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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
[ ] 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)
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DELAWARE 68-0370244
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
2201 SOUTH MCDOWELL BLVD.
P.O. BOX 6020
PETALUMA, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE 94955-6020
OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (707) 763-5600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price of the Common Stock on June 13,
1997, as reported on the Nasdaq National Market was $30,148,170. As of June 13,
1997, 10,282,489 shares of the Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders to be held on September 23, 1997, will be filed with the Commission
within 120 days after the close of the Registrant's fiscal year and are
incorporated by reference in Part III.
Total Pages 54 Index to Exhibits appears on page 51
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TABLE OF CONTENTS
PART I
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Item 1. Business.................................................................. 2
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 and Related Shareholder Matters..... 22
Item 6. Selected Financial Data................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 22
Operations................................................................
Item 8. Financial Statements and Supplementary Data............................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 26
Disclosure................................................................
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 27
Item 11. Executive Compensation.................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 27
Item 13. Certain Relationships and Related Transactions............................ 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 28
Signatures............................................................................ 46
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PART I
ITEM 1. BUSINESS
Information contained or incorporated by reference herein contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology or which constitute projected financial information. The
following contains cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements.
THE COMPANY
Tegal Corporation ("Tegal" or the "Company") designs, manufactures, markets
and services plasma etch systems used in the fabrication of integrated circuits
("ICs"). Etching constitutes one of the principal IC production process steps
and must be performed numerous times in the production of an IC.
The Company was formed in December 1989 to acquire the operations of the
former Tegal Corporation, a division of Motorola. The predecessor company was
founded in 1972 and acquired by Motorola in 1978. The Company's current
management was recruited beginning in 1991.
SEMICONDUCTOR INDUSTRY BACKGROUND
Growth of Semiconductor and Semiconductor Equipment Industries
The semiconductor industry has experienced significant growth in recent
years. This growth has resulted from the increasing demand for ICs from
traditional IC markets, such as personal computers, telecommunications, consumer
electronics, automotive electronics and office equipment, as well as the
recently developing markets, such as multimedia, wireless communications and
portable and network computing. As a result of this increased demand,
semiconductor device manufacturers in recent years have expended significant
amounts of capital to build new semiconductor fabrication facilities ("fabs")
and to expand existing fabs. In spite of the continuing growth in demand for
semiconductors, the industry periodically experiences periods of excess supply
and excess capacity as additions to capacity are brought online in large
increments which exceed the short-term growth in demand for ICs such as has
occurred in late 1995 and continues through the date of this report.
Growth in the semiconductor industry has been driven, in large part, by
advances in semiconductor performance at a decreasing cost per function.
Increasingly advanced semiconductor processing technologies allow semiconductor
manufacturers to produce ICs with smaller features, thereby increasing
processing speed and expanding device functionality and memory capacity. As ICs
have become more complex, however, both the number and price of state of the art
process tools required to manufacture ICs have increased significantly. As a
result, the cost of semiconductor manufacturing equipment is becoming an
increasingly large part of the total cost in producing advanced ICs. Today, the
average state of the art dynamic random access memory (DRAM) fab costs from $500
million to over $1.0 billion, with semiconductor manufacturing equipment costs
representing the majority of total fab costs.
Semiconductor Production Processes
To create an IC, semiconductor wafers are subjected to a large number of
complex process steps. The three primary steps in manufacturing ICs are (1)
deposition, in which a layer of insulating or conducting material is deposited
on the wafer surface, (2) photolithography, in which the circuit pattern is
projected onto a light sensitive material (the photoresist), and (3) etch, in
which the unmasked parts of the deposited material on the wafer are selectively
removed to form the IC circuit pattern.
Each step of the manufacturing process for ICs requires specialized
manufacturing equipment. Today, plasma etch systems are used for the great
majority of etching processes. During a plasma etch process (also
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known as "dry etch"), a semiconductor wafer is exposed to a plasma composed of a
reactive gas, such as chlorine, which etches away selected portions of the layer
underlying the patterned photoresist layer.
Segmentation of the Etch Market
The Company believes that the dry etch market is becoming increasingly
segmented. Certain dry etch technologies or processes are better suited for
etching different types of materials (films) and, as a result, the dry etch
market may be segmented according to the type of film being etched. In addition,
as ICs become increasingly complex, certain etch steps required to manufacture a
state of the art IC demand leading edge (or "critical") etch performance. For
example, to produce a 64-megabit DRAM device, semiconductor manufacturers are
required to etch certain device features at dimensions as small as 0.35 micron.
Nonetheless, even in the most advanced ICs, a significant number of production
steps can be performed with a significantly less demanding (or "non-critical")
etch performance. As a result, the Company believes the etch market has also
begun to segment according to the required level of etch performance -- critical
or noncritical.
Segmentation of the Etch Market by Film
The dry etch market is generally segmented into the following market
segments, defined according to the class of film being etched: polysilicon,
oxide (dielectric) and metal. According to VLSI Research Inc., the polysilicon,
oxide and metal segments of the dry etch market represented approximately 40%,
42% and 18%, respectively, of the total sales of dry etch systems in 1996. New
films are continually being developed in each of these three market segments.
Today, the semiconductor industry is faced with the need to develop and
adopt an unprecedented number of new films as conventional materials, are
running out of the physical properties needed to support continuing shrinks in
die size and to provide improved performance. Certain of these films present
unique etch production problems. For example, the use of certain new films, such
as platinum, currently being used in the development of high-density DRAM
devices, and Lead Zirconium Titanate (PZT), currently being used in the
development of non-volatile, ferroelectric random access memory (FRAM) devices,
is presenting new challenges to semiconductor manufacturers. While these new
films contribute to improved IC performance and reduced die size, their unique
properties make them particularly difficult to etch and, therefore, require more
advanced etch process technologies. Similarly, corrosion of metal etched wafers
within 48 to 72 hours after completion of the etch process has been a chronic
problem for semiconductor manufacturers, regardless of the line geometries
involved. The reaction byproducts of a chlorine based metal etch process tend to
redeposit on the wafer and corrode when exposed to water in the atmosphere.
Removal of these contaminants from the wafer is essential to prevent this
corrosion.
Segmentation of the Etch Market into Critical and Non-Critical Production
Steps
As device complexity has increased, the number of process steps required to
manufacture a state of the art IC has increased dramatically. The Company
estimates that a 64-megabit DRAM device requires more than 500 process steps,
and the Company believes approximately 50 of these process steps are etch. Each
etch step varies significantly in the degree of etch performance required to
complete that step successfully. As a result, the Company estimates that
approximately 20% to 25% of the etch systems currently required to produce a
64-megabit DRAM device need only provide non-critical etch performance.
