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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR #15D
OF THE SECURITIES AND EXCHANGE ACT OF 1934
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2004
[ ] 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
(State or other jurisdiction 68-0370244
of incorporation or organization) (I.R.S. Employer Identification No.)
2201 SOUTH MCDOWELL BOULEVARD
PETALUMA, CALIFORNIA 94954
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (707) 763-5600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark if the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, based on the closing sale price of the
common stock on September 30, 2003 as reported on the Nasdaq National Market,
was $19,203,360. As of June 24, 2004, 44,261,309 shares of the registrant's
common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant's 2004 Annual Meeting of
Stockholders to be held September 21, 2004 will be filed with the Commission
within 120 days after the close of the registrant's fiscal year and are
incorporated by reference in Part III.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Business...................................................................................................... 3
Item 2. Properties.................................................................................................... 19
Item 3. Legal Proceedings............................................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders........................................................... 19
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issue Purchases of Equity Securities .. 19
Item 6. Selected Financial Data....................................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 22
Item 7A. Quantitative and Qualitative Disclosure about Market Risks.................................................... 28
Item 8. Financial Statements and Supplementary Data................................................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 52
Item 9A. Controls and Procedures....................................................................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant............................................................ 52
Item 11. Executive Compensation........................................................................................ 53
Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 53
Item 13. Certain Relationships and Related Transactions................................................................ 53
Item 14. Principal Accountant Fees and Services........................................................................ 53
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................... 54
Signatures.................................................................................................... 57
2
PART I
ITEM 1. BUSINESS
Information contained or incorporated by reference herein contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology or which constitute projected financial information. The
following contains cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements. See "Risk Factors." All dollar amounts are
in thousands unless specified otherwise.
THE COMPANY
Tegal Corporation, a Delaware corporation ("Tegal" or the "Company"),
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.
We were formed in December 1989 to acquire the operations of the former
Tegal Corporation, a division of Motorola, Inc. ("Motorola"). Our predecessor
company was founded in 1972 and acquired by Motorola in 1978. We completed our
initial public offering in October 1995.
On August 30, 2002, we acquired all of the outstanding common stock of
Sputtered Films, Incorporated ("SFI"), a privately held California corporation
pursuant to an Agreement and Plan of Merger dated August 13, 2002. Sputtered
Films is a leader in the design, manufacture and service of high performance
physical vapor deposition sputtering systems for the semiconductor and
semiconductor packaging industry. SFI was founded in 1967 with the development
of the S-Gun, core technology of the acquired company.
On November 11, 2003, we acquired substantially all of the assets and
certain liabilities of Simplus Systems Corporation, ("Simplus"), a development
stage company, pursuant to an asset purchase agreement. Simplus had developed a
deposition cluster tool and certain patented processes for barrier, copper seed
and high-K dielectric applications. Simplus had coined the term "nano-layer
deposition" or "NLD" to describe its unique approach to chemical vapor
deposition ("CVD"). The Company is continuing to develop these NLD processes and
related tools, and is in the process of marketing them to a limited number of
key customers and joint development partners.
SEMICONDUCTOR INDUSTRY BACKGROUND
GROWTH OF SEMICONDUCTOR AND SEMICONDUCTOR EQUIPMENT INDUSTRIES
The semiconductor industry has experienced significant growth over the
last 20 years. This growth has resulted from the increasing demand for ICs from
traditional IC markets, such as personal computers, telecommunications, consumer
electronics, automotive electronics and office equipment, as well as developing
markets, such as wireless communications, multimedia and portable and network
computing. As a result of this increased demand, semiconductor device
manufacturers have periodically expended significant amounts of capital to build
new semiconductor fabrication facilities ("fabs") and to expand existing fabs.
In spite of the continuing growth in demand for semiconductors, the industry
periodically experiences cycles of excess supply and excess capacity as
additions to capacity are brought online in large increments which exceed the
short-term growth in demand for ICs. The industry periodically experiences such
fluctuations, and is currently experiencing a significant slowdown in the
purchase of equipment for the manufacture of ICs.
Growth in the semiconductor industry has been driven, in large part, by
advances in semiconductor performance at a decreasing cost per function.
Advanced semiconductor processing technologies increasingly allow semiconductor
manufacturers to produce ICs with smaller features, thereby increasing
processing speed and expanding device functionality and memory capacity. As ICs
have become more complex, however, both the number and price of state of the art
process tools required to manufacture ICs have increased significantly. As a
result, the cost of semiconductor manufacturing equipment has become an
increasingly large part of the total cost of producing advanced ICs. Today, a
typical 300 millimeter wafer fab may cost as much as $2.0 to $3.0 billion, with
semiconductor manufacturing equipment costs representing the majority of total
fab costs.
3
SEMICONDUCTOR PRODUCTION PROCESSES
To create an IC, semiconductor wafers are subjected to a large number of
complex process steps. The three primary steps in manufacturing ICs are (1)
deposition, in which a layer of insulating or conducting material is deposited
on the wafer surface, (2) photolithography, in which the circuit pattern is
projected onto a light sensitive material (the photoresist), and (3) etch, in
which the unmasked parts of the deposited material on the wafer are selectively
removed to form the IC circuit pattern.
Each step of the manufacturing process for ICs requires specialized
manufacturing equipment. Today, plasma-based systems are used for the great
majority of both deposition and etching processes. During physical vapor
deposition (also known as "PVD"), the semiconductor wafer is exposed to a plasma
environment that forms continuous thin films of electrically insulating or
electrically conductive layers on the semiconductor wafer. During a plasma etch
process (also known as "dry etch"), a semiconductor wafer is exposed to a plasma
composed of a reactive gas, such as chlorine, which etches away selected
portions of the layer underlying the patterned photoresist layer.
SEGMENTATION OF THE DEPOSITION AND ETCH MARKETS
The deposition market is generally divided into the following market
segments, defined according to the underlying technology used to create the
deposited thin film: electrochemical deposition (also known as
"electroplating"), chemical vapor deposition (also known as "CVD", of which
plasma-enhanced chemical vapor deposition "PECVD" is a major sub-segment),
atomic layer deposition (also known as "ALD"), and physical vapor deposition
(also known as "PVD").
Certain deposition technologies or processes are better suited than others
for depositing different types of materials (films). In silicon-based
microelectronic fabrication, electrochemical deposition of copper is the
essential basis for creating the multi-level metal electrical interconnects
found in advanced logic and memory ICs. CVD and PECVD deposition of dielectric
materials like silicon dioxide and silicon nitride is used to create layers of
electrical insulation between active circuit elements in the integrated circuit.
CVD and PECVD are also used for polysilicon and silicide deposition, to create
the electrically conductive thin films used in the active circuit elements. ALD
is a technique whereby, in a process repeated many times, a monolayer of
chemical reactant adsorbed on the IC wafer surface forms a single atomic layer
of a dielectric or a metallic film. Physical vapor deposition is used for both
metallic thin film deposition and, in reactive PVD processes, for dielectric
thin film deposition.
Further segmentation occurs within the PVD market according to specific
applications. One important application for PVD is the deposition of thin films
where residual film stress must be closely controlled in order to create
specific desired electrical results, as in precision thin film resistor
fabrication, or to avoid physically deforming the substrate, as in the
fabrication of power MOS devices on ultra-thin silicon wafers. The ability to
control film stress is also critical for the deposition of multi-layer thin film
stacks on photomasks used in advanced microelectronic photolithography
applications such as extreme ultraviolet lithography (also known as "EUVL") for
development of 45 nm and 32 nm fabrication processes. If stress is not low and
controlled in this step, the masks can become distorted.
We believe that enabling tight control of stress and other process
parameters, along with minimizing overall contamination levels during PVD thin
film deposition processes, will be increasingly recognized by IC makers as key
features that differentiate PVD tool products and PVD tool makers. We also
believe these capabilities will be important to device makers in the related
industries of compound semiconductor device fabrication, LED fabrication,
optical communication device manufacturing, in micro electromechanical systems
(also known as "MEMS") fabrication, and in the field of advanced packaging
processes for microelectronic devices.
ALD is used for the creation of various seed and barrier layers in
capacitor device structures, where the integrity and conformality of the
deposited film is essential to the proper functioning of the device. However,
since ALD absorption occurs at less than one monolayer with each cycle, layers
with film thicknesses of >100 Angstroms require repeated cycles and with
potentially long processing times. NLD has the benefit of being able to deposit
films more rapidly with equivalent or better integrity and conformality. In
addition, NLD uses standard chemical precursors which are well-known to
semiconductor device manufacturers and has the ability to deposit compound
films, of which most high-K dielectric materials are made. We believe that these
are compelling advantages for the deposition of certain films in the device
structures in both memory and logic application, both now and in the foreseeable
future.
The dry etch market is generally segmented into the following market
segments, defined according to the class of film being etched: polysilicon,
oxide (dielectric) and metal. New films are continually being developed in each
of these three market segments.
4
Certain dry etch technologies or processes are better suited for etching
different types of materials (films) and, as a result, the dry etch market may
be segmented according to the type of film being etched. In addition, as ICs
become increasingly complex, certain etch steps required to manufacture a state
of the art IC demand leading edge (or "critical") etch performance. For example,
to produce a 64-megabit DRAM device, semiconductor manufacturers are required to
etch certain device features at dimensions as small as 0.13 micron. Nonetheless,
even in the most advanced ICs, production steps can be performed with less
demanding (or "non-critical") etch performance. As a result, we believe the etch
market has also begun to segment according to the required level of etch
performance -- critical or non-critical.
Today, the semiconductor industry is faced with the need to develop and
adopt an unprecedented number of new materials as conventional films are running
out of the physical properties needed to support continuing shrinks in die size
and to provide improved performance. Certain of these new materials present
unique etch production problems. For example, the use of certain films, such as
platinum, iridium and Lead Zirconium Titanate ("PZT"), currently being used in
the development of non-volatile, ferroelectric random access memory ("FRAM")
devices, is presenting new challenges to semiconductor manufacturers. Magnetic
random access memory ("MRAM") devices incorporate unique magnetic materials in
the device structures, as do certain proposed "RRAM" devices. While these new
films contribute to improved device performance and reduced die size, their
unique properties make them particularly difficult to etch and, therefore,
require more advanced etch process technologies.
BUSINESS STRATEGY
We have a large installed base of etch and deposition equipment exceeding
1,700 systems and we believe that over the years we have earned a reputation as
a supplier of reliable, value-oriented systems along with systems incorporating
unique, advanced process technologies. Our systems are sold throughout the world
to both domestic and international customers. In our fiscal year ended March 31,
2004, approximately 67% of our revenues resulted from international sales. To
support our systems sales, we maintain local service and support in every major
geographic market in which we have an installed base, backed up by a spares
logistics system designed to provide delivery within 24 hours anywhere in the
world.
Tegal's strategy is to become the leading provider of integrated etch and
deposition process solutions for a defined set of new and emerging materials
central to the production of a broad array of advanced semiconductor devices.
Incorporation of these new, exotic materials is essential to achieving the
higher device densities, lower power consumption and novel functions exhibited
by the newest generation of cell phones, computer memories, fiber optic switches
and remote sensors. Currently, Tegal is the leading supplier of etch solutions
to makers of advanced "non-volatile" ferro-electric ("FeRAM") and magnetic
("MRAM") devices. FeRAM is just now entering commercial production with chips
for the newest generation of cell phones, PDA's, smart cards and radio-frequency
identification devices ("RFID's"), used for applications such as inventory
tracking and cashier-less transaction processing. Rounding out Tegal's portfolio
of new materials expertise are so-called "compound-semi" materials, such as
GaAs, GaN and InP, widely used in telecom device production.
Our long-term growth strategy is to build on our technical knowledge,
experience and reputation in semiconductor capital equipment, both through
organic growth in the markets in which it specializes and through selective
acquisitions of complementary technologies. Through its acquisitions of
Sputtered Films, Inc. and, more recently, Simplus Systems Corp., Tegal secured
new sources for complementary deposition technologies for its new materials
strategy.
PRODUCTS
6500 SERIES "CRITICAL ETCH" PRODUCTS
We offer several models of our 6500 series critical etch products
configured to address film types and applications desired by our customers. We
introduced the 6500 series tool in 1994 and since that time have expanded the
product line to address new applications including:
o new high K dielectrics and associated materials used in capacitors
at sub-0.5 micron for FRAMs, high-density DRAM and magnetic memory
(MRAM) devices;
o shallow trench isolation used to isolate transistors driven by
increased packing densities used in memory devices employing design
rules at or below 0.25 micron;
o sub-0.5 micron multi-layer metal films composed of
aluminum/copper/silicon/titanium alloys;
o sub-0.5 micron polysilicon;
o compound semiconductor III-V materials; and
o leading edge thin film head materials.
5
All 6500 series models offer one and two-chamber configurations and a
rinse/strip option. Prices for 6500 series systems typically range between $1.8
million and $3.0 million.
Our 6500 series systems have been engineered to provide process
flexibility and competitive throughput for wafers and substrates up to eight
inches in diameter, while minimizing cost and space requirements. The 6550
Spectra chamber is 300 mm capable and is currently being used on the 200 mm 6500
platform. Customer demand for new materials is at the 200 mm node. However,
having 300 mm capability is important for future customer needs. A dual chamber
platform design allows for either parallel or integrated etch processes. We seek
to maximize the 6500 series systems' average throughput by incorporating a
process chamber technology and system architecture designed to minimize
processing down-time required for cleaning and maintenance. Each 6500 series
system has a central wafer handling system with full cassette vacuum loadlocks,
non-contact optical wafer alignment and a vacuum transport system. Individual
process module servicing is possible without shutting down the system or other
chambers. Contamination control features in the 6500 series systems include pick
and place wafer handling with no moving parts above the wafer, four-level vacuum
isolation from the atmosphere to the etch chamber, and individual
high-throughput, turbo-pumped vacuum systems for the cassettes, wafer handling
platform and each process module. These and other features of the 6500 series
are designed to enable a semiconductor manufacturer to reduce wafer particle
contamination to a level that we believe exceeds industry standards and to
improve etch results and process flexibility.
In addition, our 6500 series systems incorporate a software system that
has been designed and tested to minimize the risk of the system operator
"crashing" the system or interrupting wafer fabrication, while being easy to
use. This software system incorporates a software architecture designed to
operate in multiple interface modes, including operator, maintenance engineer,
process engineer and diagnostic modes. Features include icon-based touch screen
menus for ease of use. In addition, the software provides a quick-response
interface which allows the semiconductor manufacturer access to all necessary
system information for factory automation. The system includes data in-situ
process manufacturing archiving and remote, real time diagnostics.
900 SERIES "NON-CRITICAL ETCH" PRODUCTS
We introduced our 900 series family of etch systems in 1984 as a critical
etch tool of that era. Over the years, we have enhanced the 900 series family as
non-critical etch systems capable of performing the etch steps required in the
production of silicon-based IC devices and, more recently, as critical etch
tools for new specialty devices such as gallium arsenide for high-speed
telecommunications devices. In 1994, we introduced an eight-inch wafer capable
900 series system (capable of etching five inch to eight-inch wafers). The 900
series non-critical etch systems are aimed at pad, zero layer, non-selective
nitride, backside, planarization and small flat panel display applications, thin
film etch applications used in the manufacture of read-write heads for the disk
drive industry and gallium arsenide and other III-V materials used in high-speed
digital wireless telecommunications applications. Our 900 series systems
typically sell for a price from $250,000 to $600,000.
The 900 series systems incorporate a single process chamber on a
non-loadlocked modular platform for reliability and ease of maintenance, which
we believe results in higher average throughput and lower operating costs.
Continued improvements in both reliability and performance have enabled us to
offer the 900 series systems as a solution for a broad range of applications
involving line widths down to 0.8 microns.
The i900 was introduced in July 2000. This system has enhanced the
functionality of the 900 series with added features such as user-friendly GUI
(graphical user interface) touch screens, better process control and an improved
transport system that will increase efficiency, while preserving the durability
for which the tool is known.
ENDEAVOR SERIES CRITICAL DEPOSITION PRODUCTS
We offer several models of our Endeavor series critical deposition
products configured to address film types and applications desired by the
customer. We introduced the Endeavor series tool in 1992 and since that time
have expanded the product line to address new applications. Deposition
applications addressed by the Endeavor series system include:
o chip packaging technologies requiring stress control in multi-layer
under bump metallization (UBM), including deposition onto polyimide;
o IC front side interconnect metallization;
o Ohmic contact formation and metallization of thinned wafers for high
power transistors;
o deposition of thin film resistors with fine tuning of thermal
capacitance of resistance (TCR);
6
o barrier and seed layer deposition in deep vias;
o encapsulating films for light emitting diodes (LED);
o dielectric layers for sound acoustic wave (SAW) and integrated gate
bipolar transistors (IGBT);
o automobile electronics requiring high adhesion properties of the
backside metal film stacks; and
o high precision, ultra clean deposition of films used in
photolithography and extreme ultraviolet (EUV) masks.
All Endeavor series models offer one to five process modules, and can be
configured as single or dual cassette module systems. The system is fully field
upgradeable. Prices for Endeavor series systems typically range between $1.8
million and $3.0 million.
