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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, 1999
[ ] 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 INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
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 June 4,
1999, as reported on the Nasdaq National Market was $24,179,206. As of June 4,
1999, 10,725,650 shares of the Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1999 Annual Meeting of
Stockholders to be held on September 21, 1999, 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 45 Index to Exhibits appears on page 43
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
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..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 22
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 39
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 39
Item 13. Certain Relationships and Related Transactions.............. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 40
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 over the last
20 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 have periodically 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. The industry
has experienced such excess supply and excess capacity since late 1995.
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 oxide,
polysilicon, and metal segments of the dry etch market represented approximately
50%, 25% and 25%, respectively, of the total sales of dry etch systems in 1998.
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 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 1999, approximately 72% 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
generate incremental sales from 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. Tegal
introduced the 6500 series tool in 1994 and since that time has expanded the
product line to address new applications. Etch applications addressed by the
6500 series system include; 1) new high K dielectrics and associated materials
used in capacitors at sub-0.5 micron for FRAMs and high-density DRAM devices, 2)
shallow trench isolation used to isolate transistors driven by increased packing
densities used in memory devices employing design rules at or below 0.25 micron,
3) sub-0.5 micron multi-layer metal films composed of
aluminum/copper/silicon/titanium alloys, 4) sub-0.5 micron polysilicon and 5)
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 $3.0 million.
The Company's 6500 series systems have been engineered to provide process
flexibility and competitive throughput for wafers and substrates up to eight
inches in diameter, 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 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.
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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 Seiko Epson
Bosch Micrel Semiconductor SGS-Thomson Microelectronics
Fuji Film Motorola Siemens
Hewlett-Packard NEC Sony
Hyundai Northern Telecom Toshiba
International Rectifier -- Oki Winbond
Hex Fet America Read Rite
LG Semiconductor Samsung
Of these 21 customers, 10 ordered one or more systems from the Company in
fiscal 1999. 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 1999, 1998 and 1997 accounted for 66.4%, 61.2% and 46.7%,
respectively, of the Company's total net system sales. Matsushita, Seiko Epson,
Fuji Film and Oki represented 17.9%, 14.8%, 14.7% and 11.8%, respectively, of
the Company's net system sales in fiscal 1999. 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. Other than the above customers, no single customer
represented more than 10% of the Company's net system sales in fiscal 1999, 1998
or 1997. 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 and related
device manufacturing industry, may have a material adverse effect on the
Company.
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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, 1999 and 1998 the Company's
order backlog was approximately $2.8 million and $3.4 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 16 direct
sales representatives and 12 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 locations 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, Italy and the United Kingdom and service/support
operations in Austria and China. In addition to its international direct sales
and support organizations, the Company markets its systems through independent
sales representatives in China, Israel, Korea and Singapore and selected markets
in the United States and Japan.
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 approximately 72%, 61% and 61% of total revenue for fiscal 1999,
1998 and 1997, 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 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
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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, 1999, the Company had 56 full-time employees dedicated to
equipment design engineering, process support and research and development.
Research and development expenses for fiscal 1999, 1998 and 1997 were $9.6
million, $11.0 million and $10.5 million, respectively, and represented 33.0%,
26.6% and 18.3% 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.
Through the use of such techniques, non-critical system manufacturing cycle
times take approximately 14 days and cycle times for its critical etch products
take two to three months.
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.
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
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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 26 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 13 additional
United States patents and 33 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.
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.
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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 17, 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.
On January 21, 1999 the Court issued an order interpreting the patents-in-suit
in the manner urged by the Company and rejecting the interpretation arguments
made by TEL. The Company is seeking, among other things, injunctive relief
barring TEL from importing or selling such products. The case was tried to the
Court on May 26-29, 1999 and is now under submission. The Court has indicated
that it expects to issue a decision by September 1, 1999. 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's results of operation or financial condition.
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. In March 1995,
the Company executed an agreement with AMS, containing an indemnification
provision 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 filed a claim for patent infringement in
Germany against AMS for the worldwide sale of integrated circuits manufactured
with the Company's dry plasma etch systems. Lucent and AMS have settled that
matter with respect to worldwide sales and AMS has also requested
indemnification for that matter. The Company believes that the claims made by
AMS are without merit and that the ultimate outcome of any defense of such
indemnification claims is unlikely to have a material adverse effect on the
Company's results of operations or financial condition. With respect to the
above matters, proposals have been made by the parties to an ICC arbitration
panel. The proposals must now be examined and finalized by the International
Court of Arbitration. A resolution is expected in July of this year. 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. The Company believes that GSC's dispute with Applied Materials has
subsequently been settled. 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, 1999, the Company had a total of 208 employees consisting
of 191 full-time permanent employees and 17 temporary or contract personnel,
including 56 in engineering, research and development, 38 in manufacturing, 81
in marketing, sales and customer service and support and 33 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 low volume 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.
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 $3.0 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.
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
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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. 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 business, financial condition 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 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
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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 believes 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 or existing credit lines are not renewed, 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.
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.
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.
Significant Stockholders; Anti-Takeover Effect
The Company's principal stockholders and the Company's executive officers
and directors beneficially owned approximately 41.0% of the Company's
outstanding shares of common stock as of March 31, 1999.
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Accordingly, these stockholders can be expected to have substantial influence
over the Company. 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.
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. In
addition, as of March 31, 1999, the holders of an aggregate of approximately 3.3
million shares of the Company's common stock issued and outstanding are entitled
to certain rights with respect to the registration of such shares for offer and
sale to the public under the Securities Act of 1933, as amended, pursuant to a
registration rights agreement between the Company and the holders. In addition
to other rights under the registration rights agreement, the holders may require
the Company, at any time and from time to time, to use its best efforts to
effect a registration statement on Form S-3, subject to various conditions.
There is no limit to the number of times that the holders may demand
registration on Form S-3 pursuant to the registration rights agreement. 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.
