively. The estimated fair value, as defined by SFAS 123, attributable to
options canceled and reissued during 1998 and 1997 were $0 and $1.53 per option,
respectively. In addition, included in pro forma net income for fiscal year 1998
and 1997 is an adjustment of $81 and $104, respectively, related to the
cancellation of vested options not exercised due to employee terminations.
Stock Purchase Plan
Since 1996, the Company has offered an Employee Qualified Stock Purchase
Plan ("Employee Plan") under which rights are granted to purchase shares of
common stock at 85% of the lesser of the market value of such shares at the
beginning of a twelve month offering period or at the end of that twelve month
period. Beginning in 1997, the offering period has been reduced from twelve
months to six months. Under the Employee Plan, the Company is authorized to
grant options to purchase up to 250,000 shares of common
37
39
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
stock. 61,371 common stock shares were purchased in fiscal 1998 and 53,633
common shares were purchased in 1997. Shares available for future purchase under
the Employee Plan were 134,996 at March 31, 1998.
Compensation cost (included in pro forma net income and net income per
share amounts only) for the grant date fair value, as defined by SFAS 123, of
the purchase rights granted under the Employee Plan was calculated using the
Black-Scholes model. Included in the pro forma net income for fiscal year 1996
is compensation expense related to purchase rights granted during the period
December 15, 1995 through March 31, 1996. Fiscal years 1997 and 1998 reflect
purchase rights earned for the full fiscal year. The weighted average estimated
grant date fair value per share for rights granted under the Employee Plan, as
defined by SFAS 123, for stock purchased under the Employee Plan during 1998,
was $1.47.
Pro Forma Net Income and Net Income Per Share
Had the Company recorded compensation costs based on the estimated grant
date fair value (as defined by SFAS 123) for awards granted under its stock
option plans and stock purchase plan, the Company's net income and earnings per
share would have been reduced to the pro forma amounts below for the years ended
March 31, 1998, 1997 and 1996:
1998 1997 1996
------- ------ ------
Pro forma net income............................ $(6,674) $1,865 $5,155
Pro forma net income (loss) per share:
Basic......................................... $ (0.64) $ 0.18 $ 1.14
Diluted....................................... $ (0.64) $ 0.17 $ 0.59
The pro forma effect on net income and net income per share takes into
consideration pro forma compensation related only to grants made after December
15, 1995. Consequently, the pro forma effect on net income and net income per
share for 1998 and 1997 is not necessarily representative of the pro forma
effect on net income in future years.
Savings and Investment Plan
The Company has established a defined contribution plan that covers
substantially all U.S. employees who are regularly scheduled to work 20 or more
hours per week. Employee contributions of up to 4% of each covered employee's
compensation will be matched by the Company based upon a percentage to be
determined annually by the Board of Directors ("Board"). Employees may
contribute up to 15% of their compensation, not to exceed a prescribed maximum
amount. The Company made contributions to the plan of $31, $28, and $27 in the
years ended March 31, 1998, 1997, and 1996, respectively.
NOTE 8. SHAREHOLDER RIGHTS PLAN
On June 11, 1996, the Board adopted a Preferred Shares Rights Agreement
("Agreement") and pursuant to the Agreement authorized and declared a dividend
of one preferred share purchase right ("Right") for each common share of the
Company's outstanding shares at the close of business on July 1, 1996. The
Rights are designed to protect and maximize the value of the outstanding equity
interests in the Company in the event of an unsolicited attempt by an acquiror
to take over the Company, in a manner or under terms not approved by the Board.
Each Right becomes exercisable to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock at an exercise price of $45.00
upon certain circumstances associated with an unsolicited takeover attempt and
expires on June 11, 2006. The Company may redeem the Rights at a price of $0.01
per Right.
38
40
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 9. CUSTOMERS AND FOREIGN OPERATIONS
The Company's sales are primarily to domestic and international
semiconductor manufacturers. The top five customers accounted for approximately
41%, 46%, and 42% of the Company's total net sales for the years ended March 31,
1998, 1997, and 1996, respectively. Two customers accounted for approximately
16% and 8%, respectively, of net sales for the year ended March 31, 1998, two
customers accounted for approximately 17% and 10%, respectively, of net sales
for the year ended March 31, 1997, and two customers accounted for 14% and 13%,
respectively, of the Company's net sales for the year ended March 31, 1996.
The Company's operations by geographical region were as follows:
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
Revenues:
Sales to unaffiliated customers:
United States:
Customers in United States.............. $16,045 $17,795 $22,816
Customers in Asia....................... 11,110 18,640 10,928
Europe.................................... 8,667 10,061 13,769
Japan..................................... 5,650 10,927 14,533
------- ------- -------
Total external sales................. $41,472 $57,423 $62,046
======= ======= =======
Intercompany sales among geographic areas:
From United States........................... $ 9,057 $10,052 $19,401
From Europe.................................. 940 684 562
Consolidation eliminations................... (9,997) (10,736) (19,963)
------- ------- -------
Net intercompany sales............... $ -- $ -- $ --
======= ======= =======
Intercompany sales among the Company's geographic areas are recorded on the
basis of intercompany prices established by the Company.