Our Endeavor series systems have been engineered to provide process
flexibility and competitive throughput for wafers and substrates up to eight
inches in diameter, or six inches square while minimizing cost and space
requirements. The Endeavor cassette module is SMIF compatible. Fast and
efficient, the system's capability is enhanced by parallel processing and
scheduled downtime is minimized by its modularity. Each Endeavor series system
has a central wafer handling system with full vacuum loadlocks, non-contact
optical wafer alignment and a vacuum transport system. Individual process module
servicing is possible without shutting down the system or other chambers.
Contamination control features in the Endeavor series systems include sputter-up
processing, and a gentle and reliable handling system that allows the transport
and process of wafers without clamping or mechanical pressure, and no backside
contact of the wafer or substrate at any time. All processing is done under high
vacuum, using individual high-throughput, turbo-pumped vacuum systems for the
cassette module and transfer module and each process module. These and other
features of the Endeavor series are designed to enable a semiconductor
manufacturer to reduce wafer particle contamination to a level that we believe
exceeds industry standards and to improve deposition results and process
flexibility.
In addition, our Endeavor series systems employs a user-friendly software
system that is equipped with full safety interlocks and is four-level password
protected. This software system incorporates a graphical user interface with
software architecture designed to operate in multiple interface modes, including
operator, maintenance engineer, process engineer and diagnostic modes. The
software provides a quick-response interface which allows the semiconductor
manufacturer access to all necessary system information for factory automation.
The software and automation are completely functional from remote locations via
ISDN line. This remote access can be used to download software upgrades, or as a
powerful diagnostic tool, providing our customers with immediate factory
support.
CUSTOMERS
We sell our systems to semiconductor and related electronic device
component manufacturers throughout the world. Major customers over the last
three fiscal years have included the following:
AMI Matsushita Sumitomo
AMS Motorola ST Microelectronics
Analog Devises NEC Tesla Sezam,S.A.
Denso/Ryosan Nortel Technology Toshiba
Fuji Microdevice OKI United Microelectronics
Hewlett Packard RF Microdevices University Francois Rabelais
Intel Sony Winbond Electronics Corp.
International Rectifier Setech Walsin Lihwa Corp.
Of these 24 customers, seven ordered one or more systems in fiscal 2004.
The composition of our top five customers has changed from year to year, but net
system sales to our top five customers in each of fiscal 2004, 2003, and 2002
accounted for 84.8%, 88.2%, and 54.4%, respectively, of our total net system
sales. Intel, Fuji, and Matsushita accounted for 31.4%, 22.9% and 12.6%
respectively, of our net system sales in 2004. International Rectifier,
University Francois, ST Microelectronics and OKI represented 32.2%, 22.7%, 12.5%
and 12.0%, respectively, of our net system sales in 2003. ST Microelectronics,
Nortel, Analog and NEC represented 24.2%, 17.1%, 10.1% and 13.1%, respectively,
of our net system sales in 2002. Other than the above customers, no single
customer represented more than 10% of our net system sales in fiscal 2004, 2003
or 2002. 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 and related device
manufacturing industry, may have a material adverse effect on us.
BACKLOG
We schedule production of our systems based upon order backlog and
customer commitments. We include in our backlog only orders for which written
purchase orders have been accepted and shipment dates within the next 12 months
have been assigned. As of May 31, 2004 and 2003, our order backlog was
approximately $3,275 and $6,000, respectively. Booked system orders are subject
to cancellation by the customer, but with substantial penalties except in the
case of orders for evaluation systems or for systems that have not yet incurred
production costs. Orders may be subject to rescheduling with limited or no
penalty. Some orders are received for systems to be shipped in the same quarter
as the order is received. As a result, our backlog at any particular date is not
necessarily indicative of actual sales for any succeeding period.
7
MARKETING, SALES AND SERVICE
We sell our systems worldwide through a network of six direct sales
personnel and seven independent sales representatives in sales offices located
throughout the world. In the United States of America, we market our systems
through direct sales personnel located in two regional sales offices and at our
Petaluma, California headquarters. In addition, we provide field service and
applications engineers out of our regional locations and our Petaluma
headquarters in order to ensure dedicated technical and field process support
throughout the United States of America on short notice.
We maintain sales, service and process support capabilities in Japan,
Taiwan, Germany, and Italy and service/support operations in Austria and China.
In addition to our international direct sales and support organizations, we also
market our systems through independent sales representatives in Israel, India,
Turkey, China, South Korea and Singapore and selected markets in Japan.
International sales, which consist of export sales from the United States
of America either directly to the end user or to one of our foreign
subsidiaries, accounted for approximately 67%, 66% and 67% of total revenue for
fiscal 2004, 2003 and 2002, respectively. Revenues by region for each of the
last three fiscal years were as follows:
YEARS ENDED MARCH 31,
2004 2003 2002
--------- --------- -------
United States............................. $ 5,538 $ 4,864 $ 7,168
Asia, excluding Japan..................... 1,241 1,537 3,903
Japan..................................... 6,485 2,934 4,094
Germany................................... 170 353 731
Italy..................................... 1,480 1,851 2,617
Europe, excluding Germany and Italy....... 1,614 2,561 3,093
--------- --------- ---------
Total sales............................. $ 16,528 $ 14,100 $ 21,606
========= ========= =========
We generally sell our systems on 30-to-60 day credit terms to our domestic
and European customers. Customers in the Pacific Rim countries, other than
Japan, are generally required to deliver a letter of credit payable in U.S.
dollars upon system shipment. Sales to other international customers, including
Japan, are billed either in local currency or U.S. dollars. We anticipate that
international sales will continue to account for a significant portion of
revenue in the foreseeable future.
We generally warrant our new systems for 12 months and our refurbished
systems for six months from shipment. Our field engineers provide customers with
call-out repair and maintenance services for a fee. Customers may also enter
into repair and maintenance service contracts covering our systems. We train
customer service engineers to perform routine service for a fee and provide
telephone consultation services generally free of charge.
The sales cycles for our systems vary depending upon whether the system is
an initial design-in, reorder or used equipment. Initial design-in sales cycles
are typically 12 to 18 months, particularly for 6500 and Endeavor series
systems. In contrast, reorder sales cycles are typically four to six months, and
used system sales cycles are generally one to three months. The initial
design-in sales cycle begins with the generation of a sales lead, which is
followed by qualification of the lead, an analysis of the customer's particular
applications needs and problems, one or more presentations to the customer
(frequently including extensive participation by our senior management), two to
three wafer sample demonstrations, followed by customer testing of the results
and extensive negotiations regarding the equipment's process and reliability
specifications. Initial design-in sales cycles are monitored by senior
management for correct strategic approach and resource prioritization. We may,
in some rare instances, need to provide the customer with an evaluation system
for three to six months prior to the receipt of a firm purchase order.
RESEARCH AND DEVELOPMENT
The market for semiconductor capital equipment is characterized by rapid
technological change. We believe that continued and timely development of new
systems and enhancements to existing systems is necessary for us to maintain our
competitive position. Accordingly, we devote a significant portion of our
personnel and financial resources to research and development programs and seek
to maintain close relationships with our customers in order to be responsive to
their system needs.
8
Our research and development encompasses the following areas: plasma etch,
physical vapor deposition and chemical vapor deposition technologies, process
characterization and development, material sciences applicable to etch and
deposition environments, systems design and architecture, electro-mechanical
design and software engineering. Management emphasizes advanced plasma and
reactor chamber modeling capabilities in order to accelerate bringing advanced
chamber designs to market. We employ multi-discipline teams to facilitate short
engineering cycle times and rapid product development.
As of March 31, 2004, we had 21 full-time employees dedicated to equipment
design engineering, process support and research and development. Research and
development expenses for fiscal 2004, 2003 and 2002 were $3,305, $4,815, and
$5,928, respectively, and represented 20.0%, 34.2%, and 27.4% of total revenue,
respectively. Such expenditures were primarily used for the development of new
processes, continued enhancement and customization of existing systems,
processing customer samples in our demonstration labs and providing process
engineering support at customer sites. Additionally we had in-process research
and development expense of $2,202 which represented 13.3% of revenue for fiscal
2004 that was related to the acquisition of Simplus Systems.
MANUFACTURING
Our etch systems are produced at our headquarters in Petaluma, California.
Deposition systems are currently produced at our facility in Santa Barbara,
California. Our manufacturing activities consist of assembling and testing
components and sub-assemblies, which are then integrated into finished systems.
We have structured our production facilities to be driven either by orders or by
forecasts and have adopted a modular system architecture to increase assembly
efficiency and design flexibility. We have also implemented "just-in-time"
manufacturing techniques in our assembly processes. Through the use of such
techniques, 900 series system manufacturing cycle times take approximately 14
days and cycle times for our Endeavor systems and our 6500 series products take
two to three months.
COMPETITION
The semiconductor capital equipment industry is highly competitive. We
believe that the principal competitive factor in the critical segments of the
etch industry is technical performance of the system, followed closely by the
existence of customer relationships, the system price, the ability to provide
service and technical support on a global basis and other related cost factors.
We believe that the principal competitive factor in the non-critical segments of
the etch industry is system price, followed closely by the technical performance
of the system, the existence of established customer relationships, the ability
to provide service and technical support on a global basis and other related
cost factors.
INTELLECTUAL PROPERTY
We hold an exclusive license or ownership of 73 United States of America
patents, including both deposition and etch products, and 36 corresponding
foreign patents covering various aspects of our systems. We have also applied
for 32 additional United States of America patents and 66 additional foreign
patents. Of these patents, a few expire as early as 2004, others expire as late
as 2022 with the average expiration occurring in approximately 2015. We believe
that the duration of such patents generally exceeds the life cycles of the
technologies disclosed and claimed therein. We believe that although the patents
we have exclusively licensed or hold directly will be of value, they will not
determine our success, which depends principally upon our engineering,
marketing, service and manufacturing skills. However, in the absence of patent
protection, we may be vulnerable to competitors who attempt to imitate our
systems, processes and manufacturing techniques. We have signed a non-exclusive
field of use license to two of our patents, relating to our strategic
application sets. In addition, other companies and inventors may receive patents
that contain claims applicable to our systems and processes. The sale of our
systems covered by such patents could require licenses that may not be available
on acceptable terms, if at all. We also rely on trade secrets and other
proprietary technology that we seek to protect, in part, through confidentiality
agreements with employees, vendors, consultants and other parties. There can be
no assurance that these agreements will not be breached, that we will have
adequate remedies for any breach or that our trade secrets will not otherwise
become known to or independently developed by others.
The original version of the system software for our 6500 series systems
was jointly developed by us and Realtime Performance, Inc., a third-party
software vendor. We hold a perpetual, non-exclusive, non-royalty bearing license
to use and enhance this software. The enhanced version of the software currently
used on our 6500 series systems has undergone multiple releases of the original
software, and such enhancements were developed exclusively by us. Neither the
software vendor nor any other party has any right to use our current release of
the system software. However we cannot make any assurances that this software
will not be illegally copied or reversed-engineered by either customers or
third-parties.
9
EMPLOYEES
As of March 31, 2004, we had a total of 89 regular employees, two
part-time contract personnel and two full-time contract personnel. Of our
regular employees, eight are in engineering, 13 are in research and development,
21 are in manufacturing and operations, 28 are in marketing, sales and customer
service and support and 15 are in executive and administrative positions. Many
of our employees are highly skilled, and our success will depend in part upon
our ability to attract, retain and develop such employees. Skilled employees,
especially employees with extensive technological backgrounds, remain in demand.
There can be no assurance we will be able to attract or retain the skilled
employees that may be necessary to continue our research and development,
manufacturing or marketing programs. The loss of any such persons, as well as
the failure to recruit additional key personnel in a timely manner, could have a
material adverse effect on us.
None of our employees is represented by a labor union or covered by a
collective bargaining agreement. We consider our employee relations to be good.
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; THE REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM INCLUDES A GOING CONCERN
UNCERTAINTY EXPLANATORY PARAGRAPH; THE ACCOUNTING FOR THE 2% CONVERTIBLE
DEBENTURES RESULTED IN SIGNIFICANT EXPENSE AMOUNTS.
We incurred net losses of $12,602, $12,625 and $8,730 for the years ended
March 31, 2004, 2003 and 2002, respectively, and generated negative cash flows
from operations of $3,179, $5,984 and $3,603 in these respective years. These
factors raise substantial doubt as to our ability to continue as a going
concern, and our independent registered public accounting firm has included a
going concern uncertainty explanatory paragraph in their report dated June 25,
2004 which is included elsewhere in this Form 10-K. Our plans to maintain and
increase liquidity include the restructuring executed during fiscal 2002 and
2003, which reduced headcount from 155 employees to 89 employees and has reduced
our cost structure entering fiscal 2005. We believe the cost reduction and a
projected increase in sales during fiscal 2005 will generate sufficient cash
flows to fund our operations through the end of fiscal 2005. 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. Failure to
raise additional funds may adversely affect the Company's ability to achieve its
intended business objectives. 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 2% convertible debentures due 2011 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 has resulted in substantial interest expense during fiscal 2004 of $5,251
and will continue to result in substantial interest expense through fiscal 2011
or until the debentures are converted. Approximately 22% of the debentures were
not yet converted into shares of our common stock as of March 31, 2004; however
as of June 15, 2004 all of these outstanding debentures had been converted into
shares of our common stock.
THE EXERCISE OF OUTSTANDING WARRANTS, OPTIONS AND OTHER RIGHTS TO OBTAIN
ADDITIONAL SHARES WILL DILUTE THE VALUE OF THE SHARES.
As of March 31, 2004, there were warrants exercisable for approximately
3,199,942 shares of our common stock, advisor warrants convertible into 196,129
shares, 23,900 shares issuable as interest payment on previously issued
debentures in lieu of cash and options exercisable for approximately 7,390,328
shares of our common stock. In addition, we have warrants outstanding from
previous offerings for approximately 1,610,480 shares of our common stock.
The exercise of these warrants and the issuance of the common stock will
result in dilution in the value of the shares of our outstanding common stock
and the voting power represented thereby. In addition, 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.
10
The warrants do not establish a "floor" that would limit reductions in
such conversion price or exercise price. The downward adjustment 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. We may 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 $1,673
principal amount of debentures as of March 31, 2004 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.
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 completed 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.
11
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.
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 40%, 25% and 36% of total
revenues in fiscal 2004, 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.
12
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.
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.
13
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 84.8%, 88.2% and 54.4% of our systems
revenues in fiscal 2004, 2003 and 2002, respectively. Three customers each
accounted for more than 10% of net systems sales in fiscal 2004. 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 67%, 66% and 67% of total revenue for
fiscal 2004, 2003 and 2002, 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.
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.
EVOLVING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT IN
ADDITIONAL EXPENSES AND CONTINUING UNCERTAINTY.
Changing laws, regulations and standard relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC
regulations and Nasdaq National Market rules are creating uncertainty for public
companies. We continually evaluate and monitor developments with respect to new
and proposed rules and cannot predict or estimate the amount of the additional
costs we may incur or the timing of such costs. These new or changed laws,
regulations and standards are subject to varying interpretations, in many cases
due to their lack of specificity, and as a result, their application in practice
may evolve over time as new guidance is provided by regulatory and governing
bodies. This could result in continuing uncertainty regarding compliance matters
and higher costs necessitated by ongoing revisions to disclosure and governance
practices. We are committed to maintaining high standards of corporate
governance and public disclosure. As a result, we have invested resources to
comply with evolving laws, regulations and standards, and this investment may
result in increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities to compliance
activities. If our efforts comply with new or changed laws, regulations and
standards differ from the activities intended by regulatory or governing bodies
due to ambiguities related to practice, regulatory authorities may initiate
legal proceedings against us and we may be harmed.
WE MUST INTEGRATE OUR 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.
On November 11, 2003, we acquired substantially all of the assets of
Simplus Systems Corporation. 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 Simplus or businesses, products or
technologies acquired in the future including:
14
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;
o dilution of our current stockholders due to the issuance of
additional securities as consideration for acquisitions; and
o inability to complete acquired research and development projects.
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.
OUR FINANCIAL PERFORMANCE MAY ADVERSELY AFFECT THE MORALE AND PERFORMANCE OF OUR
PERSONNEL AND OUR ABILITY TO HIRE NEW PERSONNEL.
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. 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.
15
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.
THE STRUCTURED SECONDARY OFFERING FACILITY WE ENTERED INTO IN FEBRUARY 2004 AND
AMENDED IN MAY 2004 MAY HAVE A DILUTIVE IMPACT ON OUR STOCKHOLDERS, AND THE
POTENTIAL UNAVAILABILITY OF THIS FACILITY WOULD NEGATIVELY IMPACT OUR FINANCING
ACTIVITIES.