Year 2000 Compliance
In the past, many information technology products were designed with two
digit year codes that did not recognize century and millennium fields. As a
result these hardware and software products may not function or may give
incorrect results when Year 2000 dates are used. The "Year 2000 Issue" is faced
by substantially every company which relies on computer systems. In order to
address this issue, such hardware and software products may need to be upgraded
or replaced in order to correctly process dates beginning in the Year 2000.
The Company has formed a team and named an executive sponsor to identify
remedies and test and develop contingency plans for the Year 2000 Issue. The
Company estimates that the tasks identified by this team will be completed by
October 1999. To date, the Company has evaluated its internal systems, its
products and the readiness of its key suppliers and other third parties to
determine their Year 2000 status.
The Company's Enterprise Resource Planning (ERP) system is provided by a
software vendor and contains some custom modifications to meet the Company's
business requirements. The vendor-provided software is Information Technology
Association of America certified Year 2000 compliant. The custom modifications
have been evaluated to identify the changes necessary to make them compliant.
The Company estimates that the required modifications will be completed by
October 1999. The Company's current product offerings have been tested and
determined to either be Year 2000 compliant or, where they are not compliant, an
upgrade program is available to address the problem.
The Company completed its Year 2000 risk assessment and its corrective
action and contingency plans in April 1999. The corrective action plan has
identified required modifications and upgrades to its business software and
hardware. The risk assessment has evaluated the readiness of its key suppliers
and other third parties and the effect their compliance readiness might have on
the Company. For key suppliers where
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the risk of non-compliance has been assessed as high, backup or contingency
plans have been developed and documented and audits of those vendors for Year
2000 compliance are scheduled to be performed prior to October 1999. The Company
is not currently planning on assessing the compliance readiness of its
customers. The Company's customers are generally considerably larger than the
Company and are unlikely to complete any questionnaire which the Company might
furnish to its customers to assess Year 2000 compliance. The Company does not
anticipate that its ability to conduct its business operations with its
suppliers or customers is likely to be materially adversely impacted by Year
2000 issues since purchase and sales order transactions are generally
transmitted by mail, phone or facsimile between parties as opposed to through
some form of electronic data interchange.
The total expense of preparing the Company for Year 2000 compliance is
estimated at approximately $0.4 million, which is not material to the Company's
business operations or financial condition. Less than $0.1 million of expense
has been incurred through the date of this report. Nevertheless, satisfactorily
addressing the Year 2000 Issue is dependent on many factors, some of which are
not within the Company's control. Should the Company's internal systems, or the
internal systems of one or more of its significant vendors, customers, or other
third parties fail to achieve Year 2000 compliance, the Company's business,
financial condition and results of operations could be materially adversely
affected.
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 Santa Clara,
California; Austin, Texas; Manassas, Virginia; Kent, England; Munich, Germany;
Kawasaki, Japan; Catania, Italy; Seoul, Korea and Hsin Chu City, Taiwan.
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.
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, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers and directors of the Company as of March 31, 1999:
NAME AGE POSITION
---- --- --------
Michael L. Parodi........ 50 Chairman of the Board of Directors, President and
Chief Executive Officer
David Curtis............. 45 Vice President, Finance and Administration, Chief
Financial Officer, Secretary and Treasurer
Stephen P. DeOrnellas.... 44 Vice President, Technology and Corporate Development
and Chief Technical Officer
George B. Landreth....... 44 Vice President, Product Development
James D. McKibben........ 48 Vice President, Worldwide Sales and Marketing
Colin C. Tierney......... 52 Vice President, Worldwide Operations and Customer
Support
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Michael L. Parodi joined the Company as Director, President and Chief
Executive Officer in December 1997 and assumed the additional role of Chairman
of the Board in March 1999. 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 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 Instruments Corporation ("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.
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. In November 1998, he 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.
Colin C. Tierney joined the Company in September 1998 as Vice President,
Worldwide Operations and Customer Support. From 1996 to 1998, he was Vice
President Operations with KLA where he led Operations through the merger with
Tencor and implemented new product introduction and demand flow technology
processes. From 1988 to 1996, Mr. Tierney served as Vice President, Operations
with Lam Research Corporation where he led worldwide operations and facilities
functions and directed projects to integrate several acquisitions. Prior to
1988, Mr. Tierney held senior operations positions with Scientific Microsystems,
Inc., Ultratech Stepper, Inc. and Diablo Systems Inc., a division of Xerox
Corporation.
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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 prior
two fiscal years.
HIGH LOW
---- ---
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
FISCAL YEAR 1999
First Quarter............................................... 7 3 11/16
Second Quarter.............................................. 4 5/8 1 15/16
Third Quarter............................................... 3 5/8 1 3/8
Fourth Quarter.............................................. 5 13/16 2 17/32
The approximate number of record holders of the Company's common stock as
of March 31, 1999 was 138. 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.
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue.................................. $ 29,035 $41,472 $57,423 $62,046 $ 44,645
Gross profit............................. 8,161 17,095 25,901 28,577 20,583
Operating income (loss).................. (15,402) (6,673) 3,180 6,572 1,376
Income (loss) before income taxes........ (14,997) (5,545) 4,180 6,186 949
Net income (loss)........................ (15,132) (5,545) 3,140 5,566 828
Net income (loss) per share:(1)
Basic................................. (1.42) (0.54) 0.31 1.14 (0.05)
Diluted............................... (1.42) (0.54) 0.29 0.64 (0.05)
Shares used in per share computation:
Basic................................. 10,630 10,364 10,124 4,506 502
Diluted............................... 10,630 10,364 10,764 8,760 502
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $ 17,569 $25,660 $30,323 $23,283 $ 2,351
Working capital.......................... 27,298 39,574 45,392 41,726 11,432
Total assets............................. 39,652 55,146 63,524 64,672 33,744
Short-term notes payable to banks and
others................................ 223 285 252 243 8,164
Long-term obligations.................... 30 101 301 356 4,338
Redeemable preferred stock............... 0 0 0 0 21,695
Stockholders' equity (deficit)........... 30,816 44,804 50,542 47,626 (11,633)
- ---------------
(1) See Note 1 of Tegal's Consolidated Financial Statements for an explanation
of the computation of earnings per share.
