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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-26824
TEGAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 68-0370244
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2201 South McDowell Blvd.
Petaluma, California 94954
(Address of Principal Executive Offices)
Telephone Number (707) 763-5600
(Registrant's Telephone Number, Including Area Code)
----------------
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange List. Yes |_| No |X|
As of September 30, 2003, there were 16,994,124 shares of our common stock
outstanding.
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1
TEGAL CORPORATION AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2003 and March 31, 2003................................. 3
Condensed Consolidated Statements of Operations-- for the three and six months ended September 30, 2003 and 2002.. 4
Condensed Consolidated Statements of Cash Flows-- for the six months ended September 30, 2003 and 2002............ 5
Notes to Condensed Consolidated Financial Statements.............................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................................................................................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................ 14
ITEM 4. CONTROLS AND PROCEDURES........................................................................................... 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................................................. 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................................... 17
ITEM 5. OTHER INFORMATION................................................................................................. 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................................. 26
SIGNATURES................................................................................................................ 27
2
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
September 30, March 31,
2003 2003
-------- --------
Current assets:
Cash and cash equivalents ........................ $ 7,120 $ 912
Trade receivables, net ........................... 2,689 2,681
Inventories ...................................... 6,114 7,032
Prepaid expenses and other current assets ........ 4,726 465
-------- --------
Total current assets ......................... 20,649 11,090
Property and equipment, net ......................... 4,333 4,916
Intangible assets, net .............................. 894 959
Other assets ........................................ 395 244
-------- --------
Total assets ................................. $ 26,271 $ 17,209
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable .................................... $ 159 $ 389
2% convertible debentures, net ................... 179 --
Accounts payable ................................. 2,859 1,923
Product warranty ................................. 386 734
Customer deposits ................................ 1,120 --
Accrued expenses and other current liabilities ... 2,570 2,679
Deferred revenue ................................. 415 324
-------- --------
Total current liabilities .................... 7,688 6,049
Long-term portion of capital lease obligation ....... 32 37
-------- --------
Total liabilities ............................ 7,720 6,086
-------- --------
Stockholders' equity:
Common stock ..................................... 170 161
Additional paid-in capital ....................... 79,248 68,806
Accumulated other comprehensive income ........... 365 465
Accumulated deficit .............................. (61,232) (58,309)
-------- --------
Total stockholders' equity ................... 18,551 11,123
-------- --------
$ 26,271 $ 17,209
======== ========
See accompanying notes.
3
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenue:
Product ............................. $ 2,882 $ 2,444 $ 6,424 $ 5,750
Services ............................ 328 231 671 647
-------- -------- -------- --------
Total revenue .................... 3,210 2,675 7,095 6,397
-------- -------- -------- --------
Cost of sales:
Cost of product .................... 1,794 3,554 4,286 6,408
Cost of services ................... 424 753 780 1,417
-------- -------- -------- --------
Total cost of sales .............. 2,218 4,307 5,066 7,825
-------- -------- -------- --------
Gross profit (loss) .............. 992 (1,632) 2,029 (1,428)
-------- -------- -------- --------
Operating expenses:
Research and development ............ 836 1,021 1,539 2,297
Sales and marketing ................. 556 744 1,168 1,403
General and administrative .......... 916 1,271 1,952 2,324
-------- -------- -------- --------
Total operating expenses ......... 2,308 3,036 4,659 6,024
-------- -------- -------- --------
Operating loss ................... (1,316) (4,668) (2,630) (7,452)
Other expense, net ...................... (354) (154) (293) (216)
-------- -------- -------- --------
Net loss ............................ $ (1,670) $ (4,822) $ (2,923) $ (7,668)
======== ======== ======== ========
Net loss per share, basic and diluted ... $ (0.10) $ (0.33) $ (0.18) $ (0.53)
======== ======== ======== ========
Shares used in per share computations:
Basic ............................... 16,342 14,835 16,215 14,573
Diluted ............................. 16,342 14,835 16,215 14,573
See accompanying notes.
4
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
September 30,
--------------------
2003 2002
------- -------
Cash flows from operating activities:
Net loss ........................................................................ $(2,923) $(7,668)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization ................................................. 665 407
Allowance for doubtful accounts and sales return allowances ................... 74 21
Fair value of warrants issued for services rendered ........................... 159 121
Non-cash amortization of beneficial conversion feature and debt issuance costs 292 --
Inventory provision ........................................................... -- 1,922
Changes in operating assets and liabilities:
Receivables ................................................................. (77) (864)
Inventories ................................................................. 858 1,491
Prepaid expenses and other assets ........................................... (390) 578
Accounts payable ............................................................ 935 83
Accrued expenses and other liabilities ...................................... (236) (301)
Accrued warranty ............................................................ (348) (141)
Customer deposits ........................................................... 1,120 --
Deferred revenue ............................................................ 91 635
------- -------
Net cash provided by (used in) operating activities ....................... 220 (3,716)
------- -------
Cash flows used in investing activities-- purchases of property and equipment ...... (17) (309)
------- -------
Cash flows from financing activities:
Gross proceeds from the issuance of convertible debentures ...................... 7,165 --
Convertible debentures issuance costs ........................................... (982) --
Net proceeds from issuance of common stock ...................................... 9 16
Borrowings under lines of credit ................................................ 177 5,467
Repayment of borrowings under lines of credit ................................... (397) (5,292)
Payments on capital lease financing ............................................. (5) (5)
------- -------
Net cash provided by financing activities ................................. 5,967 186
------- -------
Effect of exchange rates on cash and cash equivalents .............................. 38 (22)
------- -------
Net increase (decrease) in cash and cash equivalents ............................... 6,208 (3,861)
Cash and cash equivalents at beginning of period ................................... 912 8,100
------- -------
Cash and cash equivalents at end of period ......................................... $ 7,120 $ 4,239
======= =======
See accompanying notes.
5
TEGAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in thousands, except share data)
1. Basis of Presentation:
In the opinion of management, the unaudited condensed consolidated interim
financial statements have been prepared on the same basis as the March 31, 2003
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary to fairly state the
information set forth herein. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (the "SEC"), but
omit certain information and footnote disclosures necessary to present the
statements in accordance with generally accepted accounting principles. These
interim financial statements should be read in conjunction with the consolidated
financial statements and footnotes included in the Annual Report on Form 10-K of
Tegal Corporation (the "Company") for the fiscal year ended March 31, 2003. The
results of operations for the three and six months ended September 30, 2003 are
not necessarily indicative of results to be expected for the entire year.
The consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company incurred net losses of $2,923 and $7,668 for the six months ended
September 30, 2003 and 2002, respectively. The company generated cash flows from
operations of $220 for the period ended September 30, 2003 and negative cash
flows from operations of $3,716 for the period ended September 30, 2002. To
finance its operations, the Company raised approximately $7.2 million in
proceeds from the sale of convertible debentures and warrants during the
six-month period ended September 30, 2003 (see Note 9). Management believes that
the proceeds from the debentures, combined with the effects of its cost
compression program, will be adequate to fund operations through fiscal year
2005. However, projected sales may not materialize and unforeseen costs may be
incurred. Additionally, the convertible debentures agreement includes a material
adverse change clause which allows the debenture holders to demand the immediate
payment of all outstanding balances upon the debenture holders' determination of
the occurrence of deemed material adverse changes to the Company's financial
condition, business or operations as determined by the debenture holders based
on required financial reporting and other criteria. These issues raise
substantial doubt about the Company's ability to continue as a going concern.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of temporary cash investments
and accounts receivable. Substantially all of the Company's temporary
investments are invested in highly liquid money market funds. The Company's
accounts receivable are derived primarily from sales to customers located in the
U.S., Europe, and Asia. The Company performs ongoing credit evaluations of its
customers and generally requires no collateral. The Company maintains allowances
for potential credit losses. Write-offs during the periods presented have been
insignificant. As of September 30, 2003 and September 30, 2002 one customer
accounted for approximately 45 % and three customers accounted for approximately
49 %, respectively, of the accounts receivable balance.
During the three months ended September 30, 2003 and 2002, one customer
accounted for 35 % and two customers accounted for 71 % of total revenues,
respectively. During the six months ended September 30, 2003 and September 30,
2002, two customers accounted for 42 % and four customers accounted for 48 % of
total revenues, respectively.
2. Inventories:
Inventories consisted of:
September 30, March 31,
2003 2003
------------- ----------
Raw materials .............................. $2,753 $3,218
Work in progress ........................... 1,796 1,937
Finished goods and spares .................. 1,565 1,877
------ ------
$6,114 $7,032
====== ======
6
3. Product Warranty:
The Company provides warranty on all system sales based on the estimated
cost of product warranties at the time revenue is recognized. The warranty
obligation is affected by product failure rates, material usage rates, and the
efficiency by which the product failure is corrected. Should actual product
failure rates, material usage rates and labor efficiencies differ from
estimates, revisions to the estimated warranty liability may be required.