On February 11, 2004, we entered into a structured secondary offering
facility (the "Structured Secondary") with Kingsbridge Capital Limited
("Kingsbridge"), which was amended on May 19, 2004. Under the terms of an
Amended and Restated Common Stock Purchase Agreement (the "Purchase Agreement")
entered into by the Company and Kingsbridge on May 19, 2004 with respect to the
Structured Secondary, we may, at our sole discretion, sell to Kingsbridge, and
Kingsbridge would be obligated to purchase, up to $25 million of shares of our
common stock, par value $0.01 per share. The price at which we may sell shares
of common stock under the Purchase Agreement is based on a discount to the
volume weighted average market price of the common stock for a specified number
of trading days following each of our respective elections to sell shares
thereunder. The lowest threshold price at which our stock may be sold is at the
sole discretion of the Company, but in no case may be lower than $1.00 per
share, and in the event the price of our common stock falls below this $1.00
threshold, the Structured Secondary will not be an available source of
financing. We may utilize the Structured Secondary through February 11, 2004
from time to time in our sole discretion, subject to various conditions and
terms contained in the Purchase Agreement. Among the terms of the Purchase
Agreement is a "Material Adverse Effect" clause which permits Kingsbridge to
terminate the Structured Secondary if Kingsbridge determines that an event has
occurred that results in any effect on the business, operations, properties or
financial condition of the Company and its subsidiaries that is material and
adverse to the Company and such subsidiaries, taken as a whole, and/or any
condition, circumstance, or situation that would prohibit or otherwise interfere
with our ability to perform any of our obligations under the Purchase Agreement.
In connection with our entering into the Structured Secondary, we issued
to Kingsbridge a warrant (the "Warrant") to purchase 300,000 shares of common
stock at an exercise price of $4.11 per share. The Warrant will not be
exercisable until August 11, 2004, and will expire on August 11, 2009.
16
There are 9,151,661 shares of our common stock that are reserved for
issuance under the Structured Secondary with Kingsbridge, 300,000 of which are
issuable under the Warrant we granted to Kingsbridge. The issuance of shares
under the Structured Secondary and upon exercise of the Warrant will have a
dilutive impact on other stockholders and the issuance or even potential
issuance of such shares could have a negative effect on the market price of our
common stock. In addition, if we draw down the Structured Secondary, we will
issue shares to Kingsbridge at a discount of 10% of the daily volume weighted
average prices of our common stock during a specified period of trading days
after initiation of each respective draw down. Issuing shares at such a discount
will further dilute the interests of other stockholders.
To the extent that Kingsbridge sells shares of our common stock issued
under the Structured Secondary to third parties, our stock price may decrease
due to the additional selling pressure in the market. The perceived risk of
dilution from sales of stock to or by Kingsbridge may cause holders of our
common stock to sell their shares, or it may encourage short sales. This could
contribute to a decline in our stock price.
THE STRUCTURED SECONDARY IMPOSES CERTAIN LIMITATIONS ON OUR ABILITY TO ISSUE
EQUITY OR EQUITY-LINKED SECURITIES.
During the two-year term of the Structured Secondary, we may not engage in
certain equity or equity-linked financings without the prior written consent of
Kingsbridge, which consent will not be unreasonably withheld, conditioned or
delayed. However, we may engage in the following capital raising transactions
without Kingsbridge's consent: (1) establish stock option or award plans or
agreements (for directors, employees, consultants and/or advisors) and amend
such plans or agreements, including increasing the number of shares available
thereunder, (2) use equity securities to finance the acquisition of other
companies, equipment, technologies or lines of business, (3) issue shares of
common stock and/or preferred stock in connection with our option or award
plans, stock purchase plans, rights plans, warrants or options, (4) issue shares
of common stock and/or preferred stock in connection with the acquisition of
products, licenses, equipment or other assets and strategic partnerships or
joint ventures (the primary purpose of which is not to raise equity capital);
(5) issue shares of common and/or preferred stock to consultants and/or advisors
as consideration for services rendered, (6) issue and sell shares in an
underwritten public offering of common stock, and (7) issue shares of common
stock to Kingsbridge under any other agreement entered into between our company
and Kingsbridge.
In addition, we may not issue securities that are, or may become,
convertible or exchangeable into shares of common stock where the purchase,
conversion or exchange price for such common stock is determined using a
floating or otherwise adjustable discount to the market price of the common
stock (including pursuant to an equity line or other financing that is
substantially similar to an equity line with an investor other than Kingsbridge)
during the two-year term of our agreement with Kingsbridge.
WE MAY ISSUE ADDITIONAL SHARES AND DILUTE YOUR OWNERSHIP PERCENTAGE.
Certain events over which you have no control could result in the issuance
of additional shares of our common stock, which would dilute your ownership
percentage in our company. As of March 31, 2004, there were 36,583,850 shares of
our common stock issued and outstanding and there were 533,521 shares of common
stock reserved for issuance under our equity incentive and stock purchase plans.
In addition, as of March 31, 2004, there were outstanding options, warrants and
other rights to acquire up to approximately 7,390,000 shares of common stock. We
may also issue additional shares of common stock or preferred stock:
o to raise additional funds for working capital, commercialization,
production and marketing activities;
o upon the exercise or conversion of additional outstanding options
and warrants; and
o in lieu of cash payment of dividends.
Moreover, although the issuance of our common stock under the Structured
Secondary will have no effect on the rights or privileges of existing holders of
common stock, the economic and voting interests of each stockholder will be
diluted as a result of such issuance. Although the number of shares of common
stock that stockholders presently own will not decrease, such shares will
represent a smaller percentage of our total shares that will be outstanding
after such events. If we satisfy the conditions that allow us to draw down the
entire $25 million available under the Structured Secondary, and we choose to do
so, then generally, as the market price of our common stock decreases, the
number of shares we will have to issue upon each draw down on the Structured
Secondary increases, to a maximum of 8,851,661 shares. Therefore drawing down
upon the Structured Secondary when the price of our common stock is decreasing
will have an additional dilutive effect to your ownership percentage and may
result in additional downward pressure on the price of our common stock.
17
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Form 10-K includes or incorporates by reference forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Forward-looking statements, which are based on
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by the use of the words "anticipate," "believe,"
"estimate," "expect," "intend," "project," or similar expressions. These
forward-looking statements are subject to risks, uncertainties and assumptions
about us. Important factors that could cause actual results to differ materially
from the forward-looking statements we make in this Form 10-K are set forth
under the caption "Risk Factors" and elsewhere in this prospectus and the
documents incorporated by reference in this Form 10-K. If one or more of these
risks or uncertainties materialize, or if any underlying assumptions prove
incorrect, our actual results, performance or achievements may vary materially
from any future results, performance or achievements expressed or implied by
these forward-looking statements. All forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirely by
the cautionary statements in this paragraph.
18
ITEM 2. PROPERTIES
We maintain our headquarters, encompassing our executive office,
manufacturing, engineering and research and development operations, in one
leased 45,064 square foot facility in Petaluma, California. The lease, which was
signed on April 30, 2004, and is filed as an exhibit to this Form 10-K, expires
on December 31, 2009. The prior lease for the same facility was due to expire in
March 2004. In the prior lease, we leased 120,000 sq. ft. and occupied 80,000
sq. ft., with the balance subleased or available for sublease. The new lease for
57,418 sq. ft. is for the occupied space only and the sub-tenants' leases have
been assigned to the landlord. Other than certain large pieces of capital
equipment leased by us, we own substantially all of the machinery and equipment
used in our facilities. We believe that our existing facilities are adequate to
meet our requirements for several years.
We lease an 18,000 square foot facility in Santa Barbara, California for
manufacturing and support of Sputtered Films tools. We currently occupy about
10,700 sq. ft. with the remaining portion being sublet. The lease expires in
September 2005 with an option to extend for three additional years.
We lease sales, service and process support space in Munich, Germany;
Kawasaki, Japan; Catania, Italy; and Hsin Chu City, Taiwan.
ITEM 3. LEGAL PROCEEDINGS
Sputtering Films, Inc. v. Advanced Modular Sputtering, et al., filed in Santa
Barbara County Superior Court.
Our subsidiary, Sputtered Films, Inc. ("SFI") filed an action against two former
employees, Sergey Mishin and Rose Stuart-Curran, and the company they formed
after leaving SFI, Advanced Modular Sputtering ("AMS"), alleging
misappropriation of trade secrets, violation of signed employee Secrecy
Agreements, unfair business practices and other claims arising out of AMS's
apparent possession and use of SFI's drawings and specifications for SFI's
Endeavor Sputtering Machine and the Series IV S-Gun. SFI believes that the
sputtering tools marketed by AMS result from unauthorized use of SFI's drawings,
specifications and other trade secret technology. The case was filed in December
2003, and a trial is anticipated prior to the end of 2004. .
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of fiscal year 2004.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUE PURCHASES OF EQUITY SECURITIES
Since May 6, 2003, our common stock has traded on the Nasdaq SmallCap
Market under the symbol TGAL. Prior to this date, our common stock traded on the
Nasdaq National Market since October 19, 1995. The following table sets forth
the range of high and low sales prices for our common stock for each quarter
during the prior two fiscal years.
HIGH LOW
FISCAL YEAR 2003
First Quarter...................................... $1.420 $0.130
Second Quarter..................................... 1.300 0.330
Third Quarter...................................... 0.880 0.130
Fourth Quarter..................................... 0.790 0.250
FISCAL YEAR 2004
First Quarter...................................... $0.830 $0.300
Second Quarter..................................... 1.640 0.500
Third Quarter...................................... 3.150 0.960
Fourth Quarter..................................... 4.050 1.790
The approximate number of record holders of our common stock as of March
31, 2004 was 402. We have not paid any cash dividends since our inception and do
not anticipate paying cash dividends in the foreseeable future. Further, our
domestic line of credit restricts the declaration and payment of cash dividends.
19
EQUITY COMPENSATION PLAN INFORMATION
PLAN CATEGORY NUMBER OF WEIGHTED-AVERAGE NUMBER OF
SECURITIES TO BE EXERCISE PRICE SECURITIES
ISSUED UPON OF OUTSTANDING REMAINING
EXERCISE OF OPTIONS AVAILABLE FOR
OUTSTANDING FUTURE ISSUANCE
OPTIONS UNDER EQUITY
COMPENSATION
PLANS (EXCLUDING
SECURITIES
REFLECTED IN
COLUMN (A))
(A) (B) (C)
Equity compensation Plans approved by security holders
Equity Incentive Plan 1,195,700 $ 4.41 --
1990 Stock Option Plan 158,626 5.73 --
1998 Equity Participation Plan 5,471,002 1.34 533,521
Directors Stock Option Plan 565,000 1.77 --
------------- ---------- -----------
Total 7,390,328 $ 1.97 533,521
============= =========== ===========
WARRANTS OUTSTANDING
YEAR ENDED MARCH 31,
2004 2003 2002
------------- ------------ ---------
Number of securities to be issued upon exercise of outstanding warrants..... 5,006,551 1,693,552 1,218,552
Weighted-average exercise price of outstanding warrants..................... $ 1.39 $ 2.77 $ 3.30
SINCE MARCH 31, 2001, WE HAVE ISSUED AND SOLD THE FOLLOWING UNREGISTERED
SECURITIES.
Common Stock
On February 11, 2004, we signed a $25 million equity facility with
Kingsbridge Capital Limited ("Kingsbridge"). The arrangement will allow the us
to sell shares of our common stock to Kingsbridge at our sole discretion over a
24-month period on a "when and if needed" basis. Kingsbridge is required under
the terms of the arrangement to purchase our stock following the effectiveness
of a registration statement. The price of the common shares issued under the
agreement is based on a discount to the volume-weighted average market price
during a specified drawdown period. We have no obligation to draw down all or
any portion of the commitment. The maximum amount of shares that we may issue to
Kingsbridge under the equity facility is 8,851,661.
In connection with the agreement, on February 11, 2004, we issued fully
vested warrants to Kingsbridge to purchase 300,000 shares of our common stock at
an exercise price of $4.11 per share. This transaction was effected in reliance
on Regulation D under the Securities Act.
On December 5, 2003, we closed a transaction in which we purchased
substantially all of the assets of Simplus Systems Corporation, a Delaware
corporation, in exchange for 1,499,994 shares of our common stock. The
transaction was effected in reliance on Regulation D under the Securities Act.
On June 30, 2003, we entered into agreements with investors to raise up to
$7,165 in a private placement to institutional and individual investors of (i)
an aggregate of $7,165 in principal amount of our 2% convertible debentures,
convertible into common stock at $0.35 per share and (ii) warrants to purchase
approximately 4,100 shares of our common stock, exercisable at $0.50 per share.
The first tranche of approximately $929 of the private placement was completed
on June 30, 2003 and the second tranche was completed on September 9, 2003
following shareholder approval. This transaction was effected in reliance on
Rule 506 of Regulation D.
On August 30, 2002, we issued and sold 350,000 shares of our common stock
to consultants upon exercise of warrants at an exercise price of $1.20 in lieu
of cash payments. This transaction was effected in reliance on Rule 501 of
Regulation D.
20
On August 30, 2002, we issued and sold 1,499,987 shares of our common
stock in connection with our acquisition of Sputtered Films, Inc., a California
corporation ("SFI") pursuant to an Agreement and Plan of Merger dated as of
August 13, 2002. The transaction was effected in reliance on Regulation D.
On June 26, 2002, we issued and sold 125,000 shares of our common stock to
Silicon Valley Bank upon exercise of a warrant at an exercise price of $2.00.
This transaction was effected in reliance on Rule 501 of Regulation D.
On December 31, 2001, we closed a private placement in which we sold to
accredited investors 1,661,005 units, each unit consisting of one share of
common stock and one warrant to purchase one-half of a share of common stock,
for proceeds of $2.2 million, net of $0.1 million in cash stock issuance costs.
We also granted to the placement agent warrants to purchase 83,050 shares of our
common stock. The warrants have an exercise price of $2.50 per share and expire
on December 31, 2006. This transaction was effected in reliance on Regulation D.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue...................................................... $ 16,528 $ 14,100 $ 21,606 $ 38,205 $ 26,438
Gross profit (loss).......................................... 4,647 (66) 6,676 13,915 9,231
Operating loss............................................... (7,180) (12,617) (8,235) (7,226) (12,932)
Income (loss) before cumulative effect of change in
accounting principle (2)................................... (12,602) (12,625) (8,730) 1,096 (12,571)
Net income (loss)............................................ (12,602) (12,625) (8,730) 699 (12,571)
Net income (loss) per share: (1)
Basic...................................................... (0.56) (0.82) (0.67) 0.06 (1.15)
Diluted.................................................... (0.56) (0.82) (0.67) 0.05 (1.15)
Shares used in per share computation:
Basic...................................................... 22,442 15,311 13,030 12,499 10,964
Diluted.................................................... 22,442 15,311 13,030 12,838 10,964
MARCH 31,
2004 2003 2002 2001 2000
---------- ---------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 7,049 $ 912 $ 8,100 $ 12,649 $ 12,627
Working capital.............................................. 8,823 5,041 20,816 26,551 24,993
Total assets................................................. 22,658 17,209 29,227 42,252 35,573
Debt obligations (excluding capital leases and 2% convertible
debentures)................................................... 2,450 426 922 3,884 560
Stockholders' equity......................................... 14,955 11,123 22,286 28,609 27,431
- ----------
(1) See Note 3 of our Consolidated Financial Statements for an
explanation of the computation of earnings per share.
(2) During the fourth quarter of fiscal 2001, we implemented SAB 101,
retroactive to the beginning of the fiscal year. This was reported
as a cumulative effect of a change in accounting principle as of
April 1, 2000. The cumulative effect of the change in accounting
principle on prior years resulted in a charge to income of $397 (net
of income taxes of $25), which was included in income for the year
ended March 31, 2001. For fiscal 2001, we recognized $478 in revenue
that was included in the cumulative effect of the change in
accounting principle.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information contained herein contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, which can
be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology or which constitute projected
financial information. The following contains cautionary statements identifying
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements. See "Risk Factors."
COMPANY OVERVIEW
Tegal Corporation, a Delaware corporation ("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.
We were formed in December 1989 to acquire the operations of the former
Tegal Corporation, a division of Motorola, Inc. ("Motorola"). Our predecessor
company was founded in 1972 and acquired by Motorola in 1978. We completed our
initial public offering in October 1995.
On August 30, 2002, we acquired Sputtered Films, Incorporated ("SFI"), a
privately held California corporation, pursuant to an Agreement and Plan of
Merger dated August 13, 2002. SFI is a leader in the design, manufacture and
service of high performance physical vapor deposition sputtering systems for the
semiconductor and semiconductor packaging industry. SFI was founded in 1967 with
the development of the S-Gun, a core technology of the acquired company.
On November 11, 2003, we acquired substantially all of the assets and
certain liabilities of Simplus Systems Corporation, ("Simplus"), a development
stage company, pursuant to an asset purchase agreement. Simplus had developed a
deposition cluster tool and certain patented processes for barrier, copper seed
and high-K dielectric applications. Simplus had coined the term "nano-layer
deposition" or "NLD" to describe its unique approach to chemical vapor
deposition ("CVD"). The Company is continuing to develop these NLD processes and
related tools, and is in the process of marketing them to a limited number of
key customers and joint development partners.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of the financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to inventory, warranty obligations, purchase order commitments,
bad debts, income taxes, intangible assets, restructuring and contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
REVENUE RECOGNITION
Revenue is only recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the sales price is
fixed or determinable, and collectibility is reasonably assured. We defer
revenue recognition for new product sales until both installation and customer
acceptance has occurred. For sales of existing products, upon the transfer of
title and risk of loss, revenue is recorded at the lesser of the fair value of
the equipment or the contractual amount billable upon shipment. The remainder is
recorded as deferred revenue and recognized as revenue upon installation and
customer acceptance. Revenue for spare part sales is generally recognized upon
shipment. Services revenue is recognized as the related services are provided,
unless services are paid for in advance according to service contracts, in which
case revenue is deferred and recognized over the service period using the
straight-line method.