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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,
-----------------------
1999 1998 1997
----- ----- -----
Revenue............................................. 100.0% 100.0% 100.0%
Cost of sales....................................... 71.9 58.8 54.9
----- ----- -----
Gross profit........................................ 28.1 41.2 45.1
Operating expenses:
Research and development.......................... 33.0 26.6 18.3
Sales and marketing............................... 18.0 14.7 10.8
General and administrative........................ 30.1 16.0 10.5
----- ----- -----
Total operating expenses.................. 81.1 57.3 39.6
----- ----- -----
Operating income (loss)............................. (53.0) (16.1) 5.5
Other income (expense), net......................... 1.4 2.7 1.7
----- ----- -----
Income (loss) before income taxes................... (51.6) (13.4) 7.2
Provision for income taxes.......................... (0.5) 0.0 1.7
----- ----- -----
Net income (loss).............................. (52.1)% (13.4)% 5.5%
===== ===== =====
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Revenue
The Company's revenue is derived from sales of new and refurbished systems,
spare parts and non-warranty service. Revenue declined 30 percent in fiscal 1999
from fiscal 1998 (to $29.0 million from $41.5 million). Revenue declined 28
percent in fiscal 1998 from fiscal 1997 (to $41.5 million from $57.4 million).
The revenue decline in fiscal 1999 as compared to fiscal 1998 was 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's sales
of spare parts and service also declined in fiscal 1999 over fiscal 1998, which
the Company believes was principally due to its customers operating their Tegal
equipment at a lower level of utilization during the industry slowdown. The
Company believes that sales of its 6500 series systems were adversely affected
in fiscal 1999 by the Korean financial crisis which became apparent in the fall
of 1997 and began to adversely impact the Company's sales of 6500 series systems
in the fourth quarter of fiscal 1998 and continues through the date of this
report. The revenue decline in fiscal 1998 as compared to fiscal 1997 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 1998 over fiscal 1997, which the Company believes was primarily caused by
customers depleting their supplies of spare parts during the industry slowdown.
Revenue 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 1998, partially offsetting the
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declines experienced in 900 series etch systems and spare parts sales.
International sales accounted for approximately 72, 61 and 69 percent of total
revenue in fiscal 1999, 1998 and 1997, respectively. The Company expects that
international sales will continue to account for a significant portion of its
revenue.
Gross Profit
The Company's gross profit as a percentage of revenue (gross margin)
declined to 28 percent in fiscal 1999 from 41 percent in fiscal 1998 and 45
percent in fiscal 1997. The gross margin decline in fiscal 1999 as compared to
fiscal 1998 was principally attributable to spreading substantially fixed
manufacturing overhead expenses over significantly fewer systems manufactured
and spare parts revenue. 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 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 equipment industry slowdown will continue for several more
quarters, the Company expects that its gross margin is likely to be below 35
percent for fiscal 2000.
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
decreased to $9.6 million in fiscal 1999 from $11.0 million in fiscal 1998 and
$10.5 million in fiscal 1997. Research and development as a percentage of
revenue increased to 33 percent in fiscal 1999 from 27 percent in fiscal 1998
and 18 percent in fiscal 1997, 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 decrease in fiscal 1999 expenses over fiscal
1998 expenses was attributable to reduced spending on salaries and related
expenses due to a reduction in headcount. The Company anticipates that fiscal
2000 research and development expenses in absolute dollars will continue at or
decline slightly from fiscal 1999 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 $5.2 million in fiscal 1999 from $6.1 million in
fiscal 1998 and $6.2 million in fiscal 1997. As a percentage of revenue, sales
and marketing expenses increased to 18 percent in fiscal 1999 from 15 percent in
fiscal 1998 and 11 percent in fiscal 1997. The absolute dollar declines in sales
and marketing expenses in fiscal 1999 versus fiscal 1998 and in fiscal 1998
versus fiscal 1997 were principally due to declines in systems sales volumes,
resulting in lower commission spending and to reduced spending on advertising.
The Company expects to reduce slightly its absolute dollar spending on sales and
marketing in fiscal 2000 through improved trade show and staffing efficiencies.
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
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and investor relations activities. General and administrative expenses in
absolute dollars increased to $8.7 million in fiscal 1999 from $6.6 million in
fiscal 1998 and $6.0 million in fiscal 1997. As a percentage of revenues,
general and administrative expenses increased to 30 percent in fiscal 1999 from
16 percent in fiscal 1998 and 11 percent in fiscal 1997. The absolute dollar
increases in general and administrative expenses in fiscal 1999 over fiscal 1998
and in fiscal 1998 over fiscal 1997 were primarily attributable to the Company
incurring additional legal fees and expenses in connection with its patent
disputes with AMS and TEL. The Company anticipates that its general and
administrative expenses for fiscal 2000 will be somewhat lower than fiscal 1999
spending due primarily to anticipated reductions in legal costs associated with
its intellectual property after the first half of fiscal 2000.
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 $0.4 million, $1.1
million and $1.0 million in fiscal 1999, 1998 and 1997, respectively. In all
three years, net non-operating income was primarily attributable to interest
income on outstanding cash balances.
Provision for Income Taxes
The Company's effective tax rate was 0 percent, 0 percent and 25 percent in
fiscal 1999, 1998 and 1997, respectively. The effective tax rate for fiscal 1997
was materially lower than the statutory tax rate due to extensive operating loss
carryforwards generated in prior years. The Company incurred net losses before
taxes in fiscal 1999 and 1998 and therefore recorded no tax liability in fiscal
1998 and a $0.1 million tax liability in fiscal 1999 associated with its
operations in Japan.
Liquidity and Capital Resources
For fiscal 1999 and 1998, the Company financed its operations from
available cash balances. In fiscal 1997, the Company financed its operations
through cash generated from operations.