Examples of non-critical etch processes involved in the production of a
64-megabit DRAM device include pad etching, zero layer etching and backside
etching. The pad etching process involves the formation of relatively sizable
areas, or pads, on which wires are bonded to attach to the metal leads of the
IC's package. Pad etching typically requires a relatively large, non-critical
etch 20 to 50 microns square. Zero layer etching, the etching of targets into
the wafer for alignment of photolithography equipment, usually requires
dimensions of 2 to 5 microns. Backside etching, in which the build-up of films
resulting from the deposition process is removed from the backside of the wafer,
has no dimensional requirement. Each of these process requirements has remained
relatively constant over succeeding generations of IC devices, and the Company
believes that
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these and many other non-critical etch processes currently required to produce
state of the art ICs will remain non-critical for the foreseeable future.
Over time, the disparity in relative prices for etch systems capable of
etching at non-critical versus critical dimensions has grown significantly. The
Company believes that in 1993, the cost of an eight inch wafer-capable system
ranged from approximately $500,000 to $700,000. Given the relatively modest
price differential among etchers, manufacturers of ICs and similar devices
tended to purchase one system, the one they believed provided the most
technologically advanced solution for their particular etch requirements, to
perform all their etching. In contrast, the cost today of an eight inch capable
etch system ranges from approximately $500,000, for reliable, non-critical
etchers, to more than $2.5 million, for advanced, state of the art critical
etchers. Consequently, the Company believes it is no longer cost effective to
use state of the art etchers to perform both critical and non-critical etching.
As a result, the Company believes that semiconductor manufacturers will
increasingly implement a "mix and match" purchasing philosophy to minimize their
capital equipment expenditures by purchasing expensive, state of the art etch
systems for their critical etch process requirements and less expensive, though
reliable, etch systems for their noncritical etch requirements. When critical
etching is required in the production process, the Company believes that the
leading purchasing factor for a semiconductor manufacturer will continue to be,
ultimately, the product's etch performance. When non-critical etching is
required in the production process, the Company believes the leading system
purchasing factor for a semiconductor manufacturer implementing a "mix and
match" purchasing philosophy will be the overall product cost, with particular
emphasis on the system's sale price. In either case, however, the semiconductor
manufacturer is driven to make a value-oriented purchasing decision which
minimizes the overall etch system costs, while meeting the required etch process
performance. The Company believes that a well-implemented "mix and match"
purchasing philosophy already adopted by a significant number of semiconductor
manufacturers to minimize their expenditures for photolithography equipment,
could allow a semiconductor manufacturer to realize significant etch system
savings.
BUSINESS STRATEGY
Tegal believes it currently has one of the largest installed bases of etch
equipment in the industry and that over the years it has earned a reputation as
a supplier of reliable, value-oriented etch systems. The Company's systems are
sold throughout the world to both domestic and international customers. In
fiscal 1997, approximately 69% of the Company's revenues resulted from
international sales. To support its systems sales, the Company maintains local
service and support in every major geographic market in which it has an
installed base, backed up by a spares logistics system designed to provide
delivery within 24 hours anywhere in the world.
The Company's objective is to build on its technical knowledge, experience
and reputation in the etch industry, as well as its established sales, marketing
and customer service infrastructure, to be a leading supplier of etch systems
for both the critical and non-critical segments of the etch market. To meet this
objective, the Company is implementing a business strategy incorporating the
following elements:
- Use the performance capabilities and value positioning of the Company's
6500 series systems to penetrate the critical etch market for emerging
film, polysilicon and metal etch applications;
- Use the Company's existing installed base and established customer
relationships to increase sales of both non-critical and critical etch
systems to its existing customers;
- Lever the Company's reputation as a supplier of value-oriented,
non-critical etch systems to sell such systems to new customers
implementing a "mix and match" purchasing philosophy, and follow such
sales by aggressively marketing critical etch systems to these customers;
and
- Continue to focus research and development efforts on identifying and
designing critical etch system solutions to address new or unsatisfied
etch process requirements, particularly selected etch applications where
the Company believes its process technologies and development experience
provide it with a competitive advantage.
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TEGAL'S CRITICAL ETCH SOLUTION
The Company believes a value-oriented critical etch system must be designed
to (i) provide high performance critical etching, (ii) deliver a high average
wafer throughput, (iii) minimize up-front investment costs, (iv) minimize
operating costs and (v) provide a solution for the production of multiple
generations of ICs. In 1991, the Company began developing a new generation of
technology and systems in order to provide a value-oriented system solution for
future critical etch needs, initially in the polysilicon and metal segments of
the etch market. In July 1994, the Company introduced its 6510 system, designed
for polysilicon etch applications at the sub-0.5 micron level. In July 1995, the
Company introduced its 6520 system, designed for metal etch applications, and
its 6540 system, designed for new, emerging film etch applications. In July
1996, the Company introduced its 6510i, designed for isolation trench and
selective nitride applications. The Company's 6500 series critical etch systems
typically range between $1.8 million and $2.5 million.
Provide for High Performance Critical Etch
A high performance critical etch system must etch features with anisotropic
profiles (i.e. straight, vertical sidewalls) while etching selectively, to
minimize damage to the underlayer or other wafer materials, and etching
uniformly over a non-uniform area. These performance requirements become
increasingly difficult to achieve at critical etch line geometries, especially
the smaller line geometries below 0.5 micron required by current, state of the
art ICs. The Company believes that its High-density Reflected electron ("HRe-")
process chamber, incorporating a low pressure, high density, low energy plasma
source and its patented tri-electrode energy source, produces the straight,
vertical etching and high selectivity required to provide superior etch
performance at these critical line geometries. In addition, the Company's 6520
metal etch system incorporates a patent-pending etch-rinse-strip-rinse process
sequence which, the Company believes, provides a system solution for many of the
corrosion problems common to metal etch applications. The Company is finding
that customers are increasingly adopting these same rinse and strip capabilities
on its emerging film and polysilicon systems in order to minimize post etch
corrosion and to remove residues created by those etch processes.
Deliver a High Average Throughput
Throughput is a measure of the number of wafers a particular system can
etch in a given period of time. The industry has usually measured a system's
throughput in terms of the number of wafers processed per hour. A system with a
high hourly throughput, however, may have a significantly lower average
throughput over the long term depending upon system design and durability. As a
result, the Company believes that a value-oriented system must deliver not only
a high hourly throughput but also, and perhaps more importantly, a high average
system throughput over the long term. Due to the corrosive nature of the etch
process, etching produces a large amount of contaminants and erodes process
chamber parts (consumables). Therefore, in order to deliver the precision and
repeatability necessary for superior etch results, etch systems require periodic
cleaning and maintenance. The 6500 series system architecture is designed so
that only six of the Company's HRe- process chamber parts are exposed to the
corrosive etch plasma. These six parts are designed to be easily removable and
replaceable in order to allow for off-line cleaning and to minimize disruption
to the etch process. In addition, the Company's HRe- process chamber
incorporates a high speed vacuum pump located above and close to the wafer
surface in order to remove contaminants from the chamber more effectively,
resulting in a cleaner etch process and relatively fewer scheduled cleanings.
Finally, the Company's 6500 series system is designed to maximize reliability in
order to minimize unscheduled maintenance down-time.