22
ACCOUNTS RECEIVABLE - ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts receivable for estimated
losses resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to deteriorate, or even a
single customer was otherwise unable to make payments, additional allowances may
be required. Given the average selling prices of our systems, a single customer
default could have a material adverse effect on our consolidated financial
position, results of operations, and cash flows. In addition we maintain an
allowance for product returns and other allowances.
INVENTORIES
Inventories are stated at the lower of cost or market, reduced by
provisions for excess and obsolescence. Cost is computed using standard cost,
which approximates actual cost on a first-in, first-out basis and includes
material, labor and manufacturing overhead costs. We estimate the effects of
excess and obsolescence on the carrying values of our inventories based upon
estimates of future demand and market conditions. We establish provisions for
related inventories in excess of production demand. Should actual production
demand differ from our estimates, additional inventory write-downs may be
required, as was the case in the third quarter of fiscal 2004. Any excess and
obsolete provision is released only if and when the related inventories is sold
or scrapped.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
undiscounted expected future cash flows are less than the carrying value of the
assets, an impairment loss is recognized based on the excess of the carrying
amount over the fair value of the assets. No impairment charge has been recorded
for the years ended 2004, 2003 and 2002, respectively.
WARRANTY OBLIGATIONS
We provide for the estimated cost of our product warranties at the time
revenue is recognized. Our 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 our estimates, revisions to the estimated warranty
liability may be required.
DEFERRED TAXES
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. Based on the uncertainty of future
taxable income, we have fully reserved our deferred tax assets as of March 31,
2004 and 2003. In the event we were to determine that we would be able to
realize our deferred tax assets in the future, an adjustment to the deferred tax
asset would increase income in the period such determination was made.
23
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. With the acquisitions of Sputtered Films and Simplus
Systems Corporation we now also provide deposition capabilities. The acquisition
of Sputtered Films secured a source for a complementary deposition technology
for our new materials strategy. Simplus has developed a deposition cluster tool
and certain patented processes for barrier, copper seed and high-K dielectric
applications. Simplus coined the term "nano-layer deposition" or "NLD" to
describe its unique approach to chemical vapor deposition ("CVD").
The following table sets forth certain financial data for the years
indicated as a percentage of revenue:
YEAR ENDED MARCH 31,
2004 2003 2002
------- ------ -----
Revenue...................................... 100.0% 100.0% 100.0%
Cost of revenue.............................. 71.9 100.5 69.1
------ ------ ------
Gross profit (loss).......................... 28.1 (0.5) 30.9
------ ------ ------
Operating expenses:
Research and development expenses.......... 20.0 34.2 27.4
Sales and marketing expenses............... 14.2 20.7 18.5
General and administrative expenses........ 24.0 34.1 23.1
In-process research and development........ 13.3 -- --
------ ------ ------
Total operating expenses................ 71.5 89.0 69.0
------ ------ ------
Operating loss............................... (43.4) (89.5) (38.1)
Other expense, net........................... (32.8) -- (2.3)
------ ------ ------
Net loss................................ (76.2)% (89.5)% (40.4)%
====== ====== ======
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
REVENUE
Our revenue is derived from sales of new and refurbished systems, spare
parts and non-warranty service. Revenue increased 17 percent in fiscal 2004 from
fiscal 2003 (to $16,528 from $14,100). The revenue increase in fiscal 2004 as
compared to fiscal 2003 was principally attributable to the mix of higher priced
systems and two large upgrades on critical etch tools. Spares and service sales
were flat year to year. Our revenue is derived from sales of new and refurbished
systems, spare parts and non-warranty service. Revenue decreased 35 percent in
fiscal 2003 from fiscal 2002 (to $14,100 from $21,606). The revenue decrease in
fiscal 2003 compared to fiscal 2002 was principally attributable to a sharp
decrease in the sale of our 900 series systems during the economic slow down and
two fewer 6500 series system sales, offset in part by the sale of one Endeavor
system, in addition to lower spares and service sales. We believe the lower
spares and service sales is the result of lower usage of the systems previously
installed, occurring naturally as a result of lower capacity utilization by our
customers..
International sales accounted for approximately 67, 66 and 67 percent of
total revenue in fiscal 2004, 2003 and 2002, respectively. We expect that
international sales will continue to account for a significant portion of our
revenue.
GROSS PROFIT (LOSS)
Our gross profit (loss) as a percentage of revenue (gross margin)
increased to 28.1 percent in fiscal 2004 compared to (0.5) percent in fiscal
2003. The gross margin increase in fiscal 2004 as compared to fiscal 2003 was
principally due to increased sales activity and better absorption of overhead
accompanied by reduced department expenses in operations and service.
Additionally we had a provision for excess and obsolete inventory of
approximately $967 in the third quarter of 2004 as compared to a provision of
$1,922 in the second quarter of 2003. Our gross profit (loss) as a percentage of
revenue (gross margin) decreased to (0.5) percent in fiscal 2003 compared to 31
percent in fiscal 2002. The gross margin decrease in fiscal 2003 as compared to
fiscal 2002 was principally due to provisions for excess and obsolete inventory
for approximately $1,922 in the second quarter, accompanied by lower gross
margins for system sales because of lower volumes and continued high overhead
costs. None of the written down inventory was sold in fiscal year 2004 or fiscal
year 2003.
24
Our gross profit as a percentage of revenue has been, and will continue to
be, affected by a variety of factors, including the mix and average selling
prices of systems sold and the costs to manufacture, service and support new
product introductions and enhancements. Gross margins for our 6500 series
systems are typically lower than those of our more mature 900 series systems due
to the inefficiencies and lower vendor discounts associated with lower order
volumes and increased service, installation and warranty support. However, gross
profit improvement is one of our highest priorities. We believe that the results
of our overhead reductions, will begin to exhibit themselves in gross profit
improvements, especially as our sales volume increases.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries, prototype
material and other costs associated with our research and development efforts.
In absolute dollars, research and development expenses decreased to $3,305 in
fiscal 2004 from $4,815 in fiscal 2003. The absolute dollar decrease in fiscal
2004 expenses from fiscal year 2003 was due primarily to cuts in expenses within
non-essential programs. As a percentage of revenue, research and development
decreased to 20.0 percent from 34.2 percent in fiscal 2003. In absolute dollars,
research and development expenses decreased to $4,815 in fiscal 2003 from $5,928
in fiscal 2002. The absolute dollar decrease in fiscal 2003 expenses from fiscal
2002 was due primarily to cuts in expenses. As a percentage of revenue, research
and development increased to 34.2 percent in fiscal 2003 from 27.4 percent in
fiscal 2002. Although our research and development expense in absolute dollars
is decreasing year over year, we continue to maintain active development efforts
in support of our new materials strategy. For several years, our research and
development efforts have been focused primarily on customer needs for process
solutions rather than hardware developments, which typically require
substantially more investment.
SALES AND MARKETING
Sales and marketing expenses primarily consist of salaries, commissions,
trade show promotion and advertising expenses. In absolute dollars, sales and
marketing expenses decreased to $2,347 in fiscal 2004 from $2,922 in fiscal
2003. As a percentage of revenue, sales and marketing expenses decreased to 14.2
percent in fiscal 2004 from 20.7 percent in fiscal 2003. The absolute dollar
decrease in fiscal 2004 from fiscal 2003 was primarily due to our cuts in
expenses, such as a reduced presence at regional trade shows and conferences and
lower advertising expenses. In absolute dollars, sales and marketing expenses
decreased to $2,922 in fiscal 2003 from $3,996 in fiscal 2002. As a percentage
of revenue, sales and marketing expenses increased to 20.7 percent in fiscal
2003 from 18.5 percent in fiscal 2002. The absolute dollar decrease in fiscal
2003 from fiscal 2002 was primarily due to our cuts in expenses. Additionally we
have converted from direct sales to manufacturer's representatives in some
foreign markets where business is very light. Nevertheless, we believe that we
have sufficient coverage in our foreign markets to ensure that we are under
consideration by customers who are in a position to commit funds to capital
equipment purchases.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of salaries, legal, accounting
and related administrative services and expenses associated with general
management, finance, information systems, human resources and investor
relation's activities. General and administrative expenses in absolute dollars
decreased to $3,973 in fiscal 2004 from $4,814 in fiscal 2003. The absolute
dollar decreases in spending were related to continued strategic expense cuts
across all functions. As a percentage of revenues, general and administrative
expenses decreased to 24.0 percent, from 34.1 percent in fiscal 2003. General
and administrative expenses in absolute dollars decreased slightly to $4,814 in
fiscal 2003 from $4,987 in fiscal 2002. The absolute dollar decreases in
spending were related to continued strategic expense cuts, offset in part by the
cost of the acquisition of Sputtered Films and their operations in August 2002.
As a percentage of revenues, general and administrative expenses increased to
34.1 percent, up from 23.1 percent in fiscal 2002. We continue to seek
improvements in productivity in all general and administrative expense areas
through reduction and cross training of personnel, tighter management of outside
service providers and the lowering of costs associated with being a public
company.
IN-PROCESS RESEARCH & DEVELOPMENT
In-process Research & Development ("IPR&D") consists of those products
obtained through acquisition that are not yet proven to be technologically
feasible but have been developed to a point where there is value associated with
them in relation to potential future revenue. Because technological feasibility
was not yet proven and no alternative future uses are believed to exist for the
in-process technologies, the assigned value of $2,202 was expensed immediately
upon the date of the acquisition.
The fair value underlying the $2,202 assigned to IPR&D in the Simplus
acquisition was determined by identifying research projects in areas for which
technological feasibility had not been established and there was no alternative
future use. Projects in the IPR&D category are certain design change
improvements on the existing 150 mm and 200 mm systems and the development of a
300 mm system. The design change improvements on the existing systems is
estimated to cost approximately $500,000 to $1 million, is approximately 90%
complete and will be completed by December 31, 2004. The development of a 300 mm
system is estimated to be approximately 10% complete, and to cost between $2
Million and $4 Million over the next two to four years, as market demand
materializes.
25
The IPR&D value of $2,202 was determined by an income approach where fair
value is the present value of projected free cash flows that will be generated
by the products incorporating the acquired technologies under development,
assuming they are successfully completed. The estimated net free cash flows
generated by the products over a seven-year period were discounted at a rate of
32% percent in relation to the stage of completion and the technical risks
associated with achieving technological feasibility. The net cash flows for such
projects were based on management's estimates of revenue, expenses and asset
requirements. Any delays or failures in the completion of these projects could
impact expected return on investment and future results of operations. In
addition, our financial condition would be adversely affected if the value of
other intangible assets acquired became impaired.
All of these projects have completion risks related to functionality,
architecture performance, process technology availability, continued
availability of key technical personnel, product reliability and availability of
software support. To the extent that estimated completion dates are not met, the
risk of competitors' product introductions is greater and revenue opportunity
may be permanently lost.
OTHER EXPENSE, NET
Other expense, net consists principally of, interest income, interest
expense and gains and losses on foreign exchange. We recorded net non-operating
expense of $5,422 in fiscal 2004 and $8 in fiscal 2003. In 2004, interest
expense increased due to $5,480 of interest expense that was primarily
attributable to the accretion of the debt discount and the amortization of the
debt issuance costs related to the debenture financing (see Note 7 to the
accompanying notes to the consolidated financial statements). We recorded net
non-operating expense of $8 in fiscal 2003 and $495 in fiscal 2002. In 2003,
interest expense was reduced due to reduced borrowings on both the Japanese and
domestic lines of credit.
INCOME TAXES
Our effective tax rate was zero percent in all three fiscal years. No tax
benefit was recorded for the losses incurred in fiscal 2004, 2003 and 2002 due
to uncertainty related to the realization of such benefits. All deferred tax
assets have been fully reserved.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was $3,179 in fiscal 2004, due principally to
a net loss of $12,602 offset by non cash expense from depreciation and
amortization, warrants issued for services rendered, and non cash interest
expense, and a non cash charge for acquired IPR&D related to the Simplus
acquisition. Additionally, the net loss is offset by a net decrease in inventory
offset by an increase in accounts receivable, and a net decrease in accounts
payable, accrued liabilities, and an increase in prepaid expenses and other
assets. Net cash used in operations was $5,984, in fiscal 2003, due principally
to a loss of $12,625 (after adjusting for depreciation and amortization) and a
decrease in accounts payable, accrued liabilities, and deferred revenue, offset
in part by a decrease in accounts receivable, inventory and prepaid assets.
Net capital expenditures totaled $254, $479 and $501, in fiscal 2004, 2003
and 2002, respectively. Capital expenditures in all three years were incurred
principally for demonstration equipment, leasehold improvements and to acquire
design tools, analytical equipment and computers. Fiscal 2003 investing
activities also included $184 of cash transaction costs related to the SFI
acquisition, net of cash acquired.
Cash proceeds from financing activities totaled $9,734 for fiscal 2004 and
were primarily from the sale of debentures and the subsequent exercise of common
stock warrants by service providers and debenture holders and borrowing on the
domestic and Japanese lines of credit. Net cash used in financing activities
totaled $820 for fiscal 2003 primarily related to the repayment of the domestic
and Japanese lines of credit.
On January 19, 2004, the Company entered into a new line of credit with
Silicon Valley Bank that will be available until January 19, 2005. The new line
of credit has a maximum borrowing capacity of $3.5 million, bears interest of
prime plus 1.0% and is collateralized by substantially all of the Company's
domestic and Japanese assets. As of March 31, 2004, the Company had $1,347
outstanding under this domestic line of credit, which was further limited by the
amounts of accounts receivable and inventories on the Company's balance sheet.
26
On February 11, 2004, the Company signed a $25 million equity facility
with Kingsbridge Capital, a firm that specializes in the financing of small to
medium sized technology-based companies. The arrangement will allow the Company
to sell shares of its common stock to Kingsbridge at its sole discretion over a
24-month period on a "when and if needed" basis. Kingsbridge Capital is required
under the terms of the arrangement to purchase Tegal's stock following the
effectiveness of a registration statement. The price of the common shares issued
under the agreement is based on a discount to the volume-weighted average market
price during a specified drawdown period. The Company has no obligation to draw
down all or any portion of the commitment.
In connection with the agreement, the Company issued fully vested warrants
to Kingsbridge Capital to purchase 300,000 shares of the Company's common stock
at an exercise price of $4.11 per share. The fair value of such options, which
amounted to approximately $756 was capitalized as a transaction cost and
included in other assets. The following variables were used to determine the
fair value of such instruments under the Black-Scholes option pricing model:
volatility of 114%, term of five years, risk free interest of 3.91% and
underlying stock price equal to fair market value at the time of grant.
As of March 31, 2004, the Company's Japanese subsidiary had $979
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 March 31, 2004) plus 1.0%, and has a total capacity
of 150 million yen (approximately $1,420 at exchange rates prevailing on March
31, 2004).
Notes payable as of March 31, 2004 consisted primarily of one outstanding
note to the California Trade and Commerce Agency for $124. 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 2% convertible debenture financing which
resulted in gross proceeds of $7,165. The terms and conditions of the 2%
convertible debentures are described in notes 7 and 13 to the accompanying notes
to the consolidated financial statements.
In December 2001, the Company issued warrants in conjunction with a
private placement. During fiscal year 2004, 62,135 warrants were exercised in
the amount of $155.
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 $12,602, $12,625 and $8,730 for fiscal 2004, 2003
and 2002, respectively. The Company generated negative cash flows from
operations of $3,179, $5,984 and $3,603 for fiscal 2004, 2003 and 2002,
respectively. To finance its operations, the Company raised approximately $6,183
in net proceeds from the sale of 2% convertible debentures and exercise of
warrants during fiscal 2004 (see Note 7 to the accompanying notes to the
consolidated financial statements). Management believes that these proceeds,
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. If the projected sales do not
materialize, the Company 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
common stock, and debt covenants could impose restrictions on the Company's
operations. The sale of equity or debt could result in additional dilution to
current stockholders, and such financing may not be available to the Company 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 the Company be unable to continue as
a going concern. Additionally, the 2% 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. Our independent accountants have included a going concern
explanatory paragraph in their report dated June 25, 2004, included elsewhere in
this Form 10-K.
For more information on our capital resources, see "Risk Factors" in Part
II, Item 5.
27
The following summarizes our contractual obligations at March 31, 2004,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods (in thousands) excluding 2% convertible debentures which
were fully redeemed June 15, 2004:
Contractual obligations: LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----- ------ --------- --------- -------
Non-cancelable capital lease obligations............... $ 37 $ 11 $ 24 $ 2 $ -
Non-cancelable operating lease obligations............. 6,064 1,333 2,034 1,944 753
Notes payable and bank lines of credit, excluding 2%
convertible debentures............................... 2,450 2,450 - - -
-------- --------- ---------- --------- ----------
Total contractual cash obligations..................... $ 8,551 $ 3,794 $ 2,058 $ 1,946 $ 753
======== ========= ========== ========= ==========
Certain sales contracts of the Company 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK DISCLOSURE
We are exposed to financial market risks, including changes in foreign
currency exchange ("FX") rates and interest rates. To mitigate the risks
associated with FX rates, we utilize derivative financial instruments. We do not
use derivative financial instruments for speculative or trading purposes.