Net cash used in operations was $8.8 million in fiscal 1999, due
principally to a net loss of $13.2 million after adjusting for depreciation, a
decline in accrued expenses and accounts payable offset, in part, by a decline
in accounts receivable, inventories and other current assets. Net cash used in
operations was $2.9 million in fiscal 1998, due principally to a net loss of
$3.1 million after adjusting for depreciation, a decline in accrued expenses 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 of $5.5 million after adjusting for depreciation and a decrease in
accounts receivable and inventories offset, in part, by a decrease in accounts
payable. Included in net cash from operations were purchase credits for
preferred stock redemptions of $1.6 million in fiscal 1997. Such credits apply
to prior financing from Motorola which was fully repaid in fiscal 1997.
Net capital expenditures totaled $0.1 million, $1.3 million and $1.4
million in fiscal 1999, 1998 and 1997, 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 $0.2 million for fiscal
1999, 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 equipment leases. Net cash provided by or used in financing
activities for fiscal 1998 and 1997 were immaterial.
As of March 31, 1999, the Company had approximately $17.6 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, 1999, the Company had an aggregate
borrowing capacity of $12.5 million available under a domestic line of credit
secured by substantially all of the Company's assets. The facility is available
until August 15, 1999. In addition to the foregoing facility, as of March 31,
1999, the Company's Japanese subsidiary had available two lines of credit
available for a total of
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390 million Yen (approximately $3.3 million at exchange rates prevailing on
March 31, 1999) unused portion of two Japanese bank lines of credit totaling 450
million Yen (approximately $3.8 million at exchange rates prevailing on March
31, 1999) 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. See Item 1-- Business -- Additional Risk Factors -- Future
Capital Needs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk Disclosure
The Company is exposed to financial market risks, including changes in
foreign currency exchange ("FX") rates and interest rates. To mitigate the risks
associated with FX rates, the Company utilizes derivative financial instruments.
The Company does not use derivative financial instruments for speculative or
trading purposes.
The Company manufactures the majority of its products in the US; however,
it services customers worldwide and thus has a cost base that is diversified
over a number of European and Asian currencies as well as the US dollar (USD).
This diverse base of local currency costs serves to mitigate partially the
earnings effect of potential changes in value of the Company's local currency
denominated revenue. Additionally, the Company denominates its export sales in
US dollars, whenever possible.
The Company manages short-term exposures to changing FX rates with
financial market transactions, principally through the purchase of forward FX
contracts to offset the earnings and cash-flow impact of the nonfunctional
currency-denominated receivables. Forward FX contracts are denominated in the
same currency as the receivable being covered, and the term of the forward FX
contract matches the term of the underlying receivable. The receivables being
covered arise from trade transactions and other firm commitments affecting the
Company.
The Company does not hedge its foreign currency exposure in a manner that
would entirely eliminate the effects of changes in FX rates on its operations.
Accordingly, the Company's reported revenue and results of operations have been,
and may in the future, be affected by changes in the FX rates. The Company has
utilized a sensitivity analysis for the purpose of identifying its market risk,
in relation to underlying transactions that are sensitive to FX rates including
foreign currency forward exchange contracts and nonfunctional currency
denominated receivables. The net amount that is exposed to changes in foreign
currency rates was evaluated against a 10% change in the value of the foreign
currency versus the US dollar. Based on this analysis, the Company believes that
it is not materially sensitive to changes in foreign currency rates on its net
exposed FX position.
A 42 basis-point move in the weighted average interest rates (10% of
Tegal's weighted average interest rates in 1999) affecting Tegal's floating rate
financial instruments as of March 31, 1999, would have an immaterial effect on
Tegal's pretax results of operations over the next fiscal year.
All of the potential changes noted above are based on sensitivity analyses
performed on the Company's balances as of March 31, 1999.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEGAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
-------------------
1999 1998
-------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17,569 $25,660
Accounts receivable, less allowance for returns and
doubtful accounts of $264 and $542..................... 4,831 7,482
Inventory................................................. 12,226 14,424
Prepaid expenses and other current assets................. 1,478 2,249
-------- -------
Total current assets.............................. 36,104 49,815
Property and equipment, net................................. 3,185 4,982
Other assets, net........................................... 363 349
-------- -------
$ 39,652 $55,146
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 223 $ 285
Accounts payable.......................................... 2,254 2,691
Accrued expenses and other current liabilities............ 6,329 7,265
-------- -------
Total current liabilities......................... 8,806 10,241
Long term portion of capital lease obligations.............. 30 101
-------- -------
Total liabilities................................. 8,836 10,342
-------- -------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock; $0.01 par value; 5,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock; $0.01 par value; 35,000,000 shares
authorized; 10,725,650 and 10,566,038 shares issued and
outstanding............................................ 107 106
Additional paid-in capital................................ 55,635 55,177
Accumulated other comprehensive income (loss)............. 156 (529)
Accumulated deficit....................................... (25,082) (9,950)
-------- -------
Total stockholders' equity........................ 30,816 44,804
-------- -------
$ 39,652 $55,146
======== =======
See accompanying notes to consolidated financial statements.
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TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
----------------------------
1999 1998 1997
-------- ------- -------
Revenue..................................................... $ 29,035 $41,472 $57,423
Cost of sales............................................... 20,874 24,377 31,522
-------- ------- -------
Gross profit........................................... 8,161 17,095 25,901
-------- ------- -------
Operating expenses:
Research and development.................................. 9,594 11,048 10,531
Sales and marketing....................................... 5,221 6,107 6,182
General and administrative................................ 8,748 6,613 6,008
-------- ------- -------
Total operating expenses.......................... 23,563 23,768 22,721
-------- ------- -------
Operating income (loss)................................ (15,402) (6,673) 3,180
Other income (expenses), net................................ 405 1,128 1,000
-------- ------- -------
Income (loss) before income taxes...................... (14,997) (5,545) 4,180
Provision for income taxes.................................. 135 -- 1,040
-------- ------- -------
Net income (loss)...................................... $(15,132) $(5,545) $ 3,140
======== ======= =======
Net income (loss) per share:
Basic.................................................. $ (1.42) $ (.54) $ .31
Diluted................................................ $ (1.42) $ (.54) $ .29
Shares used in per share computation:
Basic.................................................. 10,630 10,364 10,124
Diluted................................................ 10,630 10,364 10,764
See accompanying notes to consolidated financial statements.