Minimize Up-front Investment Costs
While performance remains crucial to purchasing decision in the critical
etch segment, cost containment pressures are causing semiconductor manufacturers
to demand critical etch performance with lower up-front investment cost.
Consequently, a value-oriented critical etch system must sell for an
attractive price, relative to comparable etch systems. A value-oriented system
should also be designed to minimize installation costs,
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which can be substantial, and should have a small "footprint" (the production
area occupied by the system) to maximize the efficient use of limited, expensive
fab production space. The Company believes the design of its 6500 series systems
allows the Company to sell these systems at prices which are generally
significantly below the prices of comparable systems offered by the Company's
competitors. The Company has also designed its 6500 series systems to minimize
the time and expense required for system installation. In addition, with a
footprint of only 32 square feet, the 6500 series system occupies substantially
less production space than any comparable critical etch system currently offered
in the market.
Minimize Operating Costs
Given the complexity of the critical etch process, the costs of operating a
critical etch system can be substantial. A significant portion of overall
operating costs relates to the cost of servicing and replacing consumables, or
process chamber parts destroyed in the corrosive etch production process. A
value-oriented system, therefore, must be designed to minimize consumables. In
the Company's HRe- process chamber only six process chamber parts are exposed to
the corrosive plasma. In addition, the Company believes a magnetic field
designed to concentrate the plasma over the wafer also has the effect of
protecting process chamber parts from the corrosive plasma. As a result of its
process chamber design, the Company believes its 6500 series systems have
significantly lower consumables costs than its competitors' current systems.
Provide Solutions for Multiple Generations of Device Production Requirements
The Company also believes that a value-oriented critical etch system should
be responsive not only to the manufacturers' current etch requirements, but also
should be capable of delivering the etch performance required for the production
of multiple generations of ICs in order to maximize the useful life of the
system. As ICs continue to become increasingly complex, production requirement
will demand 0.25 micron and smaller processing technology. Systems that have not
been designed to meet these demands will eventually need to be replaced at a
significant expense. The Company's 6500 series systems have demonstrated the
ability to etch circuit lines down to 0.18 micron. As a result, the Company
believes its 6500 series systems will continue to provide solutions for future
isolation trench, emerging film, polysilicon and metal etch requirements.
TEGAL'S NON-CRITICAL ETCH SOLUTION
The Company believes that its 900 and 980 systems provide a value-oriented
non-critical etch solution for etch applications on polysilicon and oxide films.
The Company introduced its 900 series etch system in 1984 and since that time
has sold more than 1,200 of these systems worldwide. The Company believes that
the durability and performance of its 900 series systems have earned the Company
a reputation as a leading non-critical etch system supplier. The 900 series as
originally designed, however, was capable of etching only six inch and smaller
wafers and, therefore, did not address the needs of the eight inch wafer market.
As a result, the Company expanded its non-critical product offerings in July
1994 with the introduction of its eight inch wafer capable 980 system. The
Company introduced an enhanced 980 system in July 1995 which has a smaller
footprint and provides higher throughput and improved yields as compared to the
prior 980 system design. The Company's 900 and 980 systems sell for a typical
price of $350,000 and $500,000, respectively. The Company believes that these
systems provide some of the best values currently available on the market for
the large number of non-critical etch steps required to produce today's state of
the art ICs. The Company intends to market its 900 and 980 systems aggressively
as value-oriented solutions for the developing non-critical market segment. The
Company will also seek to lever its large installed base of non-critical etch
systems with its existing customers in order to sell them not only additional
non-critical etch systems, but also critical etch systems.
TECHNOLOGY
In 1991, the Company began developing a new generation of technology for
leading edge etch requirements, initially in the polysilicon and metal segments
of the market. The Company's product development efforts culminated in the
Company's HRe- process chamber and its etch-rinse-strip-rinse
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("E-R-S-R") process sequence, incorporated into the Company's 6520 systems for
metal etch applications and offered as an option on its 6510 and 6540 systems
for polysilicon and emerging film etch applications, respectively.
HRe- Process Chamber
The HRe- process chamber, formally introduced in April 1993, incorporates
advances in five interrelated areas: (i) the plasma source, (ii) control of
electrical energy flow, (iii) gas flow technology, (iv) process chamber design,
and (v) gas chemistries and recipes.
HRe- Plasma Source
The Company's HRe- plasma source includes a magnetic field which contains
the plasma at a low pressure, high density and low energy. For sub-0.5 micron
devices, the plasma source must operate at a low pressure with a high density of
activated gases at the wafer and a low energy in order to deliver superior etch
results. A low pressure plasma improves the overall quality of the etch by
minimizing the undercutting of wafer features as well as the effects of
microloading (etching concentrated features more rapidly than less concentrated
features), both of which adversely affect overall yield. Low pressure, however,
requires a high density plasma at the wafer to increase the number of plasma
particles reacting with the film being etched in order to maintain a fast etch
rate. A fast etch rate is one factor leading to a higher average throughput. Low
ion energy leads to improved etch selectivity and minimizes wafer damage, both
of which improve overall yield.
Tri-electrode Control System
The Company's patented tri-electrode control system is designed to direct
most of the electrical energy flow through the side wall of the etch chamber
instead of the wafer. As a result, only four to eight watts of energy generally
flow through wafers processed in the Company's HRe- chamber, as compared to 200
to 500 watts in most major competitors' systems. High energy levels flowing
through the wafer can result in uncontrolled wafer overheating, which can lead
to wafer damage. As a result, many of the Company's competitors are forced to
include process technology designed to cool their wafers to avoid such damage.
In contrast, the Company's tri-electrode control system controls energy flows
through the wafer to such an extent that the process chamber actually heats the
wafer by non-electrical means to help evaporate the solids and eliminate
particles and residues on the wafer surface. The Company believes that less
energy flowing through the wafer allows the HRe- process chamber to be used for
a large variety of films. In addition, lower wafer temperatures allow the use of
traditional masking materials instead of requiring newly developed hard masking
materials. Hard masking materials require additional process steps to remove.
Gas Flow Technology
In order to maintain high etch rates, it is essential to maintain a fresh
supply of activated gases. Similarly, consumed gases and evaporated materials
must be removed from the etch chamber as quickly as possible to minimize
condensation on the wafer and chamber surfaces. To maximize the removal of
consumed gases and evaporated materials, the HRe- process chamber incorporates a
high-speed pump located close to, and directly above, the wafer surface. The
Company believes that its process chamber has one of the highest gas flow rates
in the industry. The Company designed the HRe- etch chamber to be small in
volume with a high gas flow rate in order to allow the evaporated materials less
time to condense on the surface of the wafer and chamber, resulting in a cleaner
etch process. A cleaner etch process requires less frequent chamber cleaning and
maintenance, thereby maximizing processing time and average throughput.