We manufacture the majority of our products in the United States of
America; however, we service customers worldwide and thus have a cost base that
is diversified over a number of European and Asian currencies as well as the
U.S. dollar. This diverse base of local currency costs serves to mitigate
partially the earnings effect of potential changes in value of our local
currency denominated revenue. Additionally, we denominate our export sales in
U.S. dollars, whenever possible.
We manage short-term exposures to changing FX rates with financial market
transactions, principally through the purchase of forward FX contracts to offset
the earnings and cash-flow impact of the nonfunctional currency-denominated
receivables. Forward FX contracts are denominated in the same currency as the
receivable being hedged, and the term of the forward FX contract matches the
term of the underlying receivable. The receivables being hedged arise from trade
transactions affecting us.
We do not hedge our foreign currency exposures in a manner that would
entirely eliminate the effects of changes in FX rates on our operations.
Accordingly, our reported revenue and results of operations have been, and may
in the future be, affected by changes in the FX rates. We have utilized a
sensitivity analysis for the purpose of identifying market risk in relation to
underlying transactions that are sensitive to FX rates including foreign
currency forward exchange contracts and nonfunctional currency denominated
receivables. The net amount that is exposed to changes in foreign currency rates
was evaluated against a 10% change in the value of the foreign currency versus
the U.S. dollar. Based on this analysis, we believe that we are not materially
sensitive to changes in foreign currency rates on our net exposed FX position.
A 43 basis-point move in the weighted average interest rates (10% of our
weighted average interest rates in 2004) affecting our floating rate financial
instruments as of March 31, 2004 would have an immaterial effect on our pretax
results of operations over the next fiscal year. During the year ended March 31,
2004, the company's hedges were ineffective.
All of the potential changes noted above are based on sensitivity analyses
performed on our balances as of March 31, 2004. We also have market risk on
their fixed rate debt (2% convertible debentures).
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEGAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31,
2004 2003
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents........................................................................ $ 7,049 $ 912
Accounts receivable, net of allowances for sales returns
and doubtful accounts of $270 and $213 at March 31, 2004 and 2003, respectively................. 4,729 2,681
Inventories...................................................................................... 3,719 7,032
Prepaid expenses and other current assets........................................................ 905 465
----------- -----------
Total current assets.......................................................................... 16,402 11,090
Property and equipment, net........................................................................ 4,039 4,916
Intangible assets, net............................................................................. 1,190 959
Other assets....................................................................................... 1,027 244
----------- -----------
Total assets.................................................................................. $ 22,658 $ 17,209
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and bank lines of credit........................................................... $ 2,450 389
2% convertible debentures, net................................................................... 74 --
Accounts payable................................................................................. 1,645 1,923
Accrued product warranty......................................................................... 366 734
Deferred revenue................................................................................. 440 324
Accrued expenses and other current liabilities................................................... 2,604 2,679
----------- -----------
Total current liabilities..................................................................... 7,579 6,049
Long-term portion of capital lease obligations..................................................... 26 37
Other long term obligations........................................................................ 98 --
----------- ----------
Total long term liabilities................................................................... 124 37
----------- -----------
Total liabilities............................................................................. 7,703 6,086
----------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock; $0.01 par value; 5,000,000 shares authorized; none issued and outstanding....... -- --
Common stock; $0.01 par value; 100,000,000 shares authorized; 36,583,850
and 16,091,762 shares issued and outstanding at March 31, 2004 and 2003, respectively........... 366 161
Additional paid-in capital....................................................................... 85,376 68,806
Accumulated other comprehensive income........................................................... 124 465
Accumulated deficit.............................................................................. (70,911) (58,309)
------------ -----------
Total stockholders' equity.................................................................... 14,955 11,123
----------- -----------
Total liabilities and stockholders' equity.................................................... $ 22,658 $ 17,209
=========== ===========
See accompanying notes to consolidated financial statements.
29
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
2004 2003 2002
----------- ----------- --------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
Revenue.............................................................................. $ 16,528 $ 14,100 $ 21,606
Cost of revenue...................................................................... 11,881 14,166 14,930
---------- ---------- ---------
Gross profit (loss)................................................................ 4,647 (66) 6,676
---------- ---------- ---------
Operating expenses:
Research and development expenses.................................................. 3,305 4,815 5,928
Sales and marketing expenses....................................................... 2,347 2,922 3,996
General and administrative expenses................................................ 3,973 4,814 4,987
In-process research and development................................................ 2,202 -- --
---------- ---------- ---------
Total operating expenses........................................................ 11,827 12,551 14,911
---------- ---------- ---------
Operating loss.................................................................. (7,180) (12,617) (8,235)
Interest expense, net........................................................... (5,521) (329) (414)
Other expense, net.............................................................. 99 321 (81)
--------- --------- ---------
Total other expense, net............................................................. (5,422) (8) (495)
---------- ---------- ---------
Net loss............................................................................. $ (12,602) $ (12,625) $ (8,730)
=========== ======== =========
Net loss per share:
Basic and diluted.................................................................. $ (0.56) $ (0.82) $ (0.67)
Weighted average shares used in per share computations:
Basic and diluted.................................................................. 22,442 15,311 13,030
See accompanying notes to consolidated financial statements.
30
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED TOTAL
ADDITIONAL OTHER STOCK- COMPRE-
COMMON STOCK PAID-IN COMPREHENSIVE ACCUMULATED HOLDERS' HENSIVE
SHARES AMOUNT CAPITAL INCOME DEFICIT EQUITY LOSS
---------- ---------- --------- ------------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Balances at March 31, 2001............. 12,572,252 $ 126 $ 65,087 $ 350 $ (36,954) $ 28,609
Common stock issued under option and
stock purchase plans................. 77,681 1 97 -- -- 98
Common stock sold...................... 1,661,005 16 2,131 -- -- 2,147
Net loss............................... -- -- -- -- (8,730) (8,730) $ (8,730)
Cumulative translation adjustment...... -- -- -- 162 -- 162 162
----------
Total comprehensive loss............... -- -- -- -- -- -- $ (8,568)
--------- ----- ------- ------ ---------- --------- =========
Balances at March 31, 2002............. 14,310,938 143 67,315 512 (45,684) 22,286
Common stock issued under option and
stock purchase plans................. 55,412 1 25 -- -- 26
Common stock issued for acquisition.... 1,499,987 15 1,170 -- -- 1,185
Common stock issued for services
rendered............................. 225,425 2 102 -- -- 104
Warrants and options to purchase common
stock issued for services rendered.. -- -- 194 -- -- 194
Net loss............................... -- -- -- -- (12,625) (12,625) $(12,625)
Cumulative translation adjustment...... -- -- -- (47) -- (47) (47)
-----------
Total comprehensive loss............... -- -- -- -- -- -- $(12,672)
---------- -------- ------- ------ ---------- ---------- ===========
Balances at March 31, 2003............. 16,091,762 161 68,806 465 (58,309) 11,123
----------- -------- --------- ---------- ------------ ----------
Common stock issued under option and
stock purchase plans................. 90,269 1 68 -- -- 69
Common stock issued for acquisition.... 1,499,994 15 2,327 -- -- 2,342
Restricted stock issued for services
rendered............................. 158,311 332 -- -- 332
Options and warrants, issued in
previous years, exercised for
services rendered.................... 470,899 6 399 -- -- 405
Warrants and options to purchase common
stock issued for services rendered.. -- -- 756 -- -- 756
Debentures - value of Beneficial
conversion feature................... -- -- 5,190 -- -- 5,190
Debentures - fair value of warrants
issued to investors and brokers...... -- -- 1,724 -- -- 1,724
Debentures - interest & accelerated
discount............................. -- -- 4,033 -- -- 4,033
Debentures - debt issuance in form of
warrants............................. -- -- 784 -- -- 784
Debentures - converted to shares...... 15,685,769 157 (157) -- -- --
Debentures - interest converted to
shares............................... 95,609 1 (1) -- -- --
Debentures - investor warrants exercised 892,497 9 437 -- -- 446
Debentures - broker warrants exercised. 1,536,605 15 522 -- -- 537
Private Institutional Offering December
2001 - warrants exercised............ 62,135 1 156 -- -- 157
Net loss............................... -- -- -- -- (12,602) (12,602) $(12,602)
Cumulative translation adjustment...... -- -- -- (341) -- (341) (341)
-----------
Total comprehensive loss............... -- -- -- -- -- -- $(12,943)
---------- -------- ------- ------ ---------- ----------- ===========
Balances at March 31, 2004............. 36,583,850 $ 366 $85,376 $ 124 $ (70,911) $ 14,955
=========== ======== ======= ====== ========= ========
See accompanying notes to consolidated financial statements.
31
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
--------------------------------
2004 2003 2002
-------- -------- --------
Cash flows from operating activities: (IN THOUSANDS)
Net loss ......................................................................... $(12,602) $(12,625) $ (8,730)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 1,338 1,043 891
In-process research and development ........................................... 2,202 -- --
Provision for doubtful accounts and sales returns allowances .................. 56 (186) 272
Non cash interest expense - accretion of debt discount and amortization of debt
issuance costs ........................................................... 5,480 -- --
Fair value of warrants and options issued for services rendered ............. 332 143 --
Excess and obsolete inventory provision ..................................... 967 1,922 --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ...................................................... (2,362) 363 5,361
Inventories .............................................................. 2,508 3,406 1,927
Prepaid expenses and other assets ........................................ (286) 1,004 692
Accounts payable ......................................................... (311) 477 (2,973)
Accrued expenses and other current liabilities .............................. (190) (151) (826)
Accrued product warranty .................................................... (411) (581) (336)
Customer deposits ........................................................... (15) 15 --
Deferred revenue ............................................................ 115 (814) 119
-------- -------- --------
Net cash used in operating activities .................................... (3,179) (5,984) (3,603)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ............................................. (254) (295) (501)
Business acquisition, net of cash acquired ...................................... -- (184) --
-------- -------- --------
Net cash used in investing activities ...................................... (254) (479) (501)
-------- -------- --------
Cash flows from financing activities:
Gross proceeds from the issuance of 2% convertible debentures ..................... 7,165 -- --
2% convertible debentures cash issuance costs ..................................... (982) -- --
Net proceeds from issuance of common stock ....................................... 1,613 21 2,245
Borrowings under notes payable and bank lines of credit .......................... 2,474 5,590 23,834
Repayments of notes payable and bank lines of credit ............................. (527) (6,386) (26,722)
Payments on capital lease financing .............................................. (9) (45) (74)
-------- -------- --------
Net cash provided by (used in) financing activities ......................... 9,734 (820) (717)
-------- -------- --------
Effect of exchange rates on cash and cash equivalents .............................. (164) 95 272
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............................... 6,137 (7,188) (4,549)
Cash and cash equivalents at beginning of year ..................................... 912 8,100 12,649
-------- -------- --------
Cash and cash equivalents at end of year ........................................... $ 7,049 $ 912 $ 8,100
======== ======== ========
Supplemental disclosures of cash paid during the year for:
Interest ......................................................................... $ 119 $ 581 $ 508
======== ======== ========
32
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES (AMOUNTS IN THOUSANDS,
EXCEPT SHARES):
The Company reclassified finished goods inventory of $3,698 to property
and equipment during the year ended March 31, 2003 as the systems are being used
for customer testing, training and demonstration purposes and the Company does
not believe such equipment will be sold in the upcoming twelve months.
On August 30, 2002, the Company acquired the outstanding capital stock of
Sputtered Films, Inc. Consideration totaled $1,560 and consisted of 1,499,987
shares of the Company's common stock valued at $1,185 and transaction costs of
$375. The purchase price was allocated as follows:
Assets acquired:
Current assets........................... $ 708
Fixed assets............................. 824
Technology............................... 782
Trade name............................... 253
----------
Total assets........................ 2,567
Liabilities assumed:
Current liabilities..................... (1,007)
-----------
Net assets acquired......................... $ 1,560
==========
On November 11, 2003, the Company purchased certain assets and assumed
certain liabilities of Simplus Systems. Consideration totaled $2,522 and
consisted of 1,499,994 shares of the Company's common stock valued at $2,310,
fully vested Tegal employee stock options to purchase 58,863 shares of the
Company's common stock at an exercise price of $3.09 per share, valued at $32
and transaction costs of $180. The purchase price was allocated as follows:
Assets acquired:
Fixed assets............................................ 48
Identifiable intangible assets.......................... 389
In-process research and development..................... 2,202
-------
Total assets............................................... 2,639
Liabilities assumed:
Current liabilities..................................... (117)
-------
Net assets acquired........................................ $ 2,522
=======
See accompanying notes to consolidated financial statements.
33
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND
SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Tegal Corporation, a Delaware corporation ("Tegal" or the "Company"),
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.
On August 30, 2002, the Company acquired all of the outstanding common
stock of Sputtered Films, Incorporated ("SFI"), a privately held California
corporation pursuant to an Agreement and Plan of Merger dated August 13, 2002.
Sputtered Films is a leader in the design, manufacture and service of high
performance physical vapor deposition sputtering systems for the semiconductor
and semiconductor packaging industry. SFI was founded in 1967 with the
development of the S-Gun, core technology of the acquired company.
On November 11, 2003, the Company acquired substantially all of the assets
and certain liabilities of Simplus Systems Corporation, ("Simplus"), a
development stage company, pursuant to an asset purchase agreement. Simplus had
developed a deposition cluster tool and certain patented processes for barrier,
copper seed and high-K dielectric applications. Simplus had coined the term
"nano-layer deposition" or "NLD" to describe its unique approach to chemical
vapor deposition ("CVD"). The Company is continuing to develop these NLD
processes and related tools, and is in the process of marketing them to a
limited number of key customers and joint development partners.
BASIS OF PRESENTATION
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 $12,602, $12,625 and $8,730 for fiscal years
2004, 2003 and 2002, respectively. The Company generated negative cash flows
from operations of $3,179, $5,984 and $3,603 for fiscal years 2004, 2003 and
2002, respectively. To finance its operations during 2004, the Company raised
approximately $6,183 in net proceeds from the sale of 2% convertible debentures
and exercise of warrants (see Note 7 to the accompanying notes to the
consolidated financial statements). Management believes that these proceeds,
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. If the projected sales do not
materialize, the Company 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
common stock, and debt covenants could impose restrictions on the Company's
operations. The sale of equity or debt could result in additional dilution to
current stockholders, and such financing may not be available to the Company on
acceptable terms, if at all. The failure to raise additional funds may adversely
affect the Company's ability to achieve its intended business objectives. 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 the Company be unable to continue as a going concern. Additionally, the
2% 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 factors raise substantial doubt
about the Company's ability to continue as a going concern.
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. Intercompany transactions and balances are
eliminated in consolidation. Accounts denominated in foreign currencies are
translated using the foreign currencies as the functional currencies. Assets and
liabilities of foreign operations are translated to U.S. dollars at current
rates of exchange and revenues and expenses are translated using weighted
average rates. The effects of translating the financial statements of foreign
subsidiaries into U.S. dollars are reported as accumulated other comprehensive
income, a separate component of stockholders' equity. Gains and losses from
foreign currency transactions are included in the statements of operations as a
separate component of other expense, net.
34
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could vary from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments having a maturity
of three months or less on the date of purchase to be cash equivalents.
At March 31, 2004, 2003 and 2002, all of the Company's investments are
classified as cash equivalents in the consolidated balance sheets. The
investment portfolio at March 31, 2004, 2003 and 2002 is comprised of money
market funds. At March 31, 2004, 2003 and 2002, the fair value of the Company's
investments approximated cost.
FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including cash
and cash equivalents, accounts receivable and accounts payable, bank lines of
credit, notes payable, accrued expenses and other liabilities approximates fair
value due to their relatively short maturity. The Company has foreign
subsidiaries which operate and sell the Company's products in various global
markets. As a result, the Company is exposed to changes in foreign currency
exchange rates. The Company utilizes hedge instruments, primarily forward
contracts, to manage its exposure associated with firm third-party transactions
denominated in non-functional currencies. The Company does not hold derivative
financial instruments for speculative purposes. Realized and unrealized gains
and losses related to forward contracts considered to be effective hedges are
deferred until settlement of the hedged items. They are recognized as other
gains or losses when a hedged transaction is no longer expected to occur.
Realized and unrealized gains and losses on ineffective hedges are recorded to
other expense, net. Foreign currency gains and losses included in other expense,
net were not significant for the years ended March 31, 2004, 2003 and 2002 (see
Note 2 to accompanying notes to the consolidated financial statements).
At March 31, 2004, the Company had forward exchange contracts maturing at
various dates throughout fiscal 2005 to exchange 317.7 million Japanese Yen into
$2,909.
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 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 reserves
for potential credit losses. Write-offs during the periods presented have been
insignificant. As of March 31, 2004, three customers accounted for approximately
43 percent of the accounts receivable balance. As of March 31, 2003, one
customer accounted for approximately 38 percent of the accounts receivable
balance.
INVENTORIES
Inventories is stated at the lower of cost or market, reduced by
provisions for excess and obsolescence. Cost is computed using standard cost,
which approximates actual cost on a first-in, first-out basis and includes
material, labor and manufacturing overhead costs. We estimate the effects of
excess and obsolescence on the carrying values of our inventories based upon
estimates of future demand and market conditions. We establish a provision for
inventories in excess of production demand. Should actual production demand
differ from our estimates, additional inventory provision may be required, as
was the case in the third quarter of fiscal 2004. The excess and obsolete
provision is only released if and when the related inventory is sold or
scrapped. The inventory provision in fiscal 2004 was $967, $1,922 in fiscal 2003
and $0 in fiscal 2002.