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TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT EQUITY
---------- ------ ---------- ------------- ----------- -------------
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
Net income (loss).......... 3,140
Cumulative translation
adjustment............... (592)
Total comprehensive income
(loss)................... 2,548
---------- ---- ------- ----- -------- --------
Balances of March 31,
1997..................... 10,279,721 103 54,821 23 (4,405) 50,542
Common stock issued under
option and stock purchase
plans.................... 286,317 356 359
Net income (loss).......... (5,545)
Cumulative translation
adjustment............... (552)
Total comprehensive income
(loss)................... (6,097)
---------- ---- ------- ----- -------- --------
Balances at March 31,
1998..................... 10,566,038 106 55,177 (529) (9,950) 44,804
Common stock issued under
option and stock purchase
plans.................... 159,612 1 458 459
Net income (loss).......... (15,132)
Cumulative translation
adjustment............... 685
Total comprehensive income
(loss)................... (14,447)
---------- ---- ------- ----- -------- --------
Balances at March 31,
1999..................... 10,725,650 $107 $55,635 $ 156 $(25,082) $ 30,816
========== ==== ======= ===== ======== ========
See accompanying notes to consolidated financial statements.
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TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
----------------------------
1999 1998 1997
-------- ------- -------
Cash flows from operating activities:
Net income (loss)......................................... $(15,132) $(5,545) $ 3,140
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes................................ 239 -- (638)
Depreciation and amortization........................ 1,904 2,299 2,349
Purchase credit for preferred stock redemptions...... -- -- (1,587)
Allowance for doubtful accounts and sales return
allowances........................................ (277) (222) 311
Changes in operating assets and liabilities:
Accounts receivable............................... 2,929 5,062 3,559
Inventory......................................... 2,198 (1,952) 3,967
Prepaid expenses and other assets................. 756 (171) 435
Accounts payable and other current liabilities.... (1,459) (2,343) (2,467)
-------- ------- -------
Net cash provided by (used in) operating
activities...................................... (8,842) (2,872) 9,069
-------- ------- -------
Cash flows used in investing activities for the purchases of
property and equipment.................................... (106) (1,283) (1,427)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 459 359 368
Borrowings under (repayments of) notes payable............ (62) 33 9
Repayment of capital lease financing...................... (224) (348) (386)
-------- ------- -------
Net cash provided by (used in) financing
activities...................................... 173 44 (9)
-------- ------- -------
Effect of exchange rates on cash and cash equivalents....... 684 (552) (593)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (8,091) (4,663) 7,040
Cash and cash equivalents at beginning of year.............. 25,660 30,323 23,283
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 17,569 $25,660 $30,323
======== ======= =======
Supplemental disclosures of cash paid during the year:
Interest.................................................. $ 28 $ 68 $ 118
======== ======= =======
Income taxes.............................................. $ -- $ -- $ 1,727
======== ======= =======
Supplemental disclosure of noncash investing and financing
activities:
Transfer of demo lab equipment between inventory and fixed
assets................................................. $ (249) $ 682 $ 127
======== ======= =======
See accompanying notes to consolidated financial statements.
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TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 transactions are included
as a separate component of other income (expense).
The preparation of financial statements in conformity with generally
accepted accounting principles 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, although such
differences are not expected to be material to the financial statements.
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, 1999 and 1998, all of the Company's investments are classified
as cash equivalents on the balance sheet. The investment portfolio at March 31,
1999 and 1998 is comprised of money market funds. At March 31, 1999 and 1998,
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, due to their relatively short
maturity. The Company has foreign subsidiaries which operate and sell the
Company's products in various global markets. As a result, the Company is
exposed to changes in foreign currency exchange rates. The Company utilizes
hedge instruments, primarily forward contracts to manage its exposure associated
with firm third-party transactions denominated in non-functional currencies. The
Company does not hold derivative financial instruments for speculative purposes.
Forward contracts are considered identifiable hedges and realized and unrealized
gains and losses are deferred until settlement of the underlying commitments.
They are recognized as other gains or losses when a hedged transaction is no
longer expected to occur. Deferred gains and losses were not significant at
March 31, 1999 or 1998. Foreign currency gains and losses included in other
income (expenses) were not significant for the years ended March 31, 1999, 1998
and 1997.
At March 31, 1999, the Company had forward exchange contracts maturing at
various dates throughout fiscal 2000 to exchange 178,338 Yen into $1,427 which
also represented the fair value of these instruments at March 31, 1999. The
counterparties to these contracts consist of U.S. financial institutions.
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TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
The Company enters into foreign exchange options to partially hedge 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, 1999, the Company had no foreign exchange options
outstanding.
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, 1999, one customer accounted for approximately 35% of the
accounts receivable balance. As of March 31, 1998, two customers accounted for
approximately 24% and 16% of the accounts receivable balance.
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.
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
In accordance with Statement of Financial Accounting Standard No. 128
("SFAS 128"), Earnings Per Share ("EPS"), the Company reports both basic and
diluted EPS on the income statement. 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 shares outstanding plus any potentially dilutive
securities, 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 repurchased from proceeds received upon the exercise of stock options.
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TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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).
COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". Comprehensive income is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
The primary difference between net income and comprehensive income for Tegal, is
due to foreign currency translation adjustments. Comprehensive income is shown
in the statement of stockholders' equity.
SEGMENT REPORTING
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting Segments of a Business Enterprise." SFAS
131 establishes standards for disclosures about products and services,
geographic areas and major customers (see Note 9).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value. In addition,
corresponding derivative gains and losses should be either reported in the
statement of operations or stockholders equity, depending on the type of hedging
relationship that exists with respect to such derivatives. Adopting the
provisions of SFAS 133, which will be effective in fiscal 2001, is not expected
to have a material effect on the Company's consolidated financial statements.