Process Chamber Design
Given the corrosive nature of the high density etch process, consumables
(i.e. chamber parts eroded by the etch process) have historically resulted in
significant repair and down-time costs for semiconductor manufacturers. The HRe-
process chamber was designed so that only six chamber parts, as compared to many
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more in most competitors' current systems, contact the chamber's corrosive
environment. All six chamber parts have been designed to be easily removed and
replaced to allow for off-line cleaning and minimal disruption of processing
time.
Chemistries and Recipes
Each different film being etched requires a different etch chemistry or
"recipe" which generally consists of two or three of the following gases:
Chlorine, bromine, fluorine and argon. Development of the optimal etch recipe
for a given film is an experimental science in which the Company has a large
degree of experience due to its large installed base of applications and
experienced applications engineers.
"E-R-S-R" Process Sequence
Corrosion of metal etch wafers within a 48 to 72 hour period following
completion of the etch process has been a chronic problem for semiconductor
manufacturers performing metal etch applications, regardless of the line
geometries involved. In order to address this corrosion problem, the Company's
6520 system for critical metal applications has been designed to incorporate an
etch-rinse-strip-rinse ("E-R-S-R") process sequence for which the Company has
been notified it will shortly be granted a patent. The Company believes that
rinsing the wafer prior to the strip process significantly reduces corrosion by
removing the chlorinated metal contaminants from the wafer surface before they
can react with the air to form the acids which corrode the metal lines. In
addition, removal of reaction byproducts before the strip process prevents the
chlorinated metals from oxidizing to form metal residues which become water
insoluble as a byproduct of the stripping process. The Company believes that
additional time consuming processing steps are required to remove these post
metal etch strip residues, thereby adding to total production cycle time and
capital equipment cost. The Company believes that no other system on the market
today is capable of providing this on-line process sequence. Most other
competitive critical etch systems are designed to provide only an
etch-strip-rinse process sequence, if they provide a rinse process at all. As a
result, the Company believes that its 6520 HRe- metal etch system, with its
E-R-S-R process sequence, greatly reduces residue contamination and increases
wafer throughput, while reducing capital costs and clean room floor space
requirements. The Company believes that this E-R-S-R process sequence is also
beneficial to certain emerging film applications and, therefore, provides this
process sequence as an option on its 6540 systems for emerging films and on its
6510 systems for polysilicon side wall veil removal.
PRODUCTS
Critical Etch Products
The Company offers several models of its 6500 series critical etch products
based on film type and application desired by the customer. In 1994, Tegal
introduced 6500 series etch system for sub-0.5 micron polysilicon etching.
In 1995, the Company introduced its emerging films 6500 series etch system
for the etching of new materials at sub-0.5 micron, such as platinum used in the
development of high-density DRAM devices, Lead Zirconium Titanate (PZT),
currently being used in the development of FRAM devices, and alternative films
used for these same purposes such as Iridium and Y1 or Barium Strontium Titanate
(BST). The Company also introduced its metal etch system for sub-0.5 micron
critical etching of aluminum/copper alloys, 5 layer composite films with
aluminum and aluminum/silicon/titanium alloys in 1995. In 1996, the Company
introduced its isolation technology 6500 series etch system aimed at isolation
trench and selective nitride etch applications used in the development and
production of memory devices employing design rules at or below 0.35 micron. All
6500 series models offer one and two-chamber configurations.
The Company's 6500 series systems have been engineered to provide process
flexibility and competitive throughput for wafers up to eight inches, while
minimizing cost and space requirements. A dual chamber platform design allows
for either parallel or integrated etch processes. The Company seeks to maximize
the 6500 series systems' average throughput by incorporating a process chamber
technology and system
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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 (25-wafer) vacuum loadlocks, noncontact optical wafer alignment
and a vacuum transport system. Individual process module servicing is possible
without shutting down the system or other chambers. Contamination control
features in the 6500 series systems include pick and place wafer handling with
no moving parts above the wafer, four-level vacuum isolation from the atmosphere
to the etch chamber, and individual high-throughput, turbo-pumped vacuum systems
for the cassettes, wafer handling platform and each process module. These and
other features of the 6500 series are designed to enable a semiconductor
manufacturer to reduce wafer particle contamination to a level which the Company
believes exceeds industry standards and to improve etch results and process
flexibility.
In addition, the Company's 6500 series systems incorporate a software
system which has been designed and tested to minimize the risk of the system
operator "crashing" the system or interrupting wafer fabrication and to be easy
to use. This software system incorporates a software architecture designed to
operate in multiple interface modes, including operator, maintenance engineer,
process engineer and diagnostic modes. Features include icon-based touch screen
menus for ease of use. In addition, the software provides a quick-response
interface which allows the semiconductor manufacturer access to all necessary
system information for factory automation. The system includes data archiving
and remote, real time diagnostics.
Non-Critical Etch Products
The Company first introduced its 900 series etch system in 1984 as a
critical etch tool of that era. Over the years, the Company has repositioned the
900 series system as a non-critical etch system capable of performing the
less-demanding etch steps required in the production of an IC. In 1994, the
Company introduced a 8 inch wafer capable 900 series system (capable of etching
5 inch to 8 inch wafers) that was a scaled-up version of its 3 inch to 6 inch
wafer capable noncritical etch system. The 900 series non-critical etch systems
are aimed at pad, zero layer, non-selective nitride, backside, planarization and
small flat panel display applications and more recently, at thin film etch
applications used in the manufacture of read-write heads for the disk drive
industry.
The 900 and 980 series systems incorporate a single diode process chamber
on a non-loadlocked modular platform for reliability and ease of maintenance,
which the Company believes results in higher average throughput and lower
operating costs. Continued improvements in both reliability and performance have
enabled the Company to offer the 900 and 980 series systems as a solution for
non-critical applications involving line widths of 0.8 micron and greater.
CUSTOMERS
The Company sells its systems to semiconductor manufacturers throughout the
world. Major customers over the last three fiscal years have included the
following:
<TABLE>
<S> <C> <C>
Austria Mikro Systeme Motorola Siemens
International
Bosch Newport Wafer Fab Sony
EMM Northern Telecom Telecom Semiconductor
Hewlett-Packard Rohm Toshiba
Hyundai SGS-Thomson Microelectronics United Microelctronics
Corporation
International Rectifier - Hex Samsung VLSI Technology
Fet America
Linear Technology Seiko Winbond
Matsushita SEL
Micrel Semiconductor Shanghai Belling
</TABLE>
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<PAGE> 11
All of these customers, except Austria Mikro Systeme International, Newport
Wafer Fab, Rohm, Telecom Semiconductor, United Microelectronics Corporation and
VLSI Technology ordered one or more systems from the Company in fiscal 1997. The
composition of the Company's top five customers has changed from year to year,
but net system sales to the Company's top five customers in each of fiscal 1997,
1996 and 1995 accounted for 46.7%, 48.6% and 54.3%, respectively, of the
Company's total net system sales. Winbond, Hyundai and Motorola represented
16.8%, 13.6% and 10.2%, respectively, of the Company's net system sales in
fiscal 1997. Sony and Motorola represented 16.3% and 14.9%, respectively, of the
Company's net system sales in fiscal 1996. Motorola and SGS-Thomson
Microelectronics represented 18.5% and 17.2%, respectively, of the Company's net
system sales in fiscal 1995. Other than the above customers, no single customer
represented more than 10% of the Company's net system sales in fiscal 1997, 1996
or 1995. Although the composition of the group comprising the Company's largest
customers may vary from year to year, the loss of a significant customer or any
reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the semiconductor manufacturing
industry, may have a material adverse effect on the Company's business,
financial condition and results of operations.