35
WARRANTY COSTS
A warranty is provided under the terms of our system contract. Typically,
the warranty period is 6 to 12 months depending on the contract specifications.
The Company provides for these costs at the time of revenue recognition based
upon prior experience (see Note 2 to accompanying notes to the consolidated
financial statements).
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets,
ranging from three to seven years. Leasehold improvements are stated at cost and
are amortized using the straight-line method over the shorter of the estimated
useful life of the improvements or the lease term. When assets are disposed of,
the cost and related accumulated depreciation are removed from the accounts and
the resulting gains or losses are included in the results of operations. The
Company generally depreciates its assets over the following periods:
YEARS
Furniture and machinery and equipment............ 7
Computer and software............................ 3 - 5
Leasehold improvements........................... 5 or remaining lease life
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
undiscounted expected future cash flows are less than the carrying value of the
assets, an impairment loss is recognized based on the excess of the carrying
amount over the fair value of the assets.
INCOME TAXES
Deferred income taxes are recognized for the differences between the tax
bases of assets and liabilities and their financial reporting amounts based on
enacted tax rates. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS is computed using the weighted
average number of common shares outstanding plus any potentially dilutive
securities, except when the effect of including such changes is antidilutive.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations,
including FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain
Transactions Involving Stock Compensation -- an interpretation of APB Opinion
No. 25." The Company's policy is to grant options with an exercise price equal
to the closing market price of the Company's stock on the grant date.
Accordingly, no compensation cost for stock option grants has been recognized in
the Company's statements of operations. Additional proforma disclosures assuming
the Company applied the fair value method of accounting for employee stock
compensation under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" are as
follows.
As required by SFAS No. 123 for proforma disclosure purposes only, the
Company has calculated the estimated grant date fair value of its stock option
awards using the Black-Scholes model. The Black-Scholes model, as well as other
currently accepted option valuation models, was developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions. These models also require highly subjective assumptions, including
future stock price volatility and expected time until exercise, which greatly
affect the calculated grant date fair value.
The following assumptions are included in the estimated grant date fair
value calculations for the Company's stock option awards and Employee Qualified
Stock Purchase Plan ("Employee Stock Purchase Plan"):
36
2004 2003 2002
------ ------ -----
Expected life (years):
Stock options........................... 4.0 4.0 4.0
Employee stock purchase plan............ 0.5 0.5 0.5
Volatility:
Stock options........................... 119% 165% 85%
Employee stock purchase plan............ 119% 165% 85%
Risk-free interest rate................... 2.62% 2.45% 4.3%
Dividend yield............................ 0% 0% 0%
The weighted average estimated grant date fair value, as defined by SFAS
No. 123, for stock option awards granted during fiscal 2004, 2003 and 2002 was
$0.90, $0.62 and $1.02 per option, respectively.
The following table summarizes information with respect to stock options
and warrants outstanding as of March 31, 2004 (number of shares in thousands):
OUTSTANDING OPTIONS AS OF MARCH 31, 2004 EXERCISABLE AT MARCH 31, 2004
--------------------------------------------- -----------------------------
RANGE OF NUMBER OF WEIGHTED WEIGHTED AVERAGE NUMBER OF
EXERCISE OPTIONS & AVERAGE REMAINING OPTIONS & WEIGHTED AVERAGE
PRICES WARRANTS EXERCISE PRICE CONTRACTUAL LIFE WARRANTS EXERCISE PRICE
-------- -------- -------------- ----------------- -------- ----------------
$0.35 -- $1.50.. 8,223 $ 0.78 8.29 4,643 $ 0.60
$1.51 -- $2.14.. 730 1.97 6.87 180 1.51
$2.25 -- $3.00.. 1,071 2.52 3.81 1,047 2.52
$3.09 -- $3.25.. 571 3.23 5.39 568 3.23
$3.38 -- $3.88.. 205 3.48 8.74 205 3.48
$4.11 -- $4.25.. 810 4.20 7.23 510 4.25
$4.69 -- $6.88.. 543 5.34 3.49 543 5.38
$7.68 -- $8.00.. 65 7.71 5.88 65 7.71
$8.25 -- $8.75.. 169 8.66 7.38 169 8.66
$12.00 -- $12.00.. 10 12.00 2.70 10 12.00
-------- ---------
$ 0.35 -- $12.00.. 12,397 $ 1.73 7.39 7,940 $ 1.94
======== =========
The weighted average estimated grant date fair values per share, as
defined by SFAS No. 123, for rights granted under the employee stock purchase
plan during fiscal 2004, 2003 and 2002 were $0.35, $0.29 and $0.47,
respectively.
Had the Company recorded compensation costs based on the estimated grant
date fair value (as defined by SFAS 123) for awards granted under its stock
option plans and Employee Plan, the Company's net loss and loss per share would
have been increased to the proforma amounts below for the years ended March 31,
2004, 2003 and 2002:
2004 2003 2002
----------- ----------- ----------
Net loss as reported $ (12,602) $ (12,625) $ (8,730)
Proforma compensation
expense at fair value............. $ (458) $ (285) $ (1,347)
----------- ----------- -----------
Proforma net loss.................. $ (13,060) $ (12,910) $ (10,077)
=========== =========== ===========
Proforma net loss per share:
Basic and diluted................ $ (0.58) $ (0.84) $ (0.77)
COMPREHENSIVE LOSS
Comprehensive loss is defined as the change in equity of the Company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
The primary difference between net loss and comprehensive loss for the Company
is attributable to foreign currency translation adjustments. Comprehensive loss
is shown in the statement of stockholders' equity.
37
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities--An Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. In December 2003, the FASB issued a revision of FIN 46,
or FIN 46R, that delays the implementation date for certain interests created or
acquired prior to January 31, 2003 until the first interim or annual period
ending after March 15, 2004. FIN 46R was effective immediately for all new
variable interest entities created or acquired after January 31, 2003. Since
January 31, 2003, we have not invested in any entities we believe are variable
interest entities. For those arrangements entered into prior to February 1,
2003, we are required to adopt the provisions of FIN 46R (as revised December
2003) at the end of the first quarter of fiscal 2004. The Company's adoption of
FIN 46R did not result in consolidation of any entities.
In May 2003, the Financial Accounting Standard Board, or FASB, issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity." SFAS No. 150 establishes standards for how
companies classify and measure certain financial instruments with
characteristics of both liabilities and equity. It requires companies to
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS No. 150 was effective beginning the second
quarter of fiscal 2004. We believe that the adoption of this standard has had
and will continue to have no material impact on our consolidated financial
statements.
On March 31, 2004, the Financial Accounting Standards Board issued a
proposed Statement, "Share-Based Payment", that addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for equity instruments of the enterprise or liabilities
that are based on the fair value of the enterprise's equity instruments or that
may be settled by the issuance of such equity instruments. The proposed
Statement would eliminate the ability to account for share-based compensation
transactions using APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and generally would require instead that such transactions be
accounted for using a fair-value-based method. It is anticipated that this
exposure draft would be finalized during the summer of 2004 and would be
required to be applied by the Company for years ended subsequent to December 15,
2004. Had the Company adopted the proposed exposure draft, compensation expense
of approximately $460 would have been recognized in the consolidated statements
of operations for the year ended March 31, 2004.
38
NOTE 2. BALANCE SHEET AND STATEMENT OF OPERATIONS DETAIL
Inventories consisted of:
MARCH 31,
2004 2003
--------- ---------
Raw materials................................................ $ 1,563 $ 3,218
Work in process.............................................. 1,147 1,937
Finished goods and spares.................................... 1,009 1,877
--------- ---------
$ 3,719 $ 7,032
========= =========
Property and equipment, net, consisted of:
MARCH 31,
2004 2003
---------- ----------
Machinery and equipment..................................... $ 4,347 $ 4,994
Demo lab equipment.......................................... 4,468 5,591
Computer and software....................................... 1,972 2,324
Leasehold improvements...................................... 3,143 3,509
---------- ----------
13,930 16,418
Less accumulated depreciation and amortization.............. (9,891) (11,502)
----------- ----------
$ 4,039 $ 4,916
========== ==========
Machinery and equipment at March 31, 2004 and 2003, includes approximately
$56 of assets under leases that have been capitalized. Accumulated amortization
for such equipment approximated $28 and $13, respectively.
A summary of accrued expenses and other current liabilities follows:
MARCH 31,
2004 2003
-------- --------
Accrued compensation costs................................... $ 747 $ 756
Income taxes payable......................................... 500 504
Other........................................................ 1,357 1,419
-------- --------
$ 2,604 $ 2,679
======== ========
Product warranty and guarantees:
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. Warranty activity for the
years ended March 31, 2004 and 2003 is as follows:
YEAR ENDED MARCH 31,
2004 2003
-------- --------
Balance at the beginning of the period........................ $ 734 $ 1,205
Additional warranty accruals for
warranties issued during the year............................ 419 427
Changes in accruals related to pre-existing warranties........ (227) (203)
Settlements made during the year.............................. (560) (695)
-------- --------
Balance at the end of the year................................ $ 366 $ 734
======== ========
39
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.
NOTE 3. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic
and diluted net income (loss) per share on the face of the statement of
operations. Basic EPS is computed by dividing loss available to common
stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) for the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The computation
of diluted EPS uses the average market prices during the period. All amounts in
the following table are in thousands except per share data.
YEAR ENDED MARCH 31,
2004 2003 2002
---------- ---------- -------
Basic net loss per share:
Loss available to common stockholders............................... $ (12,602) $ (12,625) $ (8,730)
Weighted average common shares outstanding.......................... 22,442 15,311 13,030
Basic and diluted net loss per share................................ $ (0.56) $ (0.82) $ (0.67)
Stock options and warrants outstanding and in the money at March 31, 2004 of
8,016,520, March 31, 2003 of 4,739,559, and March 31, 2002 of 4,153,413 were
excluded from the computations of diluted net loss per share because of their
anti-dilutive effect on diluted loss per share.
NOTE 4. NOTES PAYABLE AND BANK LINES OF CREDIT
On January 19, 2004, the Company entered into a new line of credit with
Silicon Valley Bank that will be available until January 19, 2005. The new line
of credit has a maximum borrowing capacity of $3.5 million, bears interest at a
prime plus 1.0%, 5% as of March 31, 2004 and is collateralized by substantially
all of the Company's domestic and Japanese assets. As of March 31, 2004, the
Company had $1,347 outstanding under this domestic line of credit, which was
further limited by the amounts of accounts receivable and inventories on the
Company's consolidated balance sheets.
In addition, as of March 31, 2004, the Company's Japanese subsidiary had
$979 outstanding under its 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 March 31, 2004) plus 1.0%, and has a total capacity
of 150 million yen (approximately $1,420 at exchange rates prevailing on March
31, 2004).
In addition, notes payable as of March 31, 2004 consisted of one
outstanding note to the California Trade and Commerce Agency for $124. 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 default could result in the California Trade and Commerce Agency calling the
note, therefore, this note payable is classified as a current liability.
The weighted average interest rate for all notes payable and bank lines of
credit was 4.53% in fiscal year 2004.
NOTE 5. INCOME TAXES
The components of loss before benefit for income taxes are as follows:
YEAR ENDED MARCH 31,
2004 2003 2002
--------- --------- --------
Domestic..................... $ (12,396) $(12,090) $ (8,280)
Foreign...................... (206) (535) (450)
--------- --------- --------
(12,602) $(12,625) $ (8,730)
========= ========= ========
40
The income tax provision differs from the amount computed by applying the
statutory U.S. federal income tax rate as follows:
YEAR ENDED MARCH 31,
2004 2003 2002
--------- --------- ---------
Income tax benefit at U.S. statutory rate......................... $ (4,285) $ (4,293) $(2,968)
State taxes net of federal benefit................................ (265) (419) (283)
Utilization of foreign losses -- 182 --
Deferred tax assets benefit....................................... 4,367 4,042 3,146
Other............................................................. 183 488 105
--------- --------- ---------
Income tax provision.............................................. $ -- $ -- $ --
========= ========= =========
The components of deferred taxes are as follows:
MARCH 31,
2004 2003
---------- ----------
Revenue recognized for tax and deferred for book.................. $ 217 $ 246
Non-deductible accruals and reserves.............................. 4,414 3,834
Net operating loss carryforwards.................................. 19,665 14,831
Tax credits....................................................... 3,058 2,975
Uniform capitalization adjustment................................. 148 644
Other............................................................. 306 911
---------- ----------
Total................................................... 27,808 23,441
Valuation allowance............................................... (27,808) (23,441)
----------- ----------
Net deferred tax asset............................................ $ -- $ --
========== ==========
We have recorded no net deferred tax assets at March 31, 2004 and 2003,
respectively. The Company has provided a valuation allowance of $27.8 million
and $23.4 million at March 31, 2004 and March 31, 2003, respectively. The
valuation allowance fully reserves all net operating loss carryforwards, credits
and non-deductible accruals and reserves, for which realization of future
benefit is uncertain. The valuation allowance increased by $4.4 million and $4
million during the years ended March 31, 2004 and 2003 respectively.
At March 31, 2004, the Company had net operating loss carryforwards of
approximately $54.1 million and $21.7 million, for federal and state
respectively. These net operating loss carryforwards will begin to expire, if
not utilized, in the year ending March 31, 2020 and 2006 for federal and state
income tax purposes, respectively and will completely expire in 2024.
At March 31, 2004, the Company also has research and experimentation
credit carryforwards of $2.3 million and $1.1 million for federal and state
income tax purposes, respectively. The federal research and experimentation
credit carryforwards will begin to expire, if not utilized, in year 2006 and
will completely expire in 2014.
41
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company has several non-cancelable operating leases and capital
leases, primarily for general office, production and warehouse facilities, that
expire over the next five years. Future minimum lease payments under these
leases are as follows:
CAPITAL OPERATING
YEAR ENDING MARCH 31, 2004 LEASES LEASES
-------------------------- ------ ------
AS OF MARCH 31, 2004
--------------------
2005.......................................................... 15 1,333
2006.......................................................... 15 1,056
2007.......................................................... 13 978
2008.......................................................... 2 960
2009.......................................................... -- 984
Thereafter.................................................... -- 753
------- -------
Total minimum lease payments.................................. 45 $ 6,064
=========
Less amount representing interest............................. (8)
--------
Present value of minimum lease payments....................... 37
Less current portion.......................................... (11)
--------
Long term capital lease obligation............................ $ 26
========
Most leases provide for the Company to pay real estate taxes and other
maintenance expenses. Rent expense for operating leases, net of sublease income,
was $479, $1,273 and $1,289, during the years ended March 31, 2004, 2003 and
2002, respectively.
The Company signed a new lease agreement dated April 30, 2004 for the
manufacturing and corporate office facility in Petaluma, California to occupy
57,418 square feet. The lease expires December 31, 2009. The prior lease for the
same facility expired in March 2004. The Company was leasing 120,000 sq. ft. and
occupying 80,000 with the balance subleased or available for sublease. The new
lease for 51,418 sq. ft. is for the occupied space only and the sub-tenants'
leases have been assigned to the landlord.
NOTE 7. 2% CONVERTIBLE DEBENTURES:
On June 30, 2003, the Company signed definitive agreements with investors
to raise up to $7,165 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 $505 on July
1, 2003, which was recorded as an 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 gross proceeds 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 a deemed material adverse change to the Company's financial condition,
business or operations. 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 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%.
During fiscal year ended March 31, 2004, the financial advisors exercised
warrants for 1,536,605 shares (plus 23,393 warrants remitted as payments),
leaving advisor warrants for 196,129 shares unexercised at the end of the
quarter.
The debentures accrue interest at the rate of 2% per annum. Both the
principal and accrued interest, thereon of these 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 9, 2003, the closing dates
for the first and second tranches, were $0.55 and $1.49. 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.
42
As of March 31, 2004, debenture holders converted debentures in the
principal amount of $5,490 into 15,685,769 shares of the Company's common stock.
In addition, 95,609 shares were issued which represented interest payable to the
debenture holders at the time of the conversions. As of March 31, 2004, there
remained 2% convertible debentures in the principal amount of $1,673 convertible
into 4,785,659 shares of the Company's common stock.
In addition, the debenture holders were granted warrants to purchase
4,094,209 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%. As of March
31, 2004, the debenture holders had exercised warrants to purchase 892,497
shares (plus 1,770 warrants remitted as payments) of the Company's common stock.
As of March 31, 2004, there remained unexercised warrants held by the debenture
holders for 3,199,942 of the Company's common stock.
The relative fair value of the warrants has been classified as equity with
the beneficial conversion feature 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.
The following table presents the amounts originally allocated to the
beneficial conversion feature and warrants and the outstanding balance of debt
at March 31, 2004 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).......... (605) (4,585) (5,190)
Warrants (included in equity)............................... (73) (1,651) (1,724)
Conversions to common stock....................................