Warranty activity for the three-month and six-month periods ended
September 30, 2003 and 2002 was:
Warranty Activity for the Warranty Activity for the
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Balance at the beginning of the period ...................... $ 751 $ 1,138 $ 734 $ 1,205
Additional warranty accruals for warranties issued during the
period ...................................................... 25 44 145 211
Accruals related to pre-existing warranties ................. (227) -- (227) --
Settlements made during the period .......................... (163) (118) (266) (352)
------- ------- ------- -------
Balance at the end of the period ............................ $ 386 $ 1,064 $ 386 $ 1,064
======= ======= ======= =======
Certain of the Company's sales contracts include provisions under which
customers would be indemnified by the Company in the event of, among other
things, a third-party claim against the customer for intellectual property
rights infringement related to the Company's products. There are no limitations
on the maximum potential future payments under these guarantees. The Company has
accrued no amounts in relation to these provisions as no such claims have been
made and the Company believes it has valid, enforceable rights to the
intellectual property embedded in its products.
4. Net Loss Per Common Share:
Basic Earnings Per Share ("EPS") is calculated by dividing net profit
(loss) for the period by the weighted average common shares outstanding for that
period. Diluted EPS takes into account the number of additional common shares
that would have been outstanding if the dilutive potential common shares
("common stock equivalents") had been issued.
Common stock equivalents for the three months ended September 30, 2003 and
September 30, 2002, and the six months ended September 30, 2003 and September
30, 2002 were 7,942,352 and 20,692 and 3,921,964 and 32,844, respectively, and
have been excluded from shares used in calculating diluted loss per share
because their effect would be antidilutive. The antidilutive securities excluded
from shares used in calculating diluted loss per share are as follows (in
thousands):
Three Months Ended Six Months Ended
September 30, September 30,
--------------- --------------
2003 2002 2003 2002
----- ---- ---- ----
Antidilutive common equivalent shares:
Options and warrants .................................... 1,328 21 615 33
Shares issuable upon conversion of convertible debentures 6,614 -- 3,307 --
----- ----- ----- -----
Total antidilutive shares ............................... 7,942 21 3,922 33
===== ===== ===== =====
7
5. Stock-Based Compensation:
The Company accounts for stock-based employee compensation under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, (APB No. 25) and related
interpretations. Under APB No. 25, compensation cost is equal to the difference,
if any, on the date of grant between the fair value of the Company's stock and
the amount an employee must pay to acquire the stock. SFAS No. 123, Accounting
for Stock-based Compensation, established accounting and disclosure requirements
using a fair value based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123 and related
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure.
The following table illustrates the effect on net income (loss) and net
income (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation (in thousands, except per
share data):
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- ---------
Net loss as reported ...................................... $(1,670) $(4,822) $(2,923) $ (7,668)
Add: Stock-based employee compensation expense included in
Reported net loss ..................................... -- -- -- --
Deduct: Total stock-based employee compensation expense
Determined under fair value method for all awards
(34) (295) (71) (397)
------- ------- ------- ---------
Proforma net loss ......................................... $(1,704) $(5,117) $(2,994) $ (8,065)
======= ======= ======= =========
Basic net loss per share:
As reported ............................................... $ (.10) $ (.33) $ (.18) $ (.53)
Proforma .................................................. $ (.10) $ (.33) $ (.18) $ (.53)
The Company accounts for stock-based employee compensation arrangements in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, (APB No. 25) and related interpretations, and complies with
the disclosure provisions of SFAS No. 123, Accounting for Stock-based
Compensation and SFAS No. 148 Accounting for Stock-Based Compensation -
Transition and Disclosure. The disclosure provisions of SFAS No. 123 and SFAS
No. 148 require judgments by management as to the estimated lives of the
outstanding options. Management has based the estimated life of the options on
historical option exercise patterns. If the estimated life of the options
increases, the valuation of the options will increase as well.
In June 2003, the Company issued stock options to purchase 300,000 shares
of the Company's common stock to the landlord of its Petaluma facility, as part
of a new lease agreement, and options to purchase 60,000 shares of the Company's
common stock to a service provider for services rendered. The options to the
landlord were valued at $107 (included in other assets as of June 30, 2003)
using the Black-Scholes model and the value of the option was expensed
immediately. The deferred charge associated with the landlord's options is being
amortized to operating expense over the life of the new lease of seven years.
Expense related to both of these transactions for the quarter ended June 30,
2003 amounted to $32 in the June quarter. The amortization of these charges
amounted to $16 in the quarter ended September 30, 2003.
In August 2003, the Company issued stock options to purchase 10,000 shares
of the Company's common stock to a service provider for services rendered. These
options were valued at $6 using the Black-Scholes model and the value of the
option was expensed immediately. In September 2003, the Company issued 158,311
restricted shares of the Company's common stock to a service provider for
services rendered. The fair value of these securities amounted to $111 and was
expensed in the quarter ended September 30, 2003.
6. Lines of Credit:
On June 30, 2003 the Company entered into an Amended Letter Agreement and
Subordination Agreement with Silicon Valley Bank, which subordinated the bank's
interest in Tegal's intellectual property to the investors in the Convertible
Debt Financing (See Note 9). The Company agreed not to request, until such time
as the investors' security interest in the intellectual property was terminated,
any loan, letter of credit, foreign exchange forward contract, cash management
service or credit accommodation under the Company's current line of credit with
Silicon Valley Bank. At September 30, 2003, the Company had no amounts
outstanding under this domestic line of credit, which had been collateralized by
substantially all of the Company's domestic assets and which was further
8
limited by the amounts of accounts receivable and inventories on the Company's
balance sheet. The facility had a maximum borrowing capacity of $10.0 million,
and bore interest at prime plus 1.0 %, or 5.25 % as of September 30, 2003. The
Company is currently negotiating with Silicon Valley Bank to modify this line of
credit to allow renewed borrowing with similar terms and conditions, but
including the receivables of its Japanese subsidiary in the borrowing base.
As of September 30, 2003, the Company's Japanese subsidiary had no amounts
outstanding under its bank line of credit which is collateralized by Japanese
customer promissory notes held by such subsidiary in advance of payment on
customers' accounts receivable. The Japanese bank line bears interest at
Japanese prime (1.375 % as of September 30, 2003) plus 1.0 %, has a renewal date
of September 30, 2004, and has a total capacity of 150 million yen
(approximately $1,038 at exchange rates prevailing on September 30, 2003). As of
September 30, 2002, the Company's Japanese subsidiary had approximately $109
outstanding under its bank line of credit which was collateralized by Japanese
customer promissory notes held by such subsidiary in advance of payment on
customers' accounts receivable.
Notes payable as of September 30, 2003 consisted of one outstanding note,
to the California Trade and Commerce Agency for $159. The unsecured note from
the California Trade and Commerce Agency carries an annual interest rate of 5.75
% with monthly interest only payments of approximately $4.2 per month. Although
the payment deadlines are being met, the note is currently in technical default
due to the merger of Sputtered Films and Tegal Corporation.
The Company also entered into a convertible debenture financing, which is
described in Note 9 to the financial statements.
7. Comprehensive Loss:
The components of comprehensive loss for the three and six-month periods
ended September 30, 2003 and 2002 are as follows:
Three Months Six Months
Ended Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Net loss .............................. $(1,670) $(4,822) $(2,923) $(7,668)
Foreign currency translation adjustment (63) (56) (100) 6
------- ------- ------- -------
$(1,733) $(4,878) $(3,023) $(7,662)
======= ======= ======= =======
8. Acquisition:
On August 30, 2002, the Company acquired Sputtered Films, Inc., a
California corporation ("Sputtered Films") pursuant to an Agreement and Plan of
Merger Agreement dated August 13, 2002. Sputtered Films is a leader in the
design and manufacture of sputtering equipment for semiconductor, photomask,
advanced packaging (including flip chip) and compound semiconductor
applications. The acquisition of Sputtered Films secured a source for a
complementary deposition technology for the Company's new materials strategy.
The following unaudited proforma financial results of Tegal Corporation
and Sputtered Films for the three and six months ended September 30, 2002 give
effect to the acquisition of Sputtered Films as if the acquisition had occurred
on April 1, 2002 and includes adjustments such as amortization of intangible
assets directly attributable to the acquisition, and expected to have a
continuing impact on the combined company.
These unaudited proforma financial results are provided for comparative
purposes only and are not necessarily indicative of what the Company's actual
results would have been had the forgoing transaction been consummated on April
1, 2002, nor does it give effect to the synergies, cost savings and other
charges expected to result from the acquisition. Accordingly, the proforma
financial results do not purport to be indicative of the Company's results of
operations as of the date hereof or for any period ended on the date hereof or
for any other future date or period.