BACKLOG
The Company schedules production of its systems based upon order backlog
and customer commitments. The Company includes in its backlog only orders for
which written authorizations have been accepted and shipment dates within the
next 12 months have been assigned. As of March 31, 1997 and 1996 the Company's
order backlog was approximately $8.3 million and $16.5 million, respectively.
Systems orders are subject to cancellation by the customer, but with substantial
penalties other than in the case of orders for evaluation systems or for systems
which have not yet incurred production costs. Orders may be subject to
rescheduling with limited or no penalty. Some orders are received for systems to
be shipped in the same quarter as the order is received. Because of the factors
just mentioned, the Company's backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period.
MARKETING, SALES AND SERVICE
The Company sells its systems worldwide through a network of 14 direct
sales representatives and 18 independent sales representatives in 15 sales
offices located throughout the world. In the United States, the Company markets
its systems through direct sales personnel located in its Petaluma, California
headquarters, a regional sales office and through two independent sales
representatives. In addition, the Company provides field service and
applications engineers out of three regional offices and its Petaluma
headquarters in order to ensure dedicated technical and field process support
throughout the United States on short notice.
The Company maintains sales, service, and process support capabilities in
Japan, Taiwan, France and Germany and service/support operations in Austria,
China, Italy and the United Kingdom. In addition to its international direct
sales and support organizations, the Company markets its systems through
independent sales representatives in China, Israel, Italy, Korea and Singapore.
International sales, which consist of export sales from the United States
either directly to the end user or to one of the Company's foreign subsidiaries,
accounted for 69.0%, 63.2% and 62.7% of total revenue for fiscal 1997, 1996 and
1995, respectively. The Company generally sells its systems on 30-to-60 day
credit terms to its domestic and European customers. Customers in Pacific Rim
countries, other than Japan, are generally required to deliver a letter of
credit payable in U.S. dollars upon system shipment. Sales to other
international customers, including Japan, are either billed in local currency or
U.S. dollars. The Company anticipates that international sales will continue to
account for a significant portion of revenue in the foreseeable future.
International sales are subject to certain risks, including the imposition of
government controls, fluctuations in the U.S. dollar (which could increase the
sales price in local currencies of the Company's systems in foreign markets),
changes in export license and other regulatory requirements, tariffs and other
market barriers, political and economic instability, potential hostilities,
restrictions on the export or import of technology, difficulties in accounts
receivable collection, difficulties in managing distributors or representatives,
difficulties in staffing and managing international operations and potentially
adverse tax consequences. There can be no
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<PAGE> 12
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company generally warrants its new systems for 12 months and its
refurbished systems for six months from shipment. Installation is included in
the price of the system. The Company's field process engineers provide customers
with call-out repair and maintenance services for a fee. Customers may also
enter into repair and maintenance service contracts covering the Company's
systems. The Company trains customers' service engineers to perform routine
service for a fee and provides telephone consultation services generally free of
charge.
The sales cycles for the Company's systems vary depending upon whether the
system is an initial design-in, reorder or used equipment. Initial design-in
sales cycles are typically 12 to 18 months, particularly for 6500 series
systems. In contrast, reorder sales cycles are typically four to six months, and
used system sales cycles are generally one to three months. The initial
design-in sales cycle begins with the generation of a sales lead, which is
followed by qualification of the lead, an analysis of the customer's particular
applications needs and problems, one or more presentations to the customer,
frequently including extensive participation by the Company's senior management,
two to three wafer sample demonstrations, followed by customer testing of the
results and extensive negotiations regarding the equipment's process and
reliability specifications. Initial design-in sales cycles are monitored by
senior management for correct strategy approach and prioritization. The Company
may, in some instances, need to provide the customer with an evaluation critical
etch system for three to six months prior to the receipt of a firm purchase
order.
RESEARCH AND DEVELOPMENT
The market for semiconductor capital equipment is characterized by rapid
technological change. The Company believes that continued and timely development
of new systems and enhancements to existing systems is necessary for it to
maintain its competitive position. Accordingly, the Company devotes a
significant portion of its personnel and financial resources to research and
development programs and seeks to maintain close relationships with its
customers in order to be responsive to their system needs.
The Company's research and development encompasses the following areas:
plasma technology, process characterization and development, material sciences
applicable to the etch environment, system design and architecture,
electro-mechanical design and software engineering. Management emphasizes
advanced plasma and reactor chamber modeling capabilities in order to accelerate
bringing advanced chamber designs to market. The Company employs
multi-discipline teams to facilitate short engineering cycle times and rapid
product development. There can be no assurance that the Company will be able to
develop, introduce or sell new and enhanced systems. In particular, if the 6500
series does not achieve significant sales or volume production due to a lack of
customer acceptance, inability to correct technical, manufacturing or other
difficulties which may develop with this series, or for any other reason, the
Company's business, financial condition and results of operations would be
materially adversely affected.
As of March 31, 1997, the Company had 68 full-time employees dedicated to
equipment design engineering, process support and research and development.
Research and development expenses for fiscal 1997, 1996 and 1995 were $10.5
million, $10.0 million and $8.1 million, respectively, and represented 18.3%,
16.1% and 18.1% of total revenue, respectively. Such expenditures were used for
the development of new systems and the continued enhancement and customization
of existing systems. The Company expects that research and development expenses
will continue at current levels or increase slightly in fiscal 1998.
MANUFACTURING
The Company's etch systems are produced at its headquarters in Petaluma,
California. The Company's manufacturing activities consist of assembling and
testing components and sub-assemblies which are then integrated into finished
systems. The Company has structured its production facility to be driven either
by orders or by forecasts and has adopted a modular system architecture to
increase assembly efficiency and design flexibility. The Company has also
implemented "just-in-time" manufacturing techniques in its assembly processes.
The Company believes that improvements in manufacturing processes have allowed
the
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<PAGE> 13
Company to reduce significantly its non-critical system manufacturing cycle
times. Non-critical system manufacturing cycle times, which typically took
nearly three months in 1990, now take approximately 14 days. The Company's cycle
times for its critical etch products are currently two to three months. The
Company seeks to improve these cycle times as the Company continues to
manufacture 6500 systems.