(846) (3,203) (4,049)
Accretion of debt discount..................................... 599 3,273 3,872
------ ------ ------
Net amount of 2% convertible debentures..................... $ 4 $ 70 $ 74
====== ====== ======
The value of the beneficial conversion feature, warrants and debt issuance
costs are being amortized as interest expense over the life of debt using the
effective interest method. Related interest expense for fiscal 2004 amounted to
$5,480. This amount is comprised of nominal interest, amortization of beneficial
conversion feature and amortization of debt issuance costs.
The debt issuance costs associated with the debentures amounted to $2,369
and are comprised of $982 in cash issuance costs and $1,387 associated with
warrants issued to financial advisors. Approximately $603 of these costs were
allocable to the warrants and were therefore offset into equity. The remaining
balance of $1,766 was recorded as an asset to be amortized over the life of the
debt. As of March 31, 2004, $283 is included in current assets.
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 assesses the probability of
the occurrence of the material adverse change clause on a quarterly basis.
NOTE 8. ACQUISITION AND INTANGIBLE ASSETS
Sputtered Films Incorporated:
On August 30, 2002, the Company acquired Sputtered Films, Inc., a
California corporation ("Sputtered Films") pursuant to an Agreement and Plan of
Merger 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 total acquisition cost
was $1,560,000, comprised of 1,499,987 shares of the Company's common stock
valued at $1,185,000 and transaction costs of $375,000. The results of Sputtered
Films' operations have been included in the Company's results commencing on
August 31, 2002.
43
The purchase price of this acquisition has been allocated to the acquired
assets and assumed liabilities on the basis of their fair values as of the date
of the acquisition, as determined by an appraisal performed by an independent
valuation specialist. The fair value of the assets acquired and liabilities
assumed, based on the allocation of the purchase price, is summarized as
follows:
Current assets................................ $ 708
Property and equipment........................ 824
Technology.................................... 782
Trade name.................................... 253
----------
Total assets acquired...................... 2,567
Current liabilities........................... (1,007)
----------
Net assets acquired........................... $ 1,560
==========
Simplus Systems Corporation:
On November 11, 2003, the Company acquired substantially all of the assets and
certain liabilities of Simplus Systems Corporation, ("Simplus"), a development
stage company, pursuant to an asset purchase agreement. Simplus had developed a
deposition cluster tool and certain processes for barrier, copper seed and
high-K dielectric applications. The purchase consideration of $2,522 includes
1,499,994 shares of the Company's common stock valued at $2,310; 58,863 fully
vested employee stock options to purchase Tegal common stock at an exercise
price of $3.09 per share valued at $32, and acquisition costs of $180. This
transaction was accounted for as a purchase of assets in accordance with EITF
Issue No. 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt
of Productive Assets or of a Business.
The Company completed the preliminary allocation of the purchase price of
Simplus. The following table represents the preliminary allocation of the
purchase price for Simplus. In estimating the fair value of the assets acquired
and liabilities assumed, management considered various factors, including an
independent appraisal.
Fair value fixed assets acquired.................. $ 48
Work Force........................................ 50
Patents........................................... 339
In-process research and development............... 2,202
Assumed liabilities............................... (117)
----------
$ 2,522
The assets will be amortized over a period of years shown on the following
table:
Fixed assets acquired............................. 1 year
Work Force........................................ 2 years
Patents........................................... 5 years
The fair value underlying the $2,202 assigned to acquired in-process
research and development ("IPR&D") in the Simplus acquisition was charged to the
Company's results of operations during the quarter ended December 31, 2003 and
was determined by identifying research projects in areas for which technological
feasibility had not been established and there was no alternative future use.
Projects in the IPR&D category are certain design change improvements on the
existing 150 mm and 200 mm systems and the development of a 300 mm system. The
design change improvements on the existing systems is estimated to cost
approximately $500,000 to $1 million, is approximately 90% complete and will be
completed by December 31, 2004. The development of a 300 mm system is estimated
to be approximately 10% complete, and to cost between $2 and $4 million over the
next two to four years, as market demand materializes.
The IPR&D value of $2,202 was determined by an income approach where fair
value is the present value of projected free cash flows that will be generated
by the products incorporating the acquired technologies under development,
assuming they are successfully completed. The estimated net free cash flows
generated by the products over a seven-year period were discounted at a rate of
32% in relation to the stage of completion and the technical risks associated
with achieving technological feasibility. The net cash flows for such projects
were based on management's estimates of revenue, expenses and asset
requirements. Any delays or failures in the completion of these projects could
impact expected return on investment and future results of operations. In
addition, the Company's financial condition would be adversely affected if the
value of other intangible assets acquired became impaired.
44
All of these projects have completion risks related to functionality,
architecture performance, process technology availability, continued
availability of key technical personnel, product reliability and availability of
software support. To the extent that estimated completion dates are not met, the
risk of competitors' product introductions is greater and revenue opportunity
may be permanently lost.
As of March 31, 2004, intangible assets, net consisted of the following:
ACCUMULATED
GROSS AMORTIZATION NET
------ ------ -----
Technology............................................. $ 782 $ (155) $ 627
Trade name............................................. 253 (51) 202
Workforce.............................................. 50 (12) 38
Patents................................................ 339 (16) 323
------ ------ ------
Total ................................................. $1,424 $ (234) $1,190
====== ====== ======
As of March 31, 2003, intangible assets consisted of the following:
ACCUMULATED
GROSS AMORTIZATION NET
------ ------ -----
Technology............................................. $ 782 $ (57) $ 725
Trade name.............................................. 253 (19) 234
------ ------ -----
Total .................................................$ 1,035 $ (76) $ 959
======= ====== =====
The estimated future amortization expense of intangible assets as of March
31, 2004 is as follows:
2005.......................................... $ 217
2006.......................................... 216
2007.......................................... 197
2008.......................................... 197
2009.......................................... 180
Thereafter.................................... 183
------
Total.................................... $1,190
======
The following unaudited proforma financial results of Tegal Corporation
and Sputtered Films for the year ended March 31, 2004 and 2003, give effect to
the acquisition of Sputtered Films as if the acquisition had occurred on the
first day of the periods presented 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.
The 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 such
date, 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.
45
Unaudited Proforma Financial Information (in thousands, except per share
amounts):
YEAR ENDED MARCH 31,
-----------------------
2004 2003
---------- ----------
Revenue......................................... $ 16,528 $ 15,764
Net loss........................................ $ (12,602) $ (13,257)
Net loss per share, basic and diluted........... $ (0.56) $ (0.80)
Shares used in per share computations:
Basic........................................ 22,442 16,547
Diluted...................................... 22,442 16,547
NOTE 9. SALE OF COMMON STOCK AND WARRANTS
On February 11, 2004, the Company signed a $25 million equity facility
with Kingsbridge Capital, a firm that specializes in the financing of small to
medium sized technology-based companies. The arrangement will allow the Company
to sell shares of its common stock to Kingsbridge at its sole discretion over a
24-month period on a "when and if needed" basis. Kingsbridge Capital is required
under the terms of the arrangement to purchase Tegal's stock following the
effectiveness of a registration statement. The price of the common shares issued
under the agreement is based on a discount to the volume-weighted average market
price during a specified drawdown period. The Company has no obligation to draw
down all or any portion of the commitment.
In connection with the agreement, the Company issued fully vested warrants
to Kingsbridge Capital to purchase 300,000 shares of the Company's common stock
at an exercise price of $4.11 per share. The fair value of such options, which
amounted to approximately $756 was capitalized as a transaction cost. The
following variables were used to determine the fair value of such instruments
under the Black-Scholes option pricing model: volatility of 114%, term of five
years, risk free interest of 3.91% and underlying stock price equal to fair
market value at the time of grant.
During fiscal 2004 the Company granted 578,311 options to purchase shares
of the Company's common stock to certain non-employees. The fair value of such
shares amounted to approximately $332, was recorded as an operating expense.
On October 28, 2003, the Board of Directors granted options to purchase
3,410,000 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 December 18, 2003,
the Company granted options to purchase 500,000 shares of the Company's common
stock at an exercise price of $2.14 per share to certain employees, which was
the closing price of the Company's common stock on December 18, 2003.
In August 2002, the Company granted 62,650 options to purchase shares of
the Company's common stock at an exercise price of $0.83 to consultants for
services rendered. The estimated fair value of the vested options for fiscal
2003 amounted to $7 and was recorded as an operating expense. The following
variables were used to determine the fair value of such instruments under the
Black-Scholes option pricing model: volatility of 85%, term of four years, risk
free interest of 3.40% and underlying stock price equal to fair market value at
the time of grant.
During fiscal 2003, the Company granted 225,425 shares of common stock to
consultants for services rendered. The fair value of such shares, which amounted
to approximately $104, was recorded as an operating expense.
In July 2002, the Company granted 125,000 warrants to purchase shares of
the Company's common stock at an exercise price of $2.00 to a financial
institution in connection with establishing a receivables credit facility. The
fair value of such warrants, which amounted to approximately $82, was recorded
as a debt offering cost and is being amortized over the two-year life of the
associated line of credit. The amortization for fiscal 2003 amounted to $32 and
was recorded as interest expense. The following variables were used to determine
the fair value of such instruments under the Black-Scholes option pricing model:
volatility of 85%, term of two years, risk free interest of 4.95% and underlying
stock price equal to fair market value at the time of grant.
In September 2002, the Company granted 350,000 warrants to purchase shares
of the Company's common stock at an exercise price of $1.20 to consultants in
lieu of cash payments. The fair value of such warrants, which amounted to
approximately $105, was capitalized as a transaction cost under purchase
accounting. The following variables were used to determine the fair value of
such instruments under the Black-Scholes option pricing model: volatility of
85%, term of four years, risk free interest of 4.95% and underlying stock price
equal to fair market value at the time of grant.
46
NOTE 10. EMPLOYEE BENEFIT PLANS
EQUITY INCENTIVE PLAN
Pursuant to the Amended and Restated Equity Incentive Plan ("Equity
Incentive Plan"), options and stock purchase rights to purchase 3,500,000 shares
of common stock could be granted to management and consultants. The exercise
price of options and the purchase price of stock purchase rights generally has
been the fair value of the Company's common stock on the date of grant. At the
date of issuance of the stock options, all options are exercisable; however the
Company has the right to repurchase any stock acquired pursuant to the exercise
of stock options upon termination of employment or consulting agreement at the
original exercise price for up to four years from the date the options were
granted, with the repurchase rights ratably expiring over that period of time.
Incentive stock options are exercisable for up to ten years from the grant date
of the option. Nonqualified stock options are exercisable for up to 15 years
from the grant date of the option. The Equity Incentive Plan expired in December
1999. Consequently no shares were available for issuance under the Equity
Incentive Plan as of March 31, 2004.
1990 STOCK OPTION PLAN
Pursuant to the terms of the Company's 1990 Stock Option Plan ("1990
Option Plan"), options and stock purchase rights to purchase 550,000 shares of
common stock could be granted to employees of the Company or its affiliates.
Incentive stock options are exercisable for a period of up to ten years from the
date of grant of the option and nonqualified stock options are exercisable for a
period of up to ten years and two days from the date of grant of the option. At
the date of issuance of the stock options, all options are exercisable; however,
the Company has the right to repurchase any stock acquired pursuant to the
exercise of stock options upon termination of employment at the original
exercise price for up to four years from the date the options were granted, with
the repurchase rights ratably expiring over that period of time. The 1990 Option
Plan expired on March 10, 2000. Consequently no shares were available for
issuance under the 1990 Option Plan as of March 31, 2004.
1998 EQUITY PARTICIPATION PLAN
Pursuant to the terms of the Company's Amended 1998 Equity Participation
Plan ("Equity Plan"), which was authorized as a successor plan to the Company's
Equity Incentive Plan and 1990 Option Plan, 6,400,000 shares of common stock may
be granted upon the exercise of options and stock appreciation rights or upon
the vesting of restricted stock awards. The exercise price of options generally
will be the fair value of the Company's common stock on the date of grant.
Options are generally subject to vesting at the discretion of the Compensation
Committee of the Board of Directors (the "Committee"). At the discretion of the
Committee, vesting may be accelerated when the fair market value of the
Company's stock equals a certain price established by the Committee on the date
of grant. Incentive stock options will be exercisable for up to ten years from
the grant date of the option. Non-qualified stock options will be exercisable
for a maximum term to be set by the Committee upon grant. As of March 31, 2004,
533,521 shares were available for issuance under the Equity Plan.
DIRECTORS STOCK OPTION PLAN
Pursuant to the terms of the Stock Option Plan for Outside Directors, as
amended, ("Directors Plan"), up to 600,000 shares of common stock may be granted
to outside directors. Under the Directors Plan, each outside director who was
elected or appointed to the Board on or after September 15, 1998 shall be
granted an option to purchase 20,000 shares of common stock and on each second
anniversary after the applicable election or appointment shall receive an
additional option to purchase 20,000 shares, provided that such outside director
continues to serve as an outside director on that date. For each outside
director, 10,000 shares will vest on the first and second anniversaries of the
option grant date, contingent upon continued service as a director. Vesting may
be accelerated, at the discretion of the Board, when the fair market value of
the Company's stock equals a certain price set by the Board on the date of grant
of the option. The Directors Plan allows for additional grants at the discretion
of the Compensation Committee. As of March 31, 2004, no shares were available
for issuance under the Directors Plan.
47
The following table summarizes the Company's stock option activity for the
four plans described above and weighted average exercise price within each
transaction type for each of the years ended March 31, 2004, 2003 and 2002
(number of shares in thousands):
2004 2003 2002
---------------------- ---------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- -------------- ------- -------------- -------- --------------
Options outstanding at beginning of year....... 3,421 $ 3.19 2,959 $ 3.69 2,844 $ 3.94
Options canceled............................... (497) 3.23 (92) 3.76 (157) 4.48
Options granted................................ 4,771 1.14 558 0.58 275 1.58
Options exercised.............................. (305) 2.23 (4) 0.24 (3) 0.24
------- --------- ------ ------ ------ ------
Options outstanding March 31................... 7,390 1.97 3,421 $ 3.19 2,959 $ 3.69
======= ========= ===== ====== ====== ======
AWARDS
The Company granted 158,311 shares of restricted stock from the Company's
Equity Plan to consultants during fiscal year 2004 in exchange for services
rendered.
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
The Company has offered an Employee Qualified Stock Purchase Plan
("Employee Plan") under which rights are granted to purchase shares of common
stock at 85% of the lesser of the market value of such shares at the beginning
of a six month offering period or at the end of that six month period. Under the
Employee Plan, the Company is authorized to issue up to 500,000 shares of common
stock. 20,208 common stock shares were purchased in fiscal 2004 and 50,813
common shares were purchased in fiscal 2003. Shares available for future
purchase under the Employee Plan were 71,052 at March 31, 2004.
SAVINGS AND INVESTMENT PLAN
The Company has established a defined contribution plan that covers
substantially all U.S. employees. Employee contributions of up to four percent
of each U.S. employee's compensation will be matched by the Company based upon a
percentage to be determined annually by the Board. Employees may contribute up
to 15 percent of their compensation, not to exceed a prescribed maximum amount.
The Company made contributions to the plan of $8, $10 and $17 in the years ended
March 31, 2004, 2003 and 2002, respectively.
NOTE 11. STOCKHOLDER RIGHTS PLAN
On June 11, 1996, the Board adopted a Preferred Shares Rights Agreement
("Rights Agreement") and pursuant to the Rights Agreement authorized and
declared a dividend of one preferred share purchase right ("Right") for each
common share of the Company's outstanding shares at the close of business on
July 1, 1996. The Rights are designed to protect and maximize the value of the
outstanding equity interests in the Company in the event of an unsolicited
attempt by an acquirer to take over the Company in a manner or under terms not
approved by the Board. Each Right becomes exercisable to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock at an
exercise price of $45.00 upon certain circumstances associated with an
unsolicited takeover attempt and expires on June 11, 2006. The Company may
redeem the Rights at a price of $0.01 per Right. The Agreement was amended on
January 15, 1999.
48
NOTE 12. SEGMENT INFORMATION
The Company's business is completely focused on one industry segment, the
design, manufacturing and servicing of plasma etch systems and deposition
systems used in the manufacturing of integrated circuits and related devices.
The following is a summary of the Company's operations by geography:
Revenues: YEARS ENDED MARCH 31,
----------------------------
Sales to customers located in: 2004 2003 2002
--------- --------- -------
United States............................. $ 5,538 $ 4,864 $ 7,168
Asia, excluding Japan..................... 1,241 1,537 3,903
Japan..................................... 6,485 2,934 4,094
Germany................................... 170 353 731
Italy..................................... 1,480 1,851 2,617
Europe, excluding Germany and Italy....... 1,614 2,561 3,093
--------- --------- ---------
Total sales............................. $ 16,528 $ 14,100 $ 21,606
========= ========= =========
MARCH 31,
2004 2003
---------- ---------
Long-lived assets at year-end:
United States................................ $ 5,195 $ 5,807
Europe....................................... 6 19
Japan........................................ 15 16
Asia, excluding Japan........................ 13 33
---------- ---------
Total long-lived assets.............. $ 5,229 $ 5,875
========== =========
The Company's sales are primarily to domestic and international
semiconductor manufacturers. The top five customers accounted for approximately
54%, 40% and 46% of the Company's total net revenues for the years ended March
31, 2004, 2003 and 2002, respectively. Three customers accounted for 17%, 15%
and 12% of the Company's total net revenues for the year ended March 31, 2004.