NOTE 2. BALANCE SHEET AND INCOME STATEMENT DETAIL
Inventory consisted of:
MARCH 31,
------------------
1999 1998
------- -------
Raw materials............................................ $ 2,554 $ 2,050
Work in process.......................................... 1,590 2,053
Finished goods and spares................................ 8,082 10,321
------- -------
$12,226 $14,424
======= =======
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30
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
Property and equipment consisted of:
MARCH 31,
-----------------
1999 1998
------- ------
Machinery and equipment.......................... $ 8,081 $7,990
Demo lab equipment............................... 3,050 3,216
Leasehold improvements........................... 2,976 2,818
------- ------
14,107 14,024
Less accumulated depreciation and amortization... (10,922) (9,042)
------- ------
$ 3,185 $4,982
======= ======
Machinery and equipment at March 31, 1999 and 1998 includes approximately
$607 and $1,388, respectively, of assets under leases that have been
capitalized. Accumulated amortization for such equipment approximated $523 and
$1,045, respectively.
A summary of accrued expenses and other current liabilities follows:
MARCH 31,
-----------------
1999 1998
------- ------
Accrued compensation costs....................... $ 1,340 $1,591
Income taxes payable............................. 615 996
Product warranty................................. 1,855 2,256
Other............................................ 2,449 2,422
------- ------
$ 6,259 $7,265
======= ======
Other income (expenses), net, consisted of the following:
YEAR ENDED MARCH 31,
-------------------------
1999 1998 1997
----- ------ ------
Interest income................................... $ 951 $1,329 $1,250
Interest expense.................................. (28) (68) (118)
Foreign currency exchange gain (loss), net........ (549) (138) (186)
Other............................................. 31 5 54
----- ------ ------
$ 405 $1,128 $1,000
NOTE 3. EARNINGS PER SHARE
A reconciliation of the numerators and the denominators of the basic and
diluted per share computation is as follows:
1999 1998 1997
----------------------------- ---------------------------- ---------------------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- ------ --------- ------- ------ --------- ------ ------ ---------
Basic EPS:
Net income available to common
stockholders..................... $(15,132) 10,630 $(1.42) $(5,545) 10,364 $(0.54) $3,140 10,124 $0.31
====== ====== =====
Effects of dilutive securities:
Stock Options...................... -- -- -- -- -- 640
Diluted EPS:
-------- ------ ------- ------ ------ ------
Net income (loss).................. $(15,132) 10,630 $(1.42) $(5,545) 10,364 $(0.54) $3,140 10,764 $0.29
-------- ------ ------ ------- ------ ------ ------ ------ -----
------ ------ -----
30
31
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
Options to purchase 2,441,000 and 2,036,000 shares of common stock were
outstanding at March 31, 1999 and 1998, respectively, 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 shares of common
stock were outstanding at March 31, 1997, 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 $12,500 with one U.S. bank. The
line bears interest at prime (8.25 percent as of March 31, 1999), is secured by
a blanket security in all of the Company's assets, and is available until August
15, 1999. No amount was outstanding on this line of credit at March 31, 1999 and
1998. 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, 1999 and 1998.
The Company's Japanese subsidiary has two lines of credit available for
300,000 Yen and 150,000 Yen (approximately $2,524 and $1,262, respectively, at
exchange rates prevailing as of March 31, 1999), bearing interest at 0.25
percent and 0.5 percent, in excess of Japanese prime (1.375 percent as of March
31, 1999). The lines of credit are available until June 30, 2000 and November
30, 1999, 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, 1999 and 1998, were $223 and $285, respectively.
NOTE 5. INCOME TAXES
The components of income (loss) before income taxes are as follows:
YEAR ENDED MARCH 31,
-----------------------------
1999 1998 1997
-------- ------- ------
Domestic...................................... $(14,563) $(6,760) $3,400
Foreign....................................... (434) 1,215 780
-------- ------- ------
$(14,997) $(5,545) $4,180
======== ======= ======
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31,
-----------------------------
1999 1998 1997
-------- ------- ------
Current:
U.S. federal................................ $ (257) $ (939) $1,143
State and local............................. -- -- 432
Foreign..................................... 153 -- 103
-------- ------- ------
(104) (939) 1,678
-------- ------- ------
Deferred:
U.S. federal................................ 239 939 (589)
State and local............................. -- -- (49)
-------- ------- ------
239 939 (638)
-------- ------- ------
Total............................... $ 135 $ -- $1,040
======== ======= ======
31
32
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
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,
----------------------------
1999 1998 1997
------- ------- ------
Income tax provision at U.S. statutory rate.... $(5,099) $(1,885) $1,424
State taxes net of federal benefit............. (874) (323) 254
Utilization of foreign losses.................. -- (633) --
Reversal of deferred tax assets previously
reserved..................................... -- -- (178)
Utilization of net operating losses............ 638 1,621 --
Increase (reduction) in valuation allowance.... 5,419 1,161 (460)
Other.......................................... 51 59 --
------- ------- ------
Income tax expense........................... $ 135 $ -- $1,040
======= ======= ======
The components of deferred taxes are as follows:
MARCH 31,
-------------------
1999 1998
-------- -------
Revenue recognized for tax and deferred for book........ $ 344 $ 378
Non-deductible accruals and reserves.................... 2,435 2,702
Foreign net operating loss carryforward................. 458 968
Domestic net operating loss carryforward................ 5,212 --
Credits................................................. 2,101 1,550
Uniform cap adjustment.................................. 139 130
Other................................................... 193 (26)
-------- -------
Total.............................................. 10,882 5,702
Valuation allowance..................................... (10,882) (5,463)
======== =======
Net deferred tax asset........................ $ -- $ 239
======== =======
The Company has recorded net deferred tax assets of approximately $0 and
$239 at March 31, 1999 and 1998, respectively. Management's evaluation of the
recoverability of the March 31, 1998 deferred tax was based upon the Company's
ability to carry back temporary differences for future tax deductions against
previously taxed income.