The Company procures certain components and sub-assemblies included in its
systems from a limited group of suppliers, and occasionally from a single source
supplier. In particular, the Company is dependent upon MECS, a robotic equipment
supplier, as the sole source for the robotic arm used in all of its 6500 series
systems. The Company currently has no existing supply contract with MECS, and
the Company currently purchases all robotic assemblies from MECS on a purchase
order basis. Disruption or termination of certain of these sources, including
its robotic sub-assembly source, could have an adverse effect on the Company's
operations. While the Company believes that alternative sources could be
obtained and qualified to supply these components or sub-assemblies, a prolonged
inability to obtain such components or sub-assemblies, receipt of defective
components or sub-assemblies, as well as difficulties or delays in shifting to
alternative sources could have a material adverse effect on the Company's
operating results and could damage customer relationships.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of governmental regulations related to
the use, storage, handling, discharge or disposal of toxic, volatile or
otherwise hazardous chemicals used in the manufacturing process. The Company
believes that it is currently in compliance in all material respects with these
regulations and that it has obtained all necessary environmental permits to
conduct its business, which permits generally relate to the discharge of
hazardous wastes. Nevertheless, the failure to comply with present or future
regulations could result in fines being imposed on the Company, suspension of
production, alteration of the Company's manufacturing processes, or cessation of
operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur other expense to comply with environmental
regulations. Any failure by the Company to control the use, disposal or storage
of, or adequately restrict the discharge of, hazardous substances could subject
the Company to future liabilities.
COMPETITION
The semiconductor capital equipment industry is highly competitive. The
Company believes that the principal competitive factor in the critical segment
of the etch industry is technical performance of the system, followed closely by
the existence of customer relationships, the overall system price, the ability
to provide service and technical support on a global basis and other related
cost factors. The Company believes that the principal competitive factor in the
non-critical segment of the etch industry is system price, followed closely by
the technical performance of the system, the existence of established customer
relationships, the ability to provide service and technical support on a global
basis and other related cost factors.
The Company believes that to be competitive, it will require significant
financial resources in order to offer a broad range of systems, to maintain
customer service and support centers worldwide and to invest in research and
development. Many of the Company's existing and potential competitors,
including, among others, Applied Materials, Inc., Lam Research Corporation,
Hitachi Ltd. and Tokyo Electron Limited, have substantially greater financial
resources, more extensive engineering, manufacturing, marketing and customer
service and support capabilities, larger installed bases of current generation
etch and other production equipment and broader process equipment offerings as
well as greater name recognition than the Company. The Company expects its
competitors to continue to improve the design and performance of their current
systems and processes and to introduce new systems and processes with improved
price and performance characteristics. No assurance can be given that the
Company will be able to compete successfully in the United States or worldwide.
A substantial investment is required to install and integrate capital
equipment into a semiconductor production line. The Company believes that once a
device manufacturer has selected a particular vendor's capital equipment, that
manufacturer generally relies upon that vendor's equipment for the specific
production
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<PAGE> 14
line application and, to the extent possible, subsequent generations of similar
systems. Accordingly, it may be extremely difficult to achieve significant sales
to a particular customer once another vendor's capital equipment has been
selected by that customer unless there are compelling reasons to do so, such as
significant performance or cost advantages. Certain of the Company's competitors
have entered into strategic relationships or alliances with leading
semiconductor manufacturers, particularly with respect to the generation of
devices at 1.0 to 0.5 micron line geometries for which the Company did not offer
competitive systems at the time buying decisions were made. If such
relationships or alliances cover etch equipment similar to those sold by the
Company, the Company's ability to sell its 6500 series systems would be
adversely affected. In addition, certain of the Company's competitors may seek
to sell, as an attractively priced package, etch equipment together with other
process equipment, such as deposition equipment. Furthermore, some semiconductor
manufacturers have already made initial buying decisions for the next generation
of sub-0.5 micron etch requirements. Any failure to gain access and achieve
sales to new customers will adversely affect the successful commercial
introduction of the Company's 6500 series systems and would have a material
adverse effect on the Company's business, financial condition and results of
operations.
INTELLECTUAL PROPERTY
The Company holds an exclusive license to 25 United States patents,
including its tri-electrode control system, and 26 corresponding foreign patents
covering various aspects of its systems. The Company has been formally notified
that it will shortly be granted a patent for its E-R-S-R process sequence
directly, and has applied for 5 additional United States patents. The Company
believes that the duration of such patents generally exceed the life cycles of
the technologies disclosed and claimed therein. The Company believes that
although the patents it has exclusively licensed or holds directly will be of
value, they will not determine the Company's success, which depends principally
upon its engineering, marketing, service and manufacturing skills. However, in
the absence of patent protection, the Company may be vulnerable to competitors
who attempt to imitate the Company's systems or processes and manufacturing
techniques and processes. In addition, other companies and inventors may receive
patents that contain claims applicable to the Company's systems and processes.
The sale of the Company's systems covered by such patents could require licenses
that may not be available on acceptable terms, if at all. The Company also
relies on trade secrets and proprietary technology that it seeks to protect, at
least in part, through confidentiality agreements with employees, vendors,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by others.
The original version of the system software for the Company's 6500 series
systems was jointly developed by the Company and Realtime Performance, Inc., a
third party software vendor. Tegal holds a perpetual, non-exclusive, nonroyalty
bearing license to use and enhance this software. The enhanced version of the
software currently used on the Company's 6500 series systems has undergone
multiple releases of the original software, and such enhancements were developed
exclusively by the Company. Neither the software vendor nor any other party has
any right to use the Company's current release of the system software.
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, there can be no
assurance that the Company will be able to protect its technology adequately or
that competitors will not be able to develop similar technology independently.
There can be no assurance that any patent applications that the Company may file
will be issued or that foreign intellectual property laws will protect the
Company's intellectual property rights. There can be no assurance that any
patent licensed by or issued to the Company will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide competitive
advantages to the Company. Furthermore, there can be no assurance that others
will not independently develop similar systems, duplicate the Company's systems
or design around the patents licensed by or issued to the Company.
As is typical in the semiconductor industry, the Company has received
notices from time to time from third parties alleging infringement claims. In
July 1991, the Company was advised by General Signal Corporation ("GSC") that
the Company may need a license under certain U.S. patents owned by GSC relating
to "cluster tool" equipment. The Company's 6500 series systems are generally
configured with
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<PAGE> 15
multiple process chambers and, therefore, may be deemed "cluster tool"
equipment. A number of companies which were contacted by GSC with regard to
licensing these patents formed an ad-hoc committee to investigate the validity
of the GSC patents. As a result of such investigation, in November 1992 the
committee members, including the Company, jointly notified GSC that they believe
the subject patents are invalid and that, accordingly, no license is necessary.
In the fall of 1994, GSC filed suit against Applied Materials, a non-member of
the ad-hoc investigative committee, alleging infringement of such patents. To
date, GSC has taken no action against the Company in connection with the
licensing of these patents. There can be no assurance that GSC will not take any
such action in the future or, if any such action is taken, as to the outcome of
such action.