Two customers accounted for 15% and 10% of the Company's total net revenues for
the year ended March 31, 2003. One customer accounted for 15% and two customers
accounted for 12% each of the Company's total net revenues for the year ended
March 31, 2002.
NOTE 13. SUBSEQUENT EVENTS
2% Convertible Debenture Financing
As of June 15, 2004, all of the Company's outstanding 2% convertible
debentures had been converted into the Company's common stock (see Note 7 to the
accompanying notes to the consolidated financial statements). The principal and
interest amount of the debentures converted was $1,688, which was converted into
4,825,118 shares of the Company's common stock.
Acquisition of First Derivative Systems, Inc.
On May 28, 2004, Tegal purchased substantially all of the assets of First
Derivative Systems, Inc. ("FDSI") for 1,410,622 shares of common stock and
approximately $200,000 in assumed liabilities, pursuant to a purchase agreement
dated April 29, 2004. All of the shares of common stock are subject to a
registration rights agreement in which the Company has agreed to register the
shares with the Securities and Exchange Commission for resale. In addition, the
Company entered into employment agreements with key FDSI personnel. FDSI, a
privately held development stage company based in Goleta, CA, was founded in
1999 as a spin-off of Sputtered Films, Inc., which itself was acquired by Tegal
in August 2002. FDSI had developed a high-throughput, low cost-of-ownership
physical vapor deposition ("PVD") system with highly differentiated technology
for leading edge memory and logic device production on 300 millimeter wafers.
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Tegal Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Tegal Corporation and its subsidiaries at March 31, 2004
and March 31, 2003, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
net losses and has generated negative cash flows from operations. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Jose, California
June 25, 2004
50
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth our unaudited selected financial data for
each of the eight quarterly periods in the two-year period, ended March 31,
2004.
THREE MONTHS ENDED
MAR. 31, DEC. 31, SEPT. 30, JUNE 30 MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
2004 2003 2003 2003 2003 2002 2002 2002
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTERLY FINANCIAL DATA:
Revenue................................. $ 6,157 $ 3,276 $ 3,210 $ 3,885 $ 4,002 $ 3,701 $ 2,675 $ 3,722
Gross profit (loss)..................... 2,673 (55) 992 1,037 1,275 88 (1,632) 203
Net loss................................ (1,559) (8,119) (1,670) (1,254) (1,695) (3,262) (4,822) (2,846)
Net loss per share*
Basic and diluted..................... (0.06) (0.35) (0.10) (0.08) (0.09) (0.20) (0.33) (0.20)
- ----------
* Net loss per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net loss per share may not
equal the annual net loss per share.
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure 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. The
evaluation also took into account a written confirmation of a reportable
condition recently provided by our independent accountants stating that they
noted certain matters involving our accounting for the 2% convertible debentures
and related debt issuance costs. The reportable condition arose from the
accounting for our 2% convertible debentures with warrants and related
measurement and recognition of beneficial conversion and warrant discounts and
issuance costs. As a result of the above, the Company restated its unaudited
condensed consolidated financial statements for the three and nine-month periods
ended December 31, 2003 as filed on Form 10Q/A on June 25, 2004.
The reportable condition letter acknowledges that accounting for 2%
convertible debentures with warrants and related measurement and recognition of
beneficial conversion and warrant discounts and issuance costs requires a deep
understanding of complex evolving areas of generally accepted accounting
principles that are subject to interpretations and where applications of such
principles requires judgment.
The reportable condition letter recommends the Company expand and enhance
its accounting function to include sufficient knowledge of accounting for
complex financing transactions including the convertible debenture financing
referred above.
Based on their evaluation as of a date at the end of the quarter covered
by this annual report on Form 10-K, the Company's principal executive officer
and principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) under the Securities
Exchange Act of 1934 are effective, except with respect to the reportable
condition referred above.
(b) Changes in Internal Controls. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART III
Certain information required by Part III is omitted from this Report in
that we will file a definitive proxy statement pursuant to Regulation 14A (the
"Proxy Statement") no later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement that
specifically address the items set forth herein are incorporated by reference.
Such incorporation does not include the Compensation Committee Report or the
Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning our directors and executive officers required
by this Item is incorporated by reference to our Proxy Statement under the
caption "Election of Directors" and "Executive Officers of the Registrant".
The information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the Company's
Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance."
The additional information required by this Item is incorporated by
reference to our Proxy Statement.
52
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our
Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to our
Proxy Statement under the captions "Principal Stockholders" and "Ownership of
Stock by Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to our
Proxy Statement under the caption "Certain Transactions."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to our
Proxy Statement under the caption "Independent Public Accountant".
53
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements
The Company's Financial Statements and notes thereto appear in this Form
10-K according to the following Index of Consolidated Financial Statements:
PAGE
Consolidated Balance Sheets as of March 31, 2004 and 2003............................................................... 29
Consolidated Statements of Operations for the years ended March 31, 2004, 2003 and 2002................................. 30
Consolidated Statements of Stockholders' Equity for the years ended March 31, 2004, 2003 and 2002....................... 31
Consolidated Statements of Cash Flows for the years ended March 31, 2004, 2003 and 2002................................. 32
Notes to Consolidated Financial Statements.............................................................................. 34
Report of Independent Registered Public Accounting Firm................................................................. 50
(2) Financial Statement Schedule
PAGE
Schedule II-- Valuation and Qualifying Accounts......................................................................... 56
Schedules other than those listed above have been omitted since they are
either not required, not applicable, or the required information is shown in the
consolidated financial statements or related notes.
(b) Reports on Form 8-K
Current Report on Form 8-K dated February 12, 2004, under Item 5 and Item
7 thereof.
(c) Exhibits
The following exhibits are referenced or included in this report:
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger by and among Tegal Corporation, SFI
Acquisition Corp., Sputtered Films, Inc. and the Shareholder Agent
dated as of August 13, 2002 (incorporated by reference to Exhibit
2.1 to the Registrant's Current Report filed with the SEC on August
16, 2002)
2.2 Asset Acquisition Agreement by and between Tegal Corporation and
Simplus Systems Corporation, dated November 10, 2003 (incorporated
by reference to Exhibit 2.1 to Tegal's Current Report on Form 8-K
(SEC File No. 000-26824) filed on December 9, 2003)
3.1 Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibits 3(i).1 and 3(i).2 included in
Registrant's Registration Statement on Form S-1 (File No. 33-84702)
declared effective by the Securities and Exchange Commission on
October 18, 1995)
3.2 Amendment to the Certificate of Incorporation (incorporated by
reference to Exhibit 4.2 to the Registrant's Registration Statement
on Form S-3 (File No. 333-108921) declared effective by the
Securities and Exchange Commission on October 14, 2003)
3.3 By-laws of Registrant (incorporated by reference to Exhibit 3(ii)
included in Registrant's Registration Statement on Form S-1 (File
No. 33-84702) declared effective by the Securities and Exchange
Commission on October 18, 1995)
*4.1 Form of Certificate for Common Stock
4.2 First Amendment to Rights Agreement between the registrant and
ChaseMellon Shareholder Services, dated as of January 15, 1999
(incorporated by reference to Exhibit 99.1 to the Registrant's
Current Report filed with the SEC on January 1, 1999)
54
4.3 Rights Agreement between the Registrant and ChaseMellon Shareholder
Services dated as of June 11, 1996 (incorporated by reference to
Registrant's current report filed with the SEC on June 28, 1996)
**10.1 Employment Agreement between the Registrant and Stephen P.
DeOrnellas dated December 16, 1997 (incorporated by reference to
Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 filed with the SEC on May 20, 1998)
**10.2 Employment Agreement between Registrant and Michael L. Parodi dated
as of December 17, 1997 (incorporated by reference to Exhibit 10.18
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998 filed with the SEC on May 20, 1998)
10.3 Form of Unit Purchase Agreement dated December 31, 2001
(incorporated by reference to Exhibit (i) to the Registrant's
Quarterly Report filed with the SEC on February 13, 2002)
10.4 Form of Warrant (incorporated by reference to Exhibit (ii) to the
Registrant's Quarterly Report filed with the SEC on February 13,
2002)
**10.5 Third Amended and Restated Stock Option Plan for Outside Directors
(incorporated by reference to Exhibit (iv) to the Registrant's
Quarterly Report filed with the SEC on February 13, 2002)
10.6 Security and Loan Agreement between Registrant and Silicon Valley
Bank dated as of June 26, 2002 (incorporated by reference to Exhibit
(10.6) to the Registrant's Annual Report on Form 10K for the fiscal
year ended March 31, 2003 filed with the SEC on June 27, 2003)
10.7 Lease between the Registrant and Jane Crocker, formerly Jane C.
Jacobs, as Trustee under the Jane C. Jacobs Trust Agreement dated
October 5, 1990 ("Crocker") and Norman E. MacKay ("MacKay") dated as
of April 29, 2003 (incorporated by reference to Exhibit (10.7) to
the Registrant's Annual Report on Form 10K for the fiscal year ended
March 31, 2003 filed with the SEC on June 27, 2003)
10.8 Security and Loan Agreement [Exim] between Registrant and Silicon
Valley Bank dated as of June 26, 2002 (incorporated by reference to
Exhibit (10.8) to the Registrant's Annual Report on Form 10K for the
fiscal year ended March 31, 2003 filed with the SEC on June 27,
2003)
10.9 Intellectual Property Security Agreement between Registrant and
Valley Bank dated as of June 26, 2002 (incorporated by reference to
Exhibit (10.9) to the Registrant's Annual Report on Form 10K for the
fiscal year ended March 31, 2003 filed with the SEC on June 27,
2003)
10.10 Warrant to purchase stock Agreement between Registrant and Silicon
Valley Bank dated as of June 26, 2002 (incorporated by reference to
Exhibit (10.10) to the Registrant's Annual Report on Form 10K for
the fiscal year ended March 31, 2003 filed with the SEC on June 27,
2003)
**10.11 Employment Agreement between Registrant and Thomas Mika dated as of
August 12, 2002 (incorporated by reference to Exhibit (10.11) to the
Registrant's Annual Report on Form 10K for the fiscal year ended
March 31, 2003 filed with the SEC on June 27, 2003)
**10.12 Employment Agreement between Registrant and Carole Anne Demachkie
dated as of August 30, 2002 (incorporated by reference to Exhibit
(10.12) to the Registrant's Annual Report on Form 10K for the fiscal
year ended March 31, 2003 filed with the SEC on June 27, 2003)
*21.1 List of Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
24.1 Power of Attorney (incorporated by reference to the signature page
to this Annual Report)
31.1 Section 302 Certification of the Chief Executive Officer
31.2 Section 302 Certification of the Chief Financial Officer
32.1 Section 906 Certification of the Chief Executive Officer and Chief
Financial Officer
- ----------
* Incorporated by reference to identically numbered exhibits included in
Registrant's Registration Statement on Form S-1 (File No. 33-84702) declared
effective by the Securities and Exchange Commission on October 18, 1995.
** Management contract for compensatory plan or arrangement.
55
TEGAL CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 2002, 2003, 2004
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- ---------- -------- ---------- ---------
(IN THOUSANDS)
Year ended March 31, 2002:
Allowances for doubtful accounts.......................... 114 216 24 (15) 339
Sales returns and allowances.............................. 8 92 -- (57) 43
Cash discounts............................................ 5 20 -- (8) 17
Year ended March 31, 2003:
Allowances for doubtful accounts.......................... 339 64 -- (238) 165
Sales returns and allowances.............................. 43 44 -- (65) 22
Cash discounts............................................ 17 16 -- (7) 26
Year ended March 31, 2004:
Allowances for doubtful accounts.......................... 165 64 -- (19) 210
Sales returns and allowances.............................. 22 38 -- (1) 59
Cash discounts............................................ 26 (20) -- (5) 1
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEGAL CORPORATION
By: /s/ MICHAEL L. PARODI
--------------------------------
Michael L. Parodi
Chairman, President & Chief
Executive Officer
Dated: June 28, 2004
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael L. Parodi, his or her
attorney-in-fact, with the powers of substitution, for him or her in any and all
capacities, to sign any amendments to this Report of Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ MICHAEL L. PARODI Chairman, President, Chief Executive June 28, 2004
- -----------------------------------------------------
Michael L. Parodi Officer and Director (Principal
Executive Officer)
/s/ THOMAS R. MIKA Chief Financial Officer (Principal June 28, 2004
- -----------------------------------------------------
Thomas R. Mika Financial and Accounting Officer)
/s/ EDWARD A. DOHRING Director June 28, 2004
- -----------------------------------------------------
Edward A. Dohring
/s/ JEFFRY KRAUSS Director June 28, 2004
- -----------------------------------------------------
Jeffrey Krauss
/s/ DUANE WADSWORTH Director June 28, 2004
- -----------------------------------------------------
Duane Wadsworth
57
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Agreement and Plan of Merger by and among Tegal Corporation, SFI
Acquisition Corp., Sputtered Films, Inc. and the Shareholder Agent
dated as of August 13, 2002 (incorporated by reference to Exhibit
2.1 to the Registrant's Current Report filed with the SEC on August
16, 2002)
2.2 Asset Acquisition Agreement by and between Tegal Corporation and
Simplus Systems Corporation, dated November 10, 2003 (incorporated
by reference to Exhibit 2.1 to Tegal's Current Report on Form 8-K
(SEC File No. 000-26824) filed on December 9, 2003)
3.1 Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibits 3(i).1 and 3(i).2 included in
Registrant's Registration Statement on Form S-1 (File No. 33-84702)
declared effective by the Securities and Exchange Commission on
October 18, 1995)
3.2 Amendment to the Certificate of Incorporation (incorporated by
reference to Exhibit 4.2 to the Registrant's Registration Statement
on Form S-3 (File No. 333-108921) declared effective by the
Securities and Exchange Commission on October 14, 2003)
3.3 By-laws of Registrant (incorporated by reference to Exhibit 3(ii)
included in Registrant's Registration Statement on Form S-1 (File
No. 33-84702) declared effective by the Securities and Exchange
Commission on October 18, 1995)
*4.1 Form of Certificate for Common Stock
4.2 First Amendment to Rights Agreement between the registrant and
ChaseMellon Shareholder Services, dated as of January 15, 1999
(incorporated by reference to Exhibit 99.1 to the Registrant's
Current Report filed with the SEC on January 1, 1999)
4.3 Rights Agreement between the Registrant and ChaseMellon Shareholder
Services dated as of June 11, 1996 (incorporated by reference to
Registrant's current report filed with the SEC on June 28, 1996)
**10.1 Employment Agreement between the Registrant and Stephen P.
DeOrnellas dated December 16, 1997 (incorporated by reference to
Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 filed with the SEC on May 20, 1998)
**10.2 Employment Agreement between Registrant and Michael L. Parodi dated
as of December 17, 1997 (incorporated by reference to Exhibit 10.18
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998 filed with the SEC on May 20, 1998)
10.3 Form of Unit Purchase Agreement dated December 31, 2001
(incorporated by reference to Exhibit (i) to the Registrant's
Quarterly Report filed with the SEC on February 13, 2002)
10.4 Form of Warrant (incorporated by reference to Exhibit (ii) to the
Registrant's Quarterly Report filed with the SEC on February 13,
2002)
**10.5 Third Amended and Restated Stock Option Plan for Outside Directors
(incorporated by reference to Exhibit (iv) to the Registrant's
Quarterly Report filed with the SEC on February 13, 2002)
10.6 Security and Loan Agreement between Registrant and Silicon Valley
Bank dated as of June 26, 2002 (incorporated by reference to Exhibit
(10.6) to the Registrant's Annual Report on Form 10K for the fiscal
year ended March 31, 2003 filed with the SEC on June 27, 2003)
10.7 Lease between the Registrant and Jane Crocker, formerly Jane C.
Jacobs, as Trustee under the Jane C. Jacobs Trust Agreement dated
October 5, 1990 ("Crocker") and Norman E. MacKay ("MacKay") dated as
of April 29, 2003 (incorporated by reference to Exhibit (10.7) to
the Registrant's Annual Report on Form 10K for the fiscal year ended
March 31, 2003 filed with the SEC on June 27, 2003)
10.8 Security and Loan Agreement [Exim] between Registrant and Silicon
Valley Bank dated as of June 26, 2002
10.9 Intellectual Property Security Agreement between Registrant and
Valley Bank dated as of June 26, 2002
10.10 Warrant to purchase stock Agreement between Registrant and Silicon
Valley Bank dated as of June 26, 2002
**10.11 Employment Agreement between Registrant and Thomas Mika dated as of
August 12, 2002 (incorporated by reference to Exhibit (10.11) to the
Registrant's Annual Report on Form 10K for the fiscal year ended
March 31, 2003 filed with the SEC on June 27, 2003)
**10.12 Employment Agreement between Registrant and Carole Anne Demachkie
dated as of August 30, 2002 (incorporated by reference to Exhibit
(10.12) to the Registrant's Annual Report on Form 10K for the fiscal
year ended March 31, 2003 filed with the SEC on June 27, 2003)
58
*21 List of Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
24.1 Power of Attorney (incorporated by reference to the signature page
to this Annual Report)
31.1 Section 302 Certification of the Chief Executive Officer
31.2 Section 302 Certification of the Chief Financial Officer
32.1 Section 906 Certification of the Chief Executive Officer and Chief
Financial Officer
59