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------ ------
Operating income (loss):
United States................................ $(7,425) $2,378 $4,465
Europe....................................... 478 115 594
Japan........................................ 274 687 1,513
------- ------ ------
Operating income..................... $(6,673) $3,180 $6,572
======= ====== ======
MARCH 31,
------------------
1998 1997
------- -------
Identifiable assets at year-end:
United States........................................... $55,326 $62,494
Europe.................................................. 8,819 8,345
Japan................................................... 4,424 4,215
Consolidation eliminations.............................. (13,423) (11,530)
------- -------
Total identifiable assets....................... $55,146 $63,524
======= =======
39
41
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Tegal Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) on page 24 present fairly, in all material
respects, the financial position of Tegal Corporation and its subsidiaries at
March 31, 1998 and 1997 and the results of its operations and cash flows for
each of the two years in the period ended March 31, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The consolidated financial statements of Tegal Corporation for the year
ended March 31, 1996 included herein, were audited by other independent
accountants whose report dated April 23, 1996 expresses an unqualified opinion
on those statements.
/s/ Price Waterhouse LLP
San Jose, California
April 24, 1998
40
42
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tegal Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Tegal Corporation and
subsidiaries for the year ended March 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Tegal Corporation and subsidiaries for the year ended March 31, 1996,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Mountain View, California
April 23, 1996
41
43
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.
TEGAL CORPORATION
By: /s/ MICHAEL L. PARODI
------------------------------------
Michael L. Parodi
President & Chief Executive Officer
Dated: May 18, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael L. Parodi and David Curtis,
jointly and severally, his attorneys-in-fact, each with the powers of
substitution, for him in any and all capacities, to sign any amendments to this
Report of Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT V. HERY Chairman and Director May 18, 1998
- -----------------------------------------------------
Robert V. Hery
/s/ MICHAEL L. PARODI President, Chief Executive May 18, 1998
- ----------------------------------------------------- Officer and Director (Principal
Michael L. Parodi Executive Officer)
/s/ DAVID CURTIS Chief Financial Officer May 18, 1998
- ----------------------------------------------------- (Principal Financial Officer)
David Curtis
/s/ WILLIAM F. O'SHEA Corporate Controller (Principal May 18, 1998
- ----------------------------------------------------- Accounting Officer)
William F. O'Shea
/s/ FRED NAZEM Director May 18, 1998
- -----------------------------------------------------
Fred Nazem
/s/ JEFFREY KRAUSS Director May 18, 1998
- -----------------------------------------------------
Jeffrey Krauss
/s/ THOMAS R. MIKA Director May 18, 1998
- -----------------------------------------------------
Thomas R. Mika
/s/ EDWARD A. DOHRING Director May 18, 1998
- -----------------------------------------------------
Edward A. Dohring
42
44
SCHEDULE II
TEGAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1996, 1997, 1998
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- ----------- ---------- -------- ---------- -------
Year ended March 31, 1996:
Product warranty..................... $1,155 $3,634 $ (4) $(2,199) $2,586
Doubtful accounts.................... 261 262 (94) (68) 361
Sales returns and allowances......... 185 298 (171) (229) 83
Cash discounts....................... 29 87 (78) (29) 9
Year ended March 31, 1997:
Product warranty..................... 2,586 4,406 (118) (4,623) 2,251
Doubtful accounts.................... 361 13 -- (54) 320
Sales returns and allowances......... 83 532 (1) (211) 403
Cash discounts....................... 9 51 -- (19) 41
Year ended March 31, 1998:
Product warranty..................... 2,251 2,706 (31) (2,670) 2,256
Doubtful accounts.................... 320 154 -- (177) 297
Sales returns and allowances......... 444 214 -- (420) 238
Cash discounts....................... 41 31 -- (65) 7
S-1
45
INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE
The Board of Directors
Tegal Corporation:
Our audit of the consolidated financial statements for the years ended
March 31, 1998 and 1997 referred to in our report dated April 23, 1998,
appearing on page 40 in the 1998 Annual Report on Form 10-K also included an
audit of the Financial Statement Schedule for each of the years in the two-year
period ended March 31, 1998 listed in Item 14(a) of this Form 10-K. In our
opinion, the Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ Price Waterhouse LLP
San Jose, California
April 24, 1998
S-2
46
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors
Tegal Corporation:
Under date of April 23, 1996, we reported on the consolidated statements of
operations, stockholders' equity (deficit), and cash flows of Tegal Corporation
and subsidiaries for the year ended March 31, 1996, which are included herein.
In connection with our audit of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying index in Item 14, as of and for the year
ended March 31, 1996. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this consolidated financial statement schedule based on our audits.
In our opinion, the consolidated financial statement schedule, referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG Peat Marwick LLP
Mountain View, California
April 23, 1996
S-3
47
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.10 Employment Agreement between Registrant and Stephen P.
DeOrnellas dated December 16, 1997
10.14 Security and Loan Agreement between the Registrant, Imperial
Bank and Sanwa Bank dated as of August 15, 1997
10.18 Employment Agreement between Registrant and Michael L.
Parodi dated as of December 17, 1997
23.1 Consent of Independent Accountants
23.2 Consent of Independent Auditors
24.1 Power of Attorney (included on page 42)
27.1 Financial Data Schedule for the year ended March 31, 1998
27.2 Financial Data Schedule - Six Months Ended September 30,
1997
27.3 Financial Data Schedule - Three Months Ended June 31, 1997
27.4 Financial Data Schedule - Year Ended March 31, 1997
27.5 Financial Data Schedule - Nine Months Ended December 31,
1996
27.6 Financial Data Schedule - Six Months Ended September 30,
1996
27.7 Financial Data Schedule - Three Months Ended June 30, 1996
27.8 Financial Data Schedule - Year Ended March 31, 1996