On June 10, 1996, Lucent Technologies Inc. filed a claim with the United
States District Court for the Northern District of California alleging patent
infringement by Austria Mikro Systeme International AG and AMS Austria Mikro
Systeme International, Inc. (AMS) for the sale of integrated circuits
manufactured with the Company's dry plasma etch systems. On March 7, 1995, the
Company executed an indemnification agreement with AMS, covering certain uses of
select equipment sold to AMS. The lawsuit between Lucent and AMS has been
settled, and AMS and the Company are discussing the indemnity issue. The Company
believes that the ultimate outcome of any defense of any required
indemnification obligation to AMS is unlikely to have a material adverse effect
on the Company's results of operations or financial condition. No assurance can
be given, however, as to the outcome of such legal proceedings or as to the
effect of any such outcome on the Company's results of operations or financial
condition.
Although there are currently no pending claims or lawsuits against the
Company regarding possible infringement claims, there can be no assurance that
infringement claims by other third parties, or claims for indemnification
resulting from infringement claims, will not be asserted in the future or that
such assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. In the
future, litigation may be necessary to enforce patents issued or exclusively
licensed to the Company, to protect trade secrets or know-how exclusively
licensed to or owned by the Company or to defend the Company against claimed
infringement of the rights of others and to determine the scope and validity of
the proprietary rights of others. Any such litigation could result in
substantial cost and diversion of effort by the Company, which by itself could
have a material adverse effect on the Company's financial condition and
operation results. Further, adverse determinations in such litigation could
result in the Company's loss of proprietary rights, subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties or prevent the Company from manufacturing or selling its
systems, any of which could have a material adverse effect on the Company's
financial condition and results of operations. In addition, there can be no
assurance that a license under a third party's intellectual property rights will
be available on reasonable terms, if at all.
EMPLOYEES
As of March 31, 1997, the Company had a total of 252 employees consisting
of 233 full-time permanent employees and 19 temporary or contract personnel,
including 68 in engineering, research and development, 56 in manufacturing, 94
in marketing, sales and customer service and support and 34 in executive and
administrative activities. Many of the Company's employees are highly skilled,
and the Company's success will depend in part upon its ability to attract,
retain and develop such employees. Skilled employees, especially employees with
extensive technological backgrounds, are currently in great demand. There can be
no assurance that the Company will be able to attract or retain the skilled
employees which may be necessary to continue its research and development,
manufacturing or marketing programs. The loss of any such persons, as well as
the failure to recruit additional key personnel in a timely manner, could have a
material adverse effect on the Company's business, financial condition and
operating results.
None of the Company's employees are represented by a labor union or covered
by a collective bargaining agreement. The Company considers its employee
relations to be good.
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<PAGE> 16
ADDITIONAL RISK FACTORS
DEPENDENCE ON RECENTLY INTRODUCED SYSTEMS FOR CRITICAL ETCH MARKETS
The Company's 6500 series systems, its new generation of critical etch
systems, have been designed initially for sub-0.5 micron critical etch
applications in emerging films, isolation, polysilicon and metal which the
Company believes to be the leading edge of critical etch applications. The
Company's 6500 series systems which have been installed are currently being used
primarily for research and development activities or in pilot production. For
the 6500 series systems to achieve market acceptance, the Company's customers
must utilize these systems for volume production. Achieving market acceptance of
the Company's 6500 series systems is very important to the Company's future
financial results.
Because new product development commitments must be made well in advance of
sales, new product decisions must anticipate both the future requirements for
etch processes needed by semiconductor manufacturers and the equipment required
to address such applications. There can be no assurance that the market for
critical etch emerging film, isolation, polysilicon or metal etch systems will
develop as quickly or to the degree the Company expects. There can be no
assurance whether or when the 6500 series systems will achieve market
acceptance. In addition, the selling cycles of these new systems are typically
lengthy.
The 6500 series has had only limited production life. Therefore, unforeseen
technical or manufacturing difficulties may arise which may hinder market
acceptance or volume production. The Company may be required to incur
substantial, unanticipated costs to ensure the functionality and reliability of
the 6500 series systems, which may materially and adversely affect the business,
financial condition and results of operation of the Company. Such costs may
include substantial expenditures to upgrade or re-engineer installed equipment
that fails to perform to customer specifications. If the Company is unable to
re-engineer 6500 series non-performing systems under evaluation to customer
satisfaction and a number of 6500 series systems are returned to the Company,
the Company's ability to sell 6500 series systems in the future may be adversely
affected. In addition, in connection with the development and production of the
6500 series, the Company is increasing its operating expenses and is likely to
invest in increased inventory levels in the future. The failure to complete the
commercial introduction of this new generation of systems in a timely manner
could result in, among other things, an increase in operating expenses and
inventory obsolescence without corresponding sales, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
If the 6500 series does not achieve significant sales or volume production
due to a lack of customer acceptance, inability to correct technical,
manufacturing or other difficulties which may develop with this series, or for
any other reason, the Company's business, financial condition and results of
operations would be materially adversely affected.
IMPEDIMENTS TO CUSTOMER ACCEPTANCE
A substantial investment is required to install and integrate capital
equipment into a semiconductor production line. The Company believes that once a
device manufacturer has selected a particular vendor's capital equipment, that
manufacturer generally relies upon that vendor's equipment for that specific
production line application and, to the extent possible, subsequent generations
of that vendor's systems. Accordingly, it may be extremely difficult to achieve
significant sales to a particular customer once another vendor's capital
equipment has been selected by that customer unless there are compelling reasons
to do so, such as significant performance or cost advantages. Certain of the
Company's competitors have entered into strategic relationships or alliances
with leading semiconductor manufacturers, particularly with respect to the
generation of devices at 1.0 to 0.5 micron line geometries for which the Company
did not offer competitive systems at the time such buying decisions were made.
If such relationships or alliances cover etch equipment similar to those sold by
the Company, the Company's ability to sell its 6500 series systems would be
adversely affected. In addition, certain of the Company's competitors may seek
to sell, as an attractively priced package, etch equipment together with other
process equipment, such as deposition equipment. Furthermore, some semiconductor
manufacturers have already made initial buying decisions for the next generation
of sub-0.5 micron etch requirements. Any failure to gain access and achieve
sales to new customers will adversely affect
15
<PAGE> 17
the successful commercial introduction of the Company's 6500 series systems and
would have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the Company believes that its future long term success also
depends on its ability to increase sales of its etch systems, particularly its
new generation 6500 series, to Japanese semiconductor manufacturers. The
Japanese semiconductor market represents a substantial percentage of the
worldwide market and may pose additional challenges to penetrate successfully.
The Company believes that it must invest substantial resources in order to
increase its penetration of the Japanese semiconductor market and that, even
with such investments, there can be no assurance that it will be successful in
increasing its penetration of this market.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenue and operating results have fluctuated and are likely
to continue to fluctuate significantly from quarter to quarter, and there can be
no assurance as to future profitability.