9
Unaudited actual and proforma financial Information (in thousands, except
share and per share amounts):
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Actual Proforma Actual Proforma
Revenue .............................. $ 3,210 $ 2,755 $ 7,095 $ 8,061
Net loss ............................. $ (1,670) $ (5,363) $ (2,923) $ (8,361)
Net loss per share, basic and diluted $ (0.10) $ (0.34) $ (0.18) $ (0.53)
Shares used in per share computations:
Basic ............................. 16,342 15,835 16,215 15,823
Diluted ........................... 16,342 15,835 16,215 15,823
9. Convertible Debenture Financing:
On June 30, 2003, the Company signed definitive agreements with investors
to raise up to $7.2 million in a private placement of convertible debt financing
to be completed in two tranches. The first tranche, which closed on June 30,
2003, involved the sale of debentures in the principal amount of $929. The
Company received $424 in cash on June 30, 2003 and the remaining balance of $506
on July 1, 2003, which was recorded as other receivable as of June 30, 2003. The
closing of the second tranche, which occurred on September 9, 2003 following
shareholder approval on September 8, 2003, resulted in the receipt of
approximately $6,236 in cash on September 10, 2003.
The debentures agreement includes a Material Adverse Change ("MAC") clause
which allows the debenture holders to demand the immediate payment of all
outstanding balances upon the debenture holders' determination of the occurrence
of deemed material adverse changes to the Company's financial condition,
business or operations as determined by the debenture holders. Potential
material adverse changes that may cause the Company to default on the debentures
include any significant adverse effect on the Company's financial condition
arising from an event not previously disclosed in the Company's filings with the
Securities and Exchange Commission ("SEC"), such as a significant litigation
judgment against the Company, bankruptcy, or termination of the majority of the
Company's customer relationships. The MAC clause is effective until the
conversion of all outstanding debentures. As a result of the MAC clause, the
debentures are classified as current liabilities.
The Company was required to pay a cash fee of up to 6.65% of the gross
proceeds of the debentures to certain financial advisors upon the closing of the
second tranche. A fee of $448 has been recorded as a debt issuance cost and was
paid out in September 2003. The financial advisors also were granted warrants to
purchase 1,756,127 shares of the Company's common stock at an exercise price of
$0.35 per share. These warrants were valued at $1,387 using the Black-Scholes
option pricing model with the following variables: stock fair value of $0.93,
term of five years, volatility of 95% and risk-free interest rate of 2.5%.
The debentures accrue interest at the rate of 2% per annum. Both the
principal of, and the interest on, the debentures are convertible at the rate of
$0.35 per share. The principal of the debentures is convertible into 20,471,428
shares of the Company's common stock. The closing prices of the Company's common
stock on June 30, 2003 and September 8, 2003, the closing dates for the first
and second tranches, respectively, were $0.55 and $1.45. Therefore, a beneficial
conversion feature exists which needs to be accounted for under the provisions
of EITF 00-27, Application of Issue 98-5 to Certain Convertible Instruments. A
beneficial feature also exists in connection with the conversion of the interest
on the debentures into shares of common stock.
During the quarter ended September 30, 2003, several debenture holders
converted debentures in the principal amount of $255 into 728,184 shares of the
Company's common stock. These conversions resulted in the classification of $59
of debt into equity and the acceleration of amortization of $196 of debt
discount into interest expense.
In addition, the debenture holders were granted warrants to purchase
4,094,215 shares of the Company's common stock at an exercise price of $0.50.
The warrants expire after eight years. The warrants were valued using the
Black-Scholes model with the following variables: fair value of common stock of
$0.35 for the first tranche debentures and $0.93 for the second tranche
debentures, volatility of 37% and risk-free interest rate of 2.5%.
The relative fair value of the warrants of $1,572 has been classified as
equity because it meets all the equity classification criteria of EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock.
10
The following table presents the amounts allocated to the beneficial
conversion feature and warrants and remaining balance of debt after accounting
for these two equity instruments and conversions (in thousands):
First Second
Tranche Tranche Total
------- ------- -------
Debentures - principal amount .................... $ 929 $ 6,236 $ 7,165
Beneficial conversion feature (included in equity) (653) (6,236) (6,889)
Warrants (included in equity) .................... (61) -- (61)
Conversions to common stock ...................... (59) -- (59)
Accretion of debt discount ....................... 8 15 23
------- ------- -------
Net amount of debentures ......................... $ 164 $ 15 $ 179
======= ======= =======
The issuance costs associated with the debentures amounted to $3,940 and
are comprised of $982 in cash issuance costs, $1,387 associated with warrants
issued to financial advisors and $1,572 associated with warrants issued to the
second tranche debentureholders. These costs have been recorded as a short-term
asset to be amortized over the life of the debt. Amortization of debt issuance
costs for the quarter ended September 30, 2003 amounted to $48.
The value of the beneficial conversion feature, warrants and debt issuance
costs are being amortized as interest expense over the life of the debt using
the effective interest method. Interest expense for the quarter ended September
30, 2003 amounted to $303. This amount is comprised of $11 in nominal interest,
$251 in amortization of beneficial conversion feature and $41 in amortization of
debt issuance costs.
Amortization will accelerate if the Company repays the debt early, upon
conversion, if the material adverse change clause is invoked, or if it is deemed
that such invocation is probable given the presence of negative factors or if
the debt is converted into common stock. The Company will assess the probability
of the occurrence of the material adverse change clause on a quarterly basis.
10. Subsequent Events
On October 28, 2003, the Board of Directors granted options to purchase
3.5 million shares of the Company's common stock at an exercise price of $1.03
per share, which was the closing price of the Company's common stock on October
28, 2003, to certain employees and directors of the Company.
On November 11, 2003, the Company entered into a definitive agreement to
purchase substantially all of the assets and to assume certain liabilities of
Simplus Systems Corporation of Fremont, California, a development stage company.
Upon closing, which is expected to be completed by the end of November 2003, the
Company will issue 1,500,000 shares of its common stock and enter into
employment agreements with key Simplus personnel. Simplus has developed unique
Nano Layer Deposition (NLD) and Metal Organic Chemical Vapor Deposition (MOCVD)
systems which are complementary to products offered by the Company and which are
targeted at barrier, copper seed and high-k dielectric applications for DRAM and
logic devices.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information 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 forward-looking statements relate to the near-term
semiconductor capital equipment industry outlook, demand for our products, our
quarterly revenue and earnings prospects for the near-term future and other
matters contained herein. Such statements are based on current expectations and
beliefs and involve a number of uncertainties and risks that could cause the
actual results to differ materially from those projected. Such uncertainties and
risks include, but are not limited to, the cyclicality of the semiconductor
industry, impediments to customer acceptance, fluctuations in quarterly
operating results, competitive pricing pressures, the introduction of competitor
products having technological and/or pricing advantages, product volume and mix
and other risks detailed from time to time in our SEC reports. For further
information, refer to the business description and risk factors sections
included in our Form 10-K for the year ended March 31, 2003 and the risk factors
section included in this Form 10-Q (Part II, Item 5) as filed with the SEC.
11
Results of Operations
Tegal designs, manufactures, markets and services plasma etch and
deposition systems that enable the production of integrated circuits ("ICs"),
memory and related microelectronics devices used in personal computers, wireless
voice and data telecommunications, contact-less transaction devices, radio
frequency identification devices ("RFID's"), smart cards, data storage and
micro-level actuators. Etching and deposition constitute two of the principal IC
and related device production process steps and each must be performed numerous
times in the production of such devices.
The following table sets forth certain financial items as a percentage of
revenue for the three and six-month periods ended September 30, 2003 and 2002:
Three Months Six Months
Ended Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
------ ------ ------ ------
Revenue:
Product revenue ........... 89.8% 91.4% 90.5% 89.9%
Services revenue .......... 10.2 8.6 9.5 10.1
------ ------ ------ ------
Total revenue .......... 100.0 100.0 100.0 100.0
Cost of sales:
Cost of product ........... 55.9 132.9 60.4 100.2
Cost of services .......... 13.2 28.1 11.0 22.1
------ ------ ------ ------
Total cost of sales .... 69.1 161.0 71.4 122.3
------ ------ ------ ------
Gross profit (loss) ....... 30.9 (61.0) 28.6 (22.3)
Operating expenses:
Research and development .. 26.0 38.2 21.7 35.9
Sales and marketing ....... 17.3 27.8 16.5 22.0
General and administrative 28.6 47.5 27.5 36.3
------ ------ ------ ------
Total operating expenses 71.9 113.5 65.7 94.2
------ ------ ------ ------
Operating loss ...... (41.0) (174.5) (37.1) (116.5)
Other expense, net ........... (11.0) (5.8) (4.1) (3.4)
------ ------ ------ ------
Net loss ............ (52.0) (180.3) (41.2) (119.9)
====== ====== ====== ======
Product revenue. Product revenue for the three and six months ended
September 30, 2003 was $2,882 and $6,424, respectively, an increase of $438 and
$674, respectively, over the comparable periods in 2002. The increase for the
three months ended September 30, 2003 was principally due to the sale of a 6500
series system upgrade. The slight increase for the six months ended September
30, 2003 was principally due to slightly higher sales in parts and service.