At March 31, 1999, the Company had federal operating loss carryforwards of
approximately $13,150, which begin to expire in the year ending March 31, 2020.
32
33
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 6. COMMITMENTS AND CONTINGENCIES
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 ENDING
MARCH 31,
--------------------
CAPITAL OPERATING
LEASES LEASES
------- ---------
2000...................................................... $ 75 $1,941
2001...................................................... 30 1,713
2002...................................................... 2 38
2003...................................................... -- 13
2004...................................................... -- --
---- ------
Total minimum lease payments.............................. 107 $3,705
======
Less amount representing interest......................... (7)
----
$100
====
The above schedule of minimum payments excludes minimum annual sublease
rentals payable to the Company totaling $300 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 $2,069, $1,949, and $2,406 during the years ended March 31, 1999,
1998, and 1997, respectively.
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, 1999, 120,280 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, 1999, 70,281
shares were available for issuance under the Option Plan.
33
34
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
1998 EQUITY PARTICIPATION PLAN
Pursuant to the terms of the Company's 1998 Equity Participation Plan
("Equity Plan"), which was authorized as a successor plan to the Company's
Equity Incentive Plan and Option Plan, 600,000 shares of common stock may be
granted upon the exercise of options and stock appreciation rights or upon the
vesting of restricted stock awards. The exercise price of options generally will
be the fair value of the Company's common stock on the date of grant. Options
are generally subject to vesting at the discretion of the Compensation Committee
of the Board of Directors (the "Committee"). At the discretion of the Committee,
vesting may be accelerated when the fair market value of the Company's stock
equals a certain price established by the Committee on the date of grant.
Incentive stock options will be exercisable for up to 10 years from the grant
date of the option. Non-qualified stock options will be exercisable for a
maximum term to be set by the Committee upon grant. As of March 31, 1999, all
600,000 shares were available for issuance under the Equity Plan.
DIRECTORS STOCK OPTION PLAN
Pursuant to the terms of the Amended 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
elected or appointed to the Board on or after September 15, 1998, shall be
granted an option to purchase 20,000 shares of common stock and on each
secondary anniversary after the applicable election or appointment shall receive
an additional option to purchase 20,000 shares, provided that such outside
director continues to serve as an outside director on that date. 10,000 shares
each will vest on the first and second anniversaries of the option grant date,
contingent upon continued service as a director. Vesting may be accelerated, at
the discretion of the Board, when the fair market value of the Company's stock
equals a certain price set by the Board on the date of grant of the option. As
of March 31, 1999, 100,000 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, 1999, 1998, and 1997
(number of shares in thousands):
1999 1998 1997
--------------- --------------- ---------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding at beginning
of year......................... 2,036 $5.46 1,413 $4.36 1,163 $4.90
Options canceled.................. (184) 6.23 (101) 6.07 (183) 9.52
Options granted................... 742 2.15 942 6.01 595 5.50
Options exercised................. (62) 1.31 (219) 0.47 (162) 0.33
----- ----- ----- ----- ----- -----
Options outstanding March 31...... 2,532 $4.53 2,036 $5.46 1,413 $4.36
===== ===== ===== ===== ===== =====
At March 31, 1999, the repurchase right associated with 790,470 of the
options outstanding had elapsed.
34
35
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
Significant option groups outstanding at March 31, 1999, 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 (number of shares in thousands):
OPTIONS IN WHICH
UNDERLYING SHARES
NO LONGER SUBJECT
OUTSTANDING TO REPURCHASE RIGHTS
--------------- --------------------- REMAINING
EXERCISE PRICE RANGE SHARES PRICE SHARES PRICE LIFE (YEARS)
- -------------------- ------ ------ --------- --------- ------------
$ .24 - $ .53 216 $ .48 115 $ .50 4.51
$1.50 - $3.38 692 2.19 4 1.50 13.91
$4.25 - $5.50 993 4.73 381 5.07 8.64
$6.13 - $6.25 119 6.20 52 6.20 10.35
$6.88 - $8.75 453 8.19 180 7.64 10.25
$12.00 59 12.00 59 12.00 7.05
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 assumptions are included in the estimated grant date fair
value calculations for the Company's stock option awards and Employee Qualified
Stock Purchase Plan ("Employee Plan"):
1999 1998 1997
---- ---- ----
Expected life (years):
Stock options........................................ 4.0 4.0 4.0
Employee plan........................................ 0.5 0.5 0.5
Risk-free interest rate................................ 5.20% 6.16% 6.07%
Volatility............................................. 75% 60% 60%
Dividend yield......................................... 0% 0% 0%
The weighted average estimated grant date fair value, as defined by SFAS
123, for options granted during 1999, 1998 and 1997 was $1.27, $2.66 and $3.67
per option, respectively. The estimated fair value, as defined by SFAS 123,
attributable to options canceled and reissued during 1999, 1998 and 1997 were
$0, $0 and $1.53 per option, respectively.
STOCK PURCHASE PLAN
The Company has offered an 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 six month offering period or at the end of that six
month period. Under the Employee Plan, the Company is authorized to grant
options to purchase up to 250,000 shares of common stock. 97,541 common stock
shares were purchased in fiscal 1999 and 61,371 common shares were purchased in
1998. Shares available for future purchase under the Employee Plan were 37,455
at March 31, 1999.
35
36
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
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. The weighted average estimated grant date fair value per
share, as defined by SFAS 123, for rights granted under the Employee Plan for
stock purchased under the Employee Plan during 1999, 1998 and 1997 were $1.48,
$1.47 and $3.69, respectively.
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, 1999, 1998 and 1997:
1999 1998 1997
-------- ------- ------
Pro forma net income (loss)................... $(16,895) $(6,674) $1,865
Pro forma net income (loss) per share:
Basic....................................... $ (1.59) $ (0.64) $ 0.18
Diluted..................................... $ (1.59) $ (0.64) $ 0.17
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 1999, 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 percent of their compensation, not to exceed a prescribed
maximum amount. The Company made contributions to the plan of $27, $31 and $28
in the years ended March 31, 1999, 1998, and 1997, 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 acquirer
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.