Services revenue. Revenue from service sales for the three and six-month
periods ended September 30, 2003 was $328 and $671, respectively, up slightly
from $231 and $647 million for the three and six-month periods ended September
30, 2002, which we believe is a result of customers' slight increased
utilization of Tegal's etch systems.
International sales as a percentage of the Company's revenue for the three
and six months ended September 30, 2003 were approximately 81.3% and 81.8%,
respectively. International sales as a percentage of the Company's revenue for
the three and six months ended September 30, 2002 were approximately 73.0% and
73.8%, respectively. We believe that international sales will continue to
represent a significant portion of our revenue.
Gross profit (loss). Gross profit as a percentage of revenue was 30.9% and
(61.0%) for the three months ended September 30, 2003 and 2002, respectively,
and 28.6% and (22.3%)for the six months ended September 30, 2003 and 2002,
respectively. The increase in gross profit for the three and six months ended
September 30, 2003 compared to the same periods in the prior year was
principally attributable to reduced costs in the current year as a result of the
cost cutting measures taken in the prior year, coupled with a $1,922 inventory
provision in the prior year based on reduced revenue projections, which
reflected the continued slow-down of the semiconductor sector, and lower volume
of system sales.
Research and development. Research and development expenses consist
primarily of salaries, prototype material and other costs associated with our
ongoing systems and process technology development, applications and field
process support efforts. Research and development expenses were $836 and $1,021
for the three months ended September 30, 2003 and 2002, respectively, and $1,539
12
and $2,297 for the six months ended September 30, 2003 and 2002, respectively,
representing 26.0% and 38.2% of revenue for the three months and 21.7% and 35.9%
of revenue for the six months ended September 30, 2003 and 2002, respectively.
The decrease in research and development spending is due to the continued cost
reduction efforts.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions, trade show promotion and travel and living expenses
associated with those functions. Sales and marketing expenses were $556 and $744
for the three months ended September 30, 2003 and 2002, respectively, and $1,168
and $1,403 for the six months ended September 30, 2003 and 2002, respectively,
representing 17.3% and 27.8% of revenue for the three months ended September 30,
2003 and 2002, respectively, and 16.5% and 22.0% of revenue for the six months
ended September 30, 2003 and 2002, respectively. The decrease in sales and
marketing spending is due to the continued cost reduction efforts. These efforts
include but are not limited to a reduction of advertising and limited attendance
at trade shows.
General and administrative. General and administrative expenses consist
primarily of compensation for general management, accounting and finance, human
resources, information systems and investor relations' functions and for legal,
consulting and accounting fees of the Company. General and administrative
expenses were $916 and $1,271 for the three months ended September 30, 2003 and
2002, respectively, and $1,952 and $2,324 for the six months ended September 30,
2003 and 2002, respectively, representing 28.6% and 47.5% of revenue for the
three months ended September 30, 2003 and 2002, respectively, and 27.5% and
36.3% of revenue for the six months ended September 30, 2003 and 2002,
respectively. The decrease in general and administrative spending for the three
months and six months ended September 30, 2003 compared to the same period in
the prior year was primarily attributable to reduced expenses from our continued
cost cutting efforts and reduced legal expenses as compared to the same period
in the previous year.
Other expense, net. Other expense, net consists primarily of interest
expense from the debenture financing and the domestic line of credit offset in
part by interest income on outstanding cash balances, and gains and losses on
foreign exchange.
Liquidity and Capital Resources
We generated sufficient cash flows to finance our operations, for the
six-month period ended September 30, 2003, For the six-month period ended
September 30, 2002, we financed our operations through the use of outstanding
cash balances and borrowings against our promissory note borrowing facilities in
Japan, as well as our domestic line of credit.
Net cash provided from operations was $220 during the six months ended
September 30, 2003, due principally to a net loss of $2,923 offset by non cash
expense from depreciation and amortization, warrants issued for services
rendered, and non cash amortization of debt discount. Additionally the net loss
is offset by a net decrease in inventory and an increase in accounts payable and
accrued liabilities, offset by an increase of prepaid expenses and other assets.
Net cash used in operations was $3,716 during the six months ended September 30,
2002, due principally to a net loss of $7,668 offset by non cash expense for
depreciation, a non cash related provision for inventory and warrants issued for
services rendered. Additionally the net loss is offset by an increase in
accounts receivable and a decrease in accrued liabilities, partially offset by a
decrease in inventory and prepaid expenses and an increase in deferred revenue.
There were minimal net capital expenditures for the six months ended
September 30, 2003. Net capital expenditures totaled approximately $17 and $309
for the six months ended September 30, 2003 and September 30, 2002,
respectively. Capital expenditures in 2002 were incurred principally for
leasehold improvements and to acquire design tools, analytical equipment and
computers.
Cash proceeds from financing activities totaled $5,967 for the six months
ended September 30, 2003 and were primarily from the sale of debentures net of
issuance costs as discussed in Note 9 to our financial statements, partially
offset by the repayment of the Japanese line of credit. Net cash proceeds from
financing activities totaled $186 for the six months ended September 30, 2002.
The increase for the six months ended September 30, 2002 was due principally to
increased borrowing on the domestic line of credit.
On June 30, 2003 the Company entered into an Amended Letter Agreement and
Subordination Agreement with Silicon Valley Bank, which subordinated the bank's
interest in Tegal's intellectual property to the investors in the Convertible
Debt Financing (see Note 9 to our financial statements). The Company agreed not
to request, until such time as the investors' security interest in the
intellectual property was terminated, any loan, letter of credit, foreign
exchange forward contract, cash management service or credit accommodation under
the Company's current line of credit with Silicon Valley Bank. At September 30,
2003, the Company had no amounts outstanding under this domestic line of credit,
which had been collateralized by substantially all of the Company's domestic
13
assets and which was further limited by the amounts of accounts receivable and
inventories on the balance sheet. The facility had a maximum borrowing capacity
of $10.0 million, and bore interest at prime plus 1.0 %, or 5.25 % as of
September 30, 2003. The Company is currently negotiating with Silicon Valley
Bank to modify this line of credit to allow renewed borrowing with similar terms
and conditions, but including the receivables of its Japanese subsidiary.
Notes payable as of September 30, 2003 consisted of one outstanding note,
to the California Trade and Commerce Agency for $159. The unsecured note from
the California Trade and Commerce Agency carries an annual interest rate of 5.75
% with monthly interest only payments of approximately forty-two hundred dollars
per month. Although the payment deadlines are being met, the note is currently
in technical default due to the merger of Sputtered Films and Tegal Corporation.
The Company also entered into a convertible debenture financing, which is
described in Note 9 to the financial statements. The convertible debentures
include a material adverse change clause which allows the debenture holders to
demand the immediate payment of all outstanding balances upon the debenture
holders' determination of the occurrence of deemed material adverse changes to
our financial condition, business or operations as determined by the debenture
holders based on required financial reporting and other criteria. Potential
material adverse changes causing us to default on the debentures may include any
significant adverse effect on our financial condition arising from an event not
previously disclosed in our SEC filings such as a significant litigation
judgment against Tegal, bankruptcy, termination of the majority of our customer
relationships.
The consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company incurred net losses of $2,923 and $7,668 for the six months ended
September 30, 2003 and 2002, respectively. The company generated cash flows from
operations of $220 for the period ended September 30, 2003 and negative cash
flows from operations of $3,716 for the period ended September 30, 2002. To
finance its operations, the Company raised approximately $7.2 million in
proceeds from the sale of convertible debentures and warrants during the six
month period ended September 30, 2003 (see Note 9). Management believes that the
proceeds from the debentures, combined with the effects of its cost compression
program, will be adequate to fund operations through fiscal year 2005. However,
projected sales may not materialize and unforeseen costs may be incurred.
Additionally, the convertible debentures agreement includes a material adverse
change clause which allows the debenture holders to demand the immediate payment
of all outstanding balances upon the debenture holders' determination of the
occurrence of deemed material adverse changes to the Company's financial
condition, business or operations as determined by the debenture holders based
on required financial reporting and other criteria. These issues raise
substantial doubt about the Company's ability to continue as a going concern.
For more information on our capital resources, see "Risk Factors" in Part
II, Item 5.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our cash equivalents are principally comprised of money market accounts.
As of September 30, 2003, we had cash and cash equivalents of $7,120. These
accounts are subject to interest rate risk and may fall in value if market
interest rates increase. We attempt to limit this exposure by investing
primarily in short-term securities having a maturity of three months or less.
Due to the nature of our cash and cash equivalents, we have concluded that there
is no material market risk exposure.
We have foreign subsidiaries that operate and sell our products in various
global markets. As a result, our cash flow and earnings are exposed to
fluctuations in interest and foreign currency exchange rates. We attempt to
limit these exposures through the use of various hedge instruments, primarily
forward exchange contracts and currency option contracts (with maturities of
less than three months) to manage our exposure associated with firm commitments
and net asset and liability positions denominated in non-functional currencies.
There have been no material changes regarding market risk since the disclosures
made in our Form 10-K for the fiscal year ended March 31, 2003.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and, in reaching reasonable level of assurance
14
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the quarter
covered by this report. Based on the foregoing, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective at the reasonable assurance level.
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On March 17, 1998, Tegal filed suit in the United States District Court in
the Eastern District of Virginia against Tokyo Electron America, Inc. and
several of its affiliated companies (the "TEA case") alleging that TEL's 65DI
and 85DI IEM etch equipment infringe certain of Tegal's patents. The TEA case
was tried in the District Court in May 1999, and on August 31, 1999, the Court
found both patents-in-suit valid, and found that TEA had willfully infringed our
`223 dual-frequency triode etcher patent. The District Court enjoined TEA from
further sales or service of its IEM etchers. In addition, the District Court
ordered TEA to pay attorney's fees and court costs to Tegal. On appeal, the
Federal Circuit affirmed the District Court's findings of infringement and the
interpretations of the `223 patent on which those findings were made, but
reversed the contempt finding, the willfulness finding, and the award of
attorneys fees, and remanded for further consideration of TEA's defense of
anticipation. As a result, the Federal Circuit vacated the judgment and the
injunction and remanded the case for further consideration of the anticipation
defense. In a separate but related action against Tokyo Electron Limited (the
"TEL case") concerning a later generation of etchers known as the Advanced IEM
or AIEM, the United States District Court for the Eastern District of Virginia
granted summary judgment of non-infringement for TEL on August 7, 2000 and
entered judgment for TEL on September 11, 2000. On February 1, 2002, the Federal
Circuit affirmed the District Court's decision on summary judgment that the AIEM
does not infringe the `223. The Federal Circuit's decision in the TEL case is
now final. Subsequent to the Federal Circuit's decision in the TEL case, Tegal
entered into a non-exclusive license agreement with TEA. Accordingly, on October
27, 2003 the District Court vacated its stay order and dismissed the case. The
outcome of the litigation is now final.
On September 1, 1999, Tegal filed a patent infringement action against Lam
Research Corporation (the "Lam case"), asserting infringement of two of Tegal's
patents directed to dual frequency plasma processing technologies (the "618 and
the `223 patents"). Tegal sought injunctive relief barring Lam from
manufacturing, selling and supporting products that incorporate its patented
technology. The Company further sought enhanced damages for willful infringement
of its patents. The suit was initially filed in United States District Court for
the Eastern District of Virginia, but was transferred by that court to the
United States District Court of the Northern District of California. Following
an adverse decision from the United States Court of Appeals for the Federal
Circuit in a prior case against Tokyo Electron Limited, Tegal voluntarily
dismissed the '223 patent from the Lam case. A Markman hearing was held on the
'618 patent in July 2002, and in September 2002 the Court issued a claim
interpretation ruling in which it determined that the claim term "low frequency"
means "less than approximately 1Mhz." In October 2002, Lam filed a motion for
summary judgment of non-infringement of the '618 patent. On January 14, 2003,
after modifying its original Markman ruling and further interpreting "low
frequency" to have an upper limit of 1.4 Mhz, the Court granted Lam's motion for
summary judgment of noninfringement of the '618 patent. Thereafter, Lam sought
to pursue a counterclaim alleging that the case ought to be deemed "exceptional"
under 28 U.S.C. ss. 285, thus justifying an award of attorney's fees in its
favor. On June 13, 2003, the Court issued an order finding that the case is not
"exceptional" and declining to award Lam its attorney's fees. Neither party has
appealed any of the rulings made by the District Court and the time to file
appeals has expired. Thus, the outcome of the litigation is now final.
Item 2. Changes in Securities and Use of Proceeds
On September 8, 2003, the Company closed the second tranche of a private
placement in which it sold to accredited investors $6.236 million principal
amount of its 2.0% Convertible Secured Debentures Due 2011 and warrants
initially exercisable for 3,563,122 shares of common stock. The Debentures and
accrued interest thereon are convertible into shares of the Company's common
stock at a price of $0.35 per share. The warrants have an exercise price of
$0.50 per share and expire September 8, 2011. The sale and issuance of these
securities was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof, on the basis that the transaction did not involve a public
offering. The Company intends to use the net proceeds from these securities for
general corporate purposes.
In June 2003, the Company issued stock options to purchase 300,000 shares
of the Company's common stock to the landlord of its Petaluma facility, as part
of a new lease agreement, and options to purchase 60,000 shares of the Company's
common stock to a service provider for services rendered. The options to the
landlord were valued at $107,000 (included in other assets as of June 30, 2003)
using the Black-Scholes model and the value of the option was expensed
immediately. The deferred charge associated with the landlord's options is being
amortized to operating expense over the life of the new lease of seven years.
Expenses related to both of these transactions for the quarter ended June 30,
2003 amounted to $32 in the June quarter. The amortization of these charges
amounted to $16 in the quarter ended September 30, 2003.
16
In August 2003, the Company issued stock options to purchase 10,000 shares
of the Company's common stock to a service provider for services rendered. These
options were valued at $5.917 million using the Black-Scholes model and the
value of the option was expensed immediately. In September 2003, the Company
issued 158,311 restricted shares of the Company's common stock to a service
provider for services rendered. The fair value of these securities amounted to
$111 and was expensed in the quarter ended September 30, 2003.
Item 4. Submission of Matters to a Vote of Security Holders
On September 8, 2003 the Company held its annual meeting of the
stockholders. There were present at the meeting, in person or by proxy, the
holders of 15,133,957 shares of common stock of the Company, representing 94% of
the total votes eligible to be cast, constituting a majority and more than a
quorum of the outstanding shares entitled to vote.
The following individuals were re-elected to the board of directors:
Votes for Votes Withheld
--------- --------------
Michael L. Parodi ........................ 14,113,964 1,019,993
Jeffrey M. Krauss ........................ 14,266,776 867,181
Duane Wadsworth .......................... 14,330,894 803,063
Edward A. Dohring ........................ 14,328,982 804,975
The proposal to adopt an amendment to the Company's 1998 Equity
Participation Plan to increase the maximum authorized shares from 2,400,000 to
6,400,000 and to increase the award limit from 600,000 shares to 1,600,000
shares was approved by the stockholders as follows:
For ................................................................. 7,493,459
Against ............................................................. 1,697,681
Abstain ............................................................. 51,261
Broker Non Vote ..................................................... 5,891,556
The proposal to approve the sale of 2% convertible secured debentures and
warrants to purchase common stock was approved by the stockholders as follows:
For ................................................................. 7,404,078
Against ............................................................. 1,434,619
Abstain ............................................................. 73,704
Broker Non Vote ..................................................... 5,891,556
Excluded from the final tally of votes for this proposal were 330,000 shares
held by eligible shareholders intending to participate in the convertible debt
financing.
The proposal to adopt an amendment to the articles of incorporation to
increase the number of authorized shares for issuance from 35,000,000 to
100,000,000 was approved by the stockholders as follows:
For.................................................................. 13,653,404
Against.............................................................. 1,427,861
Abstain.............................................................. 52,692
Broker Non Vote...................................................... 0
17
The proposal to approve a reverse split of our common stock whereby each
outstanding 2, 3, 5, 10, or 15 shares would be combined, converted and changed
into one share of common stock, should the board decide to do so, was approved
by the stockholders as follows:
For ................................................................ 13,847,589
Against ............................................................ 1,218,985
Abstain ............................................................ 67,383
Broker Non Vote .................................................... 0
The authority of Tegal's board of directors to effect a reverse stock split,
should it decide to do so, will expire on December 2, 2003.
Item 5. Other Information
In accordance with Section 10A(i)(2) of the Securities Exchange Act of
1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the "Act"), we
are required to disclose the non-audit services approved by our Audit Committee
to be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit
services are defined in the Act as services other than those provided in
connection with an audit or a review of the financial statements of a company.
The Audit Committee has approved the engagement of PricewaterhouseCoopers LLP
for the following non-audit services: the preparation of federal and state
income tax returns.
Our stock is currently listed on The Nasdaq SmallCap Market. The Nasdaq
Stock Market's Marketplace Rules impose certain minimum financial requirements
on us for the continued listing of our stock. One such requirement is the
minimum bid price on our stock of $1.00 per share. Beginning in 2002, there have
been periods of time during which we have been out of compliance with the $1.00
minimum bid requirements of the Nasdaq SmallCap Market.