36
37
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 9. SEGMENT REPORTING
The Company operates in one segment comprising the design, manufacturing
and servicing of plasma etch systems used in the manufacturing of integrated
circuits and related devices.
The following is a summary of the Company's operations:
YEARS ENDED MARCH 31,
-----------------------------
1999 1998 1997
------- ------- -------
Revenues:
Sales to customers located in:
United States............................ $ 8,111 $16,045 $17,795
Asia..................................... 2,669 11,110 18,640
Europe................................... 6,657 8,667 10,061
Japan.................................... 11,598 5,650 10,927
------- ------- -------
Total external sales................ $29,035 $41,472 $57,423
======= ======= =======
MARCH 31,
------------------
1999 1998
------- -------
Identifiable assets at year-end:
United States............................... $38,986 $55,326
Europe...................................... 8,405 8,819
Japan....................................... 7,623 4,424
Consolidation eliminations.................. (15,362) (13,423)
------- -------
Total identifiable assets........... $39,652 $55,146
======= =======
The Company's sales are primarily to domestic and international
semiconductor manufacturers. The top five customers accounted for approximately
41%, 41%, and 46% of the Company's total net sales for the years ended March 31,
1999, 1998, and 1997, respectively. No customer accounted for 10% or more of net
sales for the year ended March 31, 1999, one customer accounted for
approximately 16% of net sales for the year ended March 31, 1998, and two
customers accounted for 17% and 10%, respectively, of the Company's net sales
for the year ended March 31, 1997.
NOTE 10. RELATED PARTY TRANSACTIONS
Included in prepaids at March 31, 1999, was a note receivable for $230 from
an employee for an advance made by Tegal to the employee. This amount was repaid
in full on April 5, 1999. There were no such transactions in fiscal 1998.
37
38
REPORT OF INDEPENDENT ACCOUNTANTS
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) and (2) on page 40 present fairly, in all material
respects, the financial position of Tegal Corporation and its subsidiaries at
March 31, 1999 and 1998 and the results of its operations and cash flows for
each of the three years in the period ended March 31, 1999 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.
PricewaterhouseCoopers LLP
San Jose, California
April 28, 1999
38
39
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") no 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."
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."
39
40
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
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, 1999 and 1998... 23
Consolidated Statements of Operations for the years ended
March 31, 1999, 1998 and 1997............................. 24
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1999, 1998 and 1997................. 25
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997............................. 26
Notes to Consolidated Financial Statements.................. 27
Report of Independent Accountants........................... 38
(2) Financial Statement Schedule
PAGE
----
Schedule II -- Valuation and Qualifying Accounts............ S-1
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
*10.2 1990 Stock Option Plan
*10.4 Employee Qualified Stock Purchase Plan
10.5 Amended and Restated Stock Option Plan for Outside Directors
(incorporated by reference to Appendix B to the Proxy
Statement for the Registrant's 1998 Annual Meeting of
Stockholders filed with the SEC on July 29, 1998 (Commission
File No. 0-26824))
40
41
EXHIBIT DESCRIPTION
- ------- -----------
10.10 Employment Agreement between the Registrant and Stephen P.
DeOrnellas dated December 16, 1997 (incorporated by
reference to Exhibit 10.10 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1998 filed
with the SEC on May 20, 1998 (Commission File No. 0-26824))
*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 and
Imperial Bank dated as of August 15, 1998
*10.15 Supplemental Source Code License Agreement with the
Registrant and Realtime Performance, Inc. dated as of
November 1, 1991
10.18 Employment Agreement between Registrant and Michael L.
Parodi dated as of December 17, 1997 (incorporated by
reference to Exhibit 10.18 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1998 filed
with the SEC on May 20, 1998 (Commission File No. 0-26824))
10.19 1998 Equity Participation Plan (incorporated by reference to
Appendix A to the Proxy Statement for the Registrant's 1998
Annual Meeting of Stockholders filed with the SEC on July
29, 1998 (Commission File No. 0-26824))
*21 List of Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
24.1 Power of Attorney (included on page 42 of this Report)
27.1 Financial Data Schedule
- ---------------
* 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.
A current report on Form 8-K regarding an amendment to the Company's
stockholders' rights plan was filed with the SEC on January 15, 1999.
41
42
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
Chairman, President & Chief
Executive Officer
Dated: June 25, 1999
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/ MICHAEL L. PARODI Chairman, President, June 25, 1999
- -------------------------------------- Chief Executive Officer and Director
Michael L. Parodi (Principal Executive Officer)
/s/ DAVID CURTIS Chief Financial Officer June 25, 1999
- -------------------------------------- (Principal Financial Officer)
David Curtis
/s/ KATHY PETRINI Corporate Controller June 25, 1999
- -------------------------------------- (Principal Accounting Officer)
Kathy Petrini
/s/ FRED NAZEM Director June 25, 1999
- --------------------------------------
Fred Nazem
/s/ JEFFREY KRAUSS Director June 25, 1999
- --------------------------------------
Jeffrey Krauss
/s/ THOMAS R. MIKA Director June 25, 1999
- --------------------------------------
Thomas R. Mika
/s/ EDWARD A. DOHRING Director June 25, 1999
- --------------------------------------
Edward A. Dohring
42
43
SCHEDULE II
TEGAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1998, 1999
(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, 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
Year ended March 31, 1999:
Product warranty...................... 2,256 1,375 (57) (2,219) 1,355
Doubtful accounts..................... 297 35 -- (130) 202
Sales returns and allowances.......... 238 (25) -- (170) 43
Cash discounts........................ 7 49 -- (37) 19
S-1
44
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.14 Security and Loan Agreement between Registrant and Imperial
Bank dated as of August 15, 1998
23.1 Consent of Independent Accountants
24.1 Power of Attorney (included on page 42)
27.1 Financial Data Schedule