On September 6, 2002, we received notification from Nasdaq that for the 30
days prior to the notice, the price of our common stock had closed below the
minimum $1.00 per share bid price requirement for continued inclusion under
Marketplace Rule 4450(a)(5) (the "Rule"), and were provided 90 calendar days, or
until December 5, 2002, to regain compliance. Our bid price did not close above
the minimum during that period. On December 6, 2002, we received notification
from Nasdaq that our securities would be delisted from The Nasdaq National
Market, the exchange on which our stock was listed prior to May 6, 2003, on
December 16, 2002 unless we either (i) applied to transfer our securities to The
Nasdaq SmallCap Market, in which case we would be afforded additional time to
come into compliance with the minimum $1.00 bid price requirement; or (ii)
appealed the Nasdaq staff's determination to the Nasdaq's Listing Qualifications
Panel (the "Panel"). On December 12, 2002 we requested an oral hearing before
the Panel and such hearing took place on January 16, 2003 in Washington, D.C.
Our appeal was based, among other things, on our intention to seek stockholder
approval for a reverse split of our outstanding common stock. On April 28, 2003
at a special meeting of our stockholders, our board of directors was granted the
authority to effect a reverse split of our common stock within a range of
two-for-one to fifteen-for-one. This authority was reaffirmed by our
stockholders at the Annual Meeting on September 8, 2003. The timing and ratio of
a reverse split, if any, is at the sole discretion of our board of directors,
but it must be completed on or before December 2, 2003. On May 6, 2003, we
transferred the listing of our common stock to The Nasdaq SmallCap Market. In
connection with this transfer, and by additional notice, Nasdaq granted us an
extension until December 31, 2003, to regain compliance with the Rule's minimum
$1.00 per share bid price requirement for continued inclusion on The Nasdaq
SmallCap Market. On September 16, 2003, the bid price for our stock had closed
at $1.00 or above for ten consecutive days. On September 17, 2003, we received a
letter from Nasdaq confirming that Tegal had regained compliance with the
minimum bid price requirement and that the question of its continued listing on
the SmallCap Market was now closed.
If we are out of compliance in the future with Nasdaq listing
requirements, we may take actions in order to achieve compliance, which actions
may include a reverse split of our common stock. If an initial delisting
decision is made by the Nasdaq's staff, we may appeal the decision as permitted
by Nasdaq rules. If we are delisted and cannot obtain listing on another major
market or exchange, our stock's liquidity would suffer, and we would likely
experience reduced investor interest. Such factors may result in a decrease in
our stock's trading price. Delisting also may restrict us from issuing
additional securities or securing additional financing.
18
Risk Factors
We have incurred operating losses and may not be profitable in the future;
Our plans to maintain and increase liquidity may not be successful; Our
auditors' report includes a going concern uncertainty explanatory paragraph; The
accounting for the Debentures would result in significant expense amounts.
We incurred net losses of $12.6 million and $8.7 million for the years
ended March 31, 2003 and 2002, respectively, and generated negative cash flows
from operations of $6.0 million and $3.6 million in these respective years. We
also incurred a net loss of $2.9 million and generated cash flows from
operations of $0.2 million during the six months ended September 30, 2003. These
factors raise substantial doubt as to our ability to continue as a going
concern, and our auditors have included a going concern uncertainty explanatory
paragraph in their latest auditors' report dated June 10, 2003 which is included
in our 10-K for the year ended March 31, 2003. Our plans to maintain and
increase liquidity include the restructuring executed during fiscal 2002 and
2003, which reduced headcount from 155 employees to 81 employees and has reduced
our cost structure entering fiscal 2004. We believe the cost reduction and a
projected increase in sales during fiscal 2004 will generate sufficient cash
flows to fund our operations through March 31, 2004. However, these projected
sales are to a limited number of new and existing customers and are based, for
the most part, on internal and customer provided estimates of future demand, not
firm customer orders. If the projected sales do not materialize, we will need to
reduce expenses further and raise additional capital through the issuance of
debt or equity securities. If additional funds are raised through the issuance
of preferred stock or debt, these securities could have rights, privileges or
preferences senior to those of our common stock, and debt covenants could impose
restrictions on our operations. The sale of equity or debt could result in
additional dilution to current stockholders, and such financing may not be
available to us on acceptable terms, if at all. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets or the amount or classification of liabilities
or any other adjustments that might be necessary should we be unable to continue
as a going concern.
Our debentures issued in June and September are convertible at a
conversion rate of $0.35 per share, which was lower than the common stock's
prices at June 30, 2003, the commitment date for the first tranche and September
8, 2003, the stockholder approval date for the second tranche. Additionally, we
granted a 20% warrant coverage to our debenture holders. The value of both the
beneficial conversion feature and warrants resulted in a significant debt
discount which will be accreted as interest expense over the eight-year life of
the debentures. This will result in substantial interest expense during fiscal
2004 and through fiscal 2011 or until the debentures are converted.
Our debentures include a material adverse change clause.
As disclosed in our Current Report on Form 8-K filed with the SEC on June
2, 2003, our 2% Convertible Secured Debentures Due 2011 that we sold on June 30,
2003 and September 9, 2003 include a material adverse change clause. This
material adverse change clause allows the debenture holders to demand the
immediate payment of all outstanding balances upon the debenture holders'
determination of the occurrence of deemed material adverse changes to our
financial condition, business or operations as determined by the debenture
holders based on required financial reporting and other criteria. Potential
material adverse changes causing us to default on the debentures may include any
significant adverse effect on our financial condition arising from an event not
previously disclosed in our SEC filings such as a significant litigation
judgment against Tegal, bankruptcy or termination of the majority of our
customer relationships. As of July 31, 2003, $0.9 million principal amount, and
as of October 9, 2003, $6.2 million principal amount of our 2% Convertible
Secured Debentures Due 2011 plus accrued interest payable in kind by issuance of
additional debentures convertible into common stock in the amount of such
interest could be demanded for immediate payment by the debenture holders upon
such an event of default. In the event of such a demand, Tegal would need to
pursue additional funding for repayment of such amount, or risk insolvency.
19
The conversion of our convertible securities, the exercise of outstanding
warrants, options and other rights to obtain additional shares will dilute the
value of the shares.
On June 30, 2003, we entered into agreements with investors to raise up to
$7.2 million in a private placement of convertible debt financing to be
completed in two tranches, the first of which was completed on June 30, 2003 for
$0.9 million and the second of which was completed on September 9, 2003 for $6.2
million following stockholder approval on September 8, 2003. As of September 10,
2003, there are debentures convertible into 20,471,428 shares of our common
stock (2,655,554 from the first tranche and 17,815,874 from the second tranche,
all of which are based on a conversion price of $0.35 per share and a cash
payment in lieu of any fractional share), warrants exercisable for approximately
4,094,212 shares of our common stock (531,103 from the first tranche and
3,563,109 from the second tranche), advisor warrants convertible into 1,756,127
shares, 3,542,436 shares issuable as interest payment in lieu of cash and
options exercisable for approximately 1,474,725 shares of our common stock. In
addition, we have warrants outstanding from previous offerings for approximately
1,705,964 shares of our common stock.
The conversion of these convertible securities and the exercise of these
warrants will result in dilution in the value of the shares of our outstanding
common stock and the voting power represented thereby. In addition, the
conversion price of the Debentures or the exercise price of the warrants may be
lowered under the price adjustment provisions in the event of a "dilutive
issuance," that is, if we issue common stock at any time prior to their maturity
at a per share price below such conversion or exercise price, either directly or
in connection with the issuance of securities that are convertible into, or
exercisable for, shares of our common stock. A reduction in the exercise price
may result in the issuance of a significant number of additional shares upon the
exercise of the warrants.
Neither the debentures nor the warrants establish a "floor" that would
limit reductions in such conversion price or exercise price. The downward
adjustment of the conversion price of these debentures and of the exercise price
of these warrants could result in further dilution in the value of the shares of
our outstanding common stock and the voting power represented thereby.
On October 14, 2003, we registered 3,542,436 shares which can be issued as
interest payments to the debenture holders in lieu of cash. The number of shares
issuable as interest payments is calculated by dividing total interest due over
the life of the debentures at 2% per annum by a price per share of $0.35. If we
elect to use such shares to pay interest, such issuance will result in dilution
to our stockholders.
Sales of substantial amounts of our shares of common stock could cause the price
of our common stock to go down.
To the extent the holders of our convertible securities and warrants
convert or exercise such securities and then sell the shares of our common stock
they receive upon conversion or exercise, our stock price may decrease due to
the additional amount of shares available in the market. The subsequent sales of
these shares could encourage short sales by our stockholders and others which
could place further downward pressure on our stock price. Moreover, holders of
these convertible securities and warrants may hedge their positions in our
common stock by shorting our common stock, which could further adversely affect
our stock price. The effect of these activities on our stock price could
increase the number of shares issuable upon future conversions of our
convertible securities or exercises of our warrants.
We received stockholder approval to increase the number of authorized
shares of common stock to 100,000,000 shares and to effect a reverse stock
split. We may also issue additional capital stock, convertible securities and/or
warrants to raise capital in the future. In addition, we may elect to pay any
accrued interest on the outstanding $7.2 million principal amount of debentures
with shares of our common stock. Interest on the debentures is compounded
quarter-annually, based on 2% per annum on the principal amount outstanding. In
addition, to attract and retain key personnel, we may issue additional
securities, including stock options. All of the above could result in additional
dilution of the value of our common stock and the voting power represented
thereby. No prediction can be made as to the effect, if any, that future sales
of shares of our common stock, or the availability of shares for future sale,
will have on the market price of our common stock prevailing from time to time.
Sales of substantial amounts of shares of our common stock in the public market,
or the perception that such sales could occur, may adversely affect the market
price of our common stock and may make it more difficult for us to sell our
equity securities in the future at a time and price which we deem appropriate.
Public or private sales of substantial amounts of shares of our common stock by
persons or entities that have exercised options and/or warrants could adversely
affect the prevailing market price of the shares of our common stock.
20
The semiconductor industry is cyclical and may experience periodic downturns
that may negatively affect customer demand for our products and result in losses
such as those experienced in the past.
Our business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits. The semiconductor industry is highly cyclical and
historically has experienced periodic downturns, which often have had a
detrimental effect on the semiconductor industry's demand for semiconductor
capital equipment, including etch and deposition systems manufactured by us. In
response to the current prolonged industry slow-down, we have initiated a
substantial cost containment program and a corporate-wide restructuring to
preserve our cash. However, the need for continued investment in research and
development, possible capital equipment requirements and extensive ongoing
customer service and support requirements worldwide will continue to limit our
ability to reduce expenses in response to the current downturn.
Our competitors have greater financial resources and greater name recognition
than we do and therefore may compete more successfully in the semiconductor
capital equipment industry than we can.
We believe that to be competitive, we 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 our existing and potential competitors, including, among others, Applied
Materials, Inc., Lam Research Corporation, Novellus 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, deposition and other production
equipment and broader process equipment offerings, as well as greater name
recognition than we do. We cannot assure you that we will be able to compete
successfully against these companies in the United States or worldwide.
If we fail to meet the continued listing requirements of the Nasdaq Stock
Market, our stock could be delisted.
Our stock is currently listed on The Nasdaq SmallCap Market. The Nasdaq
Stock Market's Marketplace Rules impose certain minimum financial requirements
on us for the continued listing of our stock. One such requirement is the
minimum bid price on our stock of $1.00 per share. Beginning in 2002, there have
been periods of time during which we have been out of compliance with the $1.00
minimum bid requirements of The Nasdaq SmallCap Market.
On September 6, 2002, we received notification from Nasdaq that for the 30
days prior to the notice, the price of our common stock had closed below the
minimum $1.00 per share bid price requirement for continued inclusion under
Marketplace Rule 4450(a)(5) (the "Rule"), and were provided 90 calendar days, or
until December 5, 2002, to regain compliance. Our bid price did not close above
the minimum during that period. On December 6, 2002, we received notification
from Nasdaq that our securities would be delisted from The Nasdaq National
Market, the exchange on which our stock was listed prior to May 6, 2003, on
December 16, 2002 unless we either (i) applied to transfer our securities to The
Nasdaq SmallCap Market, in which case we would be afforded additional time to
come into compliance with the minimum $1.00 bid price requirement; or (ii)
appealed the Nasdaq staff's determination to the Nasdaq's Listing Qualifications
Panel (the "Panel"). On December 12, 2002 we requested an oral hearing before
the Panel and such hearing took place on January 16, 2003 in Washington, D.C.
Our appeal was based, among other things, on our intention to seek stockholder
approval for a reverse split of our outstanding common stock. On April 28, 2003
at a special meeting of our stockholders, our board of directors was granted the
authority to effect a reverse split of our common stock within a range of
two-for-one to fifteen-for-one. This authority was reaffirmed by our
stockholders at the Annual Meeting on September 8, 2003. The timing and ratio of
a reverse split, if any, is at the sole discretion of our board of directors,
but it must be completed on or before December 2, 2003. On May 6, 2003, we
transferred the listing of our common stock to The Nasdaq SmallCap Market. In
connection with this transfer, and by additional notice, Nasdaq granted us an
extension until December 31, 2003, to regain compliance with the Rule's minimum
$1.00 per share bid price requirement for continued inclusion on The Nasdaq
SmallCap Market. On September 16, 2003, the bid price for our stock had closed
at $1.00 or above for ten consecutive days. On September 17, 2003, we received a
letter from Nasdaq confirming that Tegal had regained compliance with the
minimum bid price requirement and that the question of its continued listing on
The SmallCap Market was now closed.
If we are out of compliance in the future with Nasdaq listing
requirements, we may take actions in order to achieve compliance, which actions
may include a reverse split of our common stock. If an initial delisting
decision is made by the Nasdaq's staff, we may appeal the decision as permitted
by Nasdaq rules. If we are delisted and cannot obtain listing on another major
market or exchange, our stock's liquidity would suffer, and we would likely
experience reduced investor interest. Such factors may result in a decrease in
our stock's trading price. Delisting also may restrict us from issuing
additional securities or securing additional financing.
21
We depend on sales of our advanced products to customers that may not fully
adopt our product for production use.
We have designed our advanced etch and deposition products for customer
applications in emerging new films, polysilicon and metal which we believe to be
the leading edge of critical applications for the production of advanced
semiconductor and other microelectronic devices. Revenues from the sale of our
advanced etch and deposition systems accounted for 25% and 36% of total revenues
in fiscal 2003 and 2002, respectively. Our advanced systems are currently being
used primarily for research and development activities or low volume production.
For our advanced systems to achieve full market adoption, our customers must
utilize these systems for volume production. There can be no assurance that the
market for devices incorporating emerging films, polysilicon or metal will
develop as quickly or to the degree we expect.
If our advanced systems do not achieve significant sales or volume
production due to a lack of full customer adoption, our business, financial
condition, results of operations and cash flows will be materially adversely
affected.
Our potential customers may not adopt our products because of their significant
cost or because our potential customers are already using a competitor's tool.
A substantial investment is required to install and integrate capital
equipment into a semiconductor production line. Additionally, we believe 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 that customer has
selected another vendor's capital equipment unless there are compelling reasons
to do so, such as significant performance or cost advantages. Any failure to
gain access and achieve sales to new customers will adversely affect the
successful commercial adoption of our products and could have a detrimental
effect on us.
Our quarterly operating results may continue to fluctuate.
Our 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.
Our 900 series etch systems typically sell for prices ranging between
$250,000 and $600,000, while prices of our 6500 series critical etch systems and
our Endeavor deposition system typically range between $1.8 million and $3.0
million. To the extent we are successful in selling our 6500 and Endeavor 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.
Other factors that could affect our quarterly operating results include:
o our timing of new systems and technology announcements and releases
and ability to transition between product versions;
o seasonal fluctuations in sales;
o changes in the mix of our revenues represented by our various
products and customers;
o adverse changes in the level of economic activity in the United
States or other major economies in which we do business;
o foreign currency exchange rate fluctuations;
o expenses related to, and the financial impact of, possible
acquisitions of other businesses; and
o changes in the timing of product orders due to unexpected delays in
the introduction of our customers' products, due to lifecycles of
our customers' products ending earlier than expected or due to
market acceptance of our customers' products.
22
Because technology changes rapidly, we may not be able to introduce our products
in a timely enough fashion.
The semiconductor manufacturing industry is subject to rapid technological
change and new system introductions and enhancements. We believe that our future
success depends on our ability to continue to enhance our existing systems and
their process capabilities, and to develop and manufacture in a timely manner
new systems with improved process capabilities. We may incur substantial
unanticipated costs to ensure product functionality and reliability early in our
products' life cycles. There can be no assurance that we will be successful in
the introduction and volume manufacture of new systems or that we will be able
to develop and introduce, in a timely manner, new systems or enhancements to our
existing systems and processes which satisfy customer needs or achieve market
adoption.
Some of our sales cycles are lengthy, exposing us to the risks of inventory
obsolescence and fluctuations in operating results.
Sales of our 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. We often experience delays in finalizing system sales following
initial system qualification while the customer evaluates and receives approvals
for the purchase of our systems and completes a new or expanded facility. Due to
these and other factors, our systems typically have a lengthy sales cycle (often
12 to 18 months in the case of critical etch and deposition systems) during
which we may expend substantial funds and management effort. Lengthy sales
cycles subject us to a number of significant risks, including inventory
obsolescence and fluctuations in operating results over which we have little or
no control.
We may not be able to protect our intellectual property or obtain licenses for
third parties' intellectual property and therefore we may be exposed to
liability for infringement or the risk that our operations may be adversely
affected.
Although we attempt to protect our intellectual property rights through
patents, copyrights, trade secrets and other measures, we may not be able to
protect our technology adequately and competitors may be able to develop similar
technology independently. Additionally, patent applications that we may file may
not be issued and foreign intellectual property laws may not protect our
intellectual property rights. There is also a risk that patents licensed by or
issued to us will be challenged, invalidated or circumvented and that the rights
granted thereunder will not provide competitive advantages to us. Furthermore,
others may independently develop similar systems, duplicate our systems or
design around the patents licensed by or issued to us.
Existing litigation and any future litigation could result in substantial
cost and diversion of effort by us, which by itself could have a detrimental
effect on our financial condition, operating results and cash flows. Further,
adverse determinations in such litigation could result in our loss of
proprietary rights, subject us to significant liabilities to third parties,
require us to seek licenses from third parties or prevent us from manufacturing
or selling our systems. In addition, licenses under third parties' intellectual
property rights may not be available on reasonable terms, if at all.
Our customers are concentrated and therefore the loss of a significant customer
may harm our business.
Our top five customers accounted for 88.2%, 54.4% and 42.0% of our systems
revenues in fiscal 2003, 2002 and 2001, respectively. Four customers each
accounted for more than 10% of net systems sales in fiscal 2003. Although the
composition of the group comprising our 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
detrimental effect on our business, financial condition, results of operations
and cash flows. Our ability to increase our sales in the future will depend, in
part, upon our ability to obtain orders from new customers, as well as the
financial condition and success of our existing customers and the general
economy, which is largely beyond our ability to control.
We are exposed to additional risks associated with international sales and
operations.
International sales accounted for 66%, 67% and 61% of total revenue for
fiscal 2003, 2002 and 2001, respectively. 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 our
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 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 detrimental effect on our operations,
financial results and cash flows.
23
Sales of our systems in certain countries are billed in local currency,
and we have a line of credit denominated in Japanese Yen. We generally attempt
to offset a portion of our U.S. dollar denominated balance sheet exposures
subject to foreign exchange rate remeasurement by purchasing forward currency
contracts for future delivery. There can be no assurance that our future results
of operations and cash flows will not be adversely affected by foreign currency
fluctuations. In addition, the laws of certain countries in which our products
are sold may not provide our products and intellectual property rights with the
same degree of protection as the laws of the United States.
We must integrate our acquisition of Sputtered Films and proposed acquisition of
Simplus Systems Corporation and we may need to make additional future
acquisitions to remain competitive. The process of identifying, acquiring and
integrating future acquisitions may constrain valuable management resources, and
our failure to effectively integrate future acquisitions may result in the loss
of key employees and the dilution of stockholder value and have an adverse
effect on our operating results.
We acquired Sputtered Films, Inc. in August 2002. On November 10, 2003,
the Company entered into a definitive agreement to purchase substantially all of
the assets and assume certain liabilities of Simplus Systems Corporation of
Fremont, California, a development stage company. We may in the future seek to
acquire or invest in additional businesses, products or technologies that we
believe could complement or expand our business, augment our market coverage,
enhance our technical capabilities or that may otherwise offer growth
opportunities. We may encounter problems with the assimilation of Sputtered
Films and Simplus or businesses, products or technologies acquired in the future
including:
o difficulties in assimilation of acquired personnel, operations,
technologies or products;
o unanticipated costs associated with acquisitions;
o diversion of management's attention from other business concerns and
potential disruption of our ongoing business;
o adverse effects on our existing business relationships with our
customers;
o potential patent or trademark infringement from acquired
technologies;
o adverse effects on our current employees and the inability to retain
employees of acquired companies;
o use of substantial portions of our available cash as all or a
portion of the purchase price; and
o dilution of our current stockholders due to the issuance of
additional securities as consideration for acquisitions.
If we are unable to successfully integrate our acquired companies or to
create new or enhanced products and services, we may not achieve the anticipated
benefits from our acquisitions. If we fail to achieve the anticipated benefits
from the acquisitions, we may incur increased expenses and experience a
shortfall in our anticipated revenues and we may not obtain a satisfactory
return on our investment. In addition, if a significant number of employees of
acquired companies fail to remain employed with us, we may experience
difficulties in achieving the expected benefits of the acquisitions.
Completing any potential future acquisitions could cause significant
diversions of management time and resources. Financing for future acquisitions
may not be available on favorable terms, or at all. If we identify an
appropriate acquisition candidate for any of our businesses, we may not be able
to negotiate the terms of the acquisition successfully, finance the acquisition
or integrate the acquired business, products, technologies or employees into our
existing business and operations. Future acquisitions may not be well-received
by the investment community, which may cause our stock price to fall. We have
not entered into any agreements or understanding regarding any future
acquisitions and cannot ensure that we will be able to identify or complete any
acquisition in the future.
If we acquire businesses, new products or technologies in the future, we
may be required to amortize significant amounts of identifiable intangible
assets and we may record significant amounts of goodwill that will be subject to
annual testing for impairment. If we consummate one or more significant future
acquisitions in which the consideration consists of stock or other securities,
our existing stockholders' ownership could be significantly diluted. If we were
to proceed with one or more significant future acquisitions in which the
consideration included cash, we could be required to use a substantial portion
of our available cash.
24
Our workforce reductions and financial performance may adversely affect the
morale and performance of our personnel and our ability to hire new personnel.
We have made reductions in our workforce in order to reduce costs and
bring staffing in line with our anticipated requirements. There were costs
associated with the workforce reductions related to severance and other
employee-related costs, and our restructuring may yield unanticipated costs and
consequences, such as attrition beyond our planned reduction in staff. In
addition, our common stock has declined in value below the exercise price of
many options granted to employees pursuant to our stock option plans. Thus, the
intended benefits of the stock options granted to our employees, the creation of
performance and retention incentives, may not be realized. In addition,
workforce reductions and management changes create anxiety and uncertainty and
may adversely affect employee morale. As a result, we may lose employees whom we
would prefer to retain. As a result of these factors, our remaining personnel
may seek employment with larger, more established companies or companies
perceived as having less volatile stock prices.
Provisions in our agreements, charter documents, stockholder rights plan and
Delaware law may deter takeover attempts, which could decrease the value of your
shares.
Our certificate of incorporation and bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us
without the consent of our board of directors. Our board of directors has the
right to issue preferred stock without stockholder approval, which could be used
to dilute the stock ownership of a potential hostile acquirer. Delaware law
imposes some restrictions on mergers and other business combinations between us
and any holder of 15% or more of our outstanding common stock. In addition, we
have adopted a stockholder rights plan that makes it more difficult for a third
party to acquire us without the approval of our board of directors. These
provisions apply even if the offer may be considered beneficial by some
stockholders.
Our stock price is volatile and could result in a material decline in the value
of your investment in Tegal.
We believe that factors such as announcements of developments related to
our business, fluctuations in our operating results, sales of our common stock
into the marketplace, failure to meet or changes in analysts' expectations,
general conditions in the semiconductor industry or the worldwide economy,
announcements of technological innovations or new products or enhancements by us
or our competitors, developments in patents or other intellectual property
rights, developments in our relationships with our customers and suppliers,
natural disasters and outbreaks of hostilities could cause the price of our
common stock to fluctuate substantially. In addition, in recent years the stock
market in general, and the market for shares of small capitalization stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of our common stock will not experience
significant fluctuations in the future, including fluctuations that are
unrelated to our performance.
Potential disruption of our supply of materials required to build our systems
could have a negative effect on our operations and damage our customer
relationships.
Materials delays have not been significant in recent years. Nevertheless,
we procure certain components and sub-assemblies included in our systems from a
limited group of suppliers, and occasionally from a single source supplier. For
example, we depend on MECS Corporation, a robotic equipment supplier, as the
sole source for the robotic arm used in all of our 6500 series systems. We
currently have no existing supply contract with MECS Corporation, and we
currently purchase all robotic assemblies from MECS Corporation on a purchase
order basis. Disruption or termination of certain of these sources, including
our robotic sub-assembly source, could have an adverse effect on our operations
and damage our relationship with our customers.
Any failure by us to comply with environmental regulations imposed on us could
subject us to future liabilities.
We are 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 our manufacturing process. We believe that we are
currently in compliance in all material respects with these regulations and that
we have obtained all necessary environmental permits generally relating to the
discharge of hazardous wastes to conduct our business. Nevertheless, our failure
to comply with present or future regulations could result in additional or
corrective operating costs, suspension of production, alteration of our
manufacturing processes or cessation of our operations.
25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31 Certifications of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certifications of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current Report on Form 8-K filed on July 2, 2003, under item 5 and
item 7 thereof .
26
SIGNATURES
Pursuant to the requirements 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
(Registrant)
/s/ THOMAS R. MIKA
----------------------------------------
Thomas R. Mika
Chief Financial Officer
Dated: November 14, 2003