The Company's 900 and 980 non-critical etch systems typically sell for
prices ranging between $350,000 and $500,000, while prices of the Company's 6500
series critical etch systems typically range between $1.8 million and $2.5
million. To the extent the Company is successful in selling 6500 series systems,
the sale of a small number of these systems will probably account for a
substantial portion of revenue in future quarters, and a transaction for a
single system could have a substantial impact on revenue and gross margin for a
given quarter.
The Company's backlog at the beginning of each quarter does not normally
include all systems sales needed to achieve planned revenue for the quarter.
Consequently, the Company depends on obtaining orders for shipment within a
particular quarter to achieve its revenue objectives for that period. Because
the Company builds a portion of its systems according to forecast, the absence
of significant backlog for an extended period of time could hinder the Company's
ability to plan expense, production and inventory levels, which could materially
adversely affect its operating results. Furthermore, a substantial portion of
the Company's net revenue has historically been realized near the end of the
quarter. Accordingly, the failure to receive anticipated orders or delays in
shipments near the end of a quarter, due, for example, to unanticipated customer
delays, cancellations or manufacturing difficulties, may cause quarterly net
revenue to fall significantly short of the Company's objectives, which could
materially adversely affect the Company's operating results.
The timing of new systems and technology announcement and releases by the
Company and others may also contribute to fluctuations in quarterly operating
results, including cases in which new systems or technology offerings cause
customers to defer ordering systems from the Company's existing product lines.
The Company's revenue and operating results may also fluctuate due to the timing
and mix of systems sold, the volume of service provided and spare parts
delivered in a particular quarter and changes in pricing by the Company, its
competitors or suppliers. The impact of these and other factors on the Company's
revenue and operating results in any future periods are, and will continue to
be, difficult for the Company to forecast.
The need for continued investment in research and development, for capital
equipment requirements and for extensive ongoing customer service and support
capability worldwide result in significant fixed costs which will be difficult
to reduce in the event that the Company does not meet its sales objectives. The
Company's expense levels are based, in part, on expectations of future revenue.
If revenue in a particular quarter does not meet expectations, fixed operating
expenses will adversely affect results of operations. A variety of factors
influence the level of revenue in a particular quarter. Those factors include
the timing and mix of systems sales, the introduction or announcement of new
systems by the Company or the Company's competitors, management decisions to
commence or discontinue product lines, the Company's ability to design,
introduce and manufacture new systems on a timely basis, the timing of research
and development expenditures and expenses attendant to the further development
of marketing, process support and service capabilities, specific economic
conditions in the semiconductor industry or major global semiconductor markets,
general economic conditions and exchange rate fluctuations. The impact of these
and other factors on the Company's revenue and operating results in any future
periods are, and will continue to be, difficult for the Company to forecast.
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CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY
The Company's business depends upon the capital expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and systems utilizing integrated circuits.
The semiconductor industry is highly cyclical and historically has experienced
periodic downturns, which often have had a material adverse effect on the
semiconductor industry's demand for semiconductor capital equipment, including
etch systems manufactured by the Company. The semiconductor industry is
currently experiencing such a slowdown. The current and prior semiconductor
industry downturns have adversely affected the Company's revenue, gross margins
and results of operations. In addition, the need for continued investment in
research and development, substantial capital equipment requirements, and
extensive ongoing customer service and support requirements worldwide will
continue to limit the Company's ability to reduce expenses in response to any
such downturn or slowdown. The Company's revenue, gross margin and results of
operations may continue to be materially adversely affected by the current
slowdown or by future downturns or slowdowns in the rate of capital investment
in the semiconductor industry. Moreover, although the semiconductor industry may
experience growth that causes significant growth in the semiconductor capital
equipment industry, there can be no assurance that such growth can be sustained
or that the Company will be positioned to benefit from such growth.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION
The semiconductor manufacturing industry is subject to rapid technological
change and new system introductions and enhancements. The Company believes that
its future success depends on its ability to continue to enhance its existing
systems and their process capabilities, and to develop and manufacture in a
timely manner new systems with improved process capabilities. The industry also
is subject to fundamental changes in equipment requirements, such as the recent
shift from six inch wafer equipment to eight inch wafer equipment and the
anticipated shift from eight inch wafer equipment to twelve inch wafer
equipment.
The Company must manage system transitions successfully, as introductions
of new systems could adversely affect sales of existing systems, including its
recently introduced 6500 series. There can be no assurance that the Company will
be successful in the introduction and volume manufacture of new systems or that
the Company will be able to develop and introduce, in a timely manner, new
systems or enhancements to its existing systems and processes which satisfy
customer needs or achieve market acceptance. In this regard, the Company did not
offer a competitive etch product for the recent generation of devices with 1.0
to 0.5 micron line geometries. The failure of the Company to accomplish any of
the above would adversely affect the Company's business, financial condition and
results of operations. In addition, the Company may incur substantial
unanticipated costs to ensure product functionality and reliability early in its
products' life cycles. If new products have quality or reliability problems, the
Company could experience reduced orders, delays in collecting accounts
receivable, higher manufacturing costs, and additional service and warranty
expenses, any of which could have a material adverse effect on the Company's
business, financial condition and operating results.
LENGTHY SALES CYCLE
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to add new manufacturing capacity or to
expand existing manufacturing capacity, both of which typically involve a
significant capital commitment. The Company often experiences delays in
finalizing system sales following initial system qualification while the
customer evaluates and receives approvals for the purchase of the Company's
systems and completes a new or expanded facility. Due to these and other
factors, the Company's systems typically have a lengthy sales cycle (often 12 to
18 months in the case of critical etch systems) during which the Company may
expend substantial funds and management effort. Lengthy sales cycles subject the
Company to a number of significant risks, including inventory obsolescence and
fluctuations in operating results over which the Company has little or no
control.
17
<PAGE> 19
IMPORTANCE OF "MIX AND MATCH" PURCHASING PHILOSOPHY TO NON-CRITICAL SYSTEM
SALES
A significant element of the Company's strategy is to sell its non-critical
etch systems to semiconductor manufacturers who have adopted a "mix and match"
purchasing philosophy to meet their non-critical etch process requirements. This
strategy depends, in significant part, upon the recognition by IC manufacturers
that costs can be minimized by purchasing more expensive, state of the art etch
systems for their critical etch process requirements and less expensive, but
reliable, etch systems for their non-critical etch process requirements, and the
willingness of such manufacturers to implement such a purchasing philosophy to
lower manufacturing costs. Many semiconductor manufacturers have limited or no
experience with integrating etch systems in the manner necessary for full
implementation and acceptance of a "mix and match" purchasing philosophy, and
there can be no assurance that semiconductor manufacturers will adopt such a
strategy. Also, there can be no assurance that certain of the Company's
competitors will not offer competitive non-critical etch systems to respond to
semiconductor manufacturers' non-critical etch needs. Any of these developments
could have a material adverse effect on the Company's business, financial
condition and results of operations.
FUTURE CAPITAL NEEDS
The development, manufacture and marketing of etch systems are highly
capital intensive. In order to be competitive, the Company must continue to make
significant expenditures for, among other things, capital equipment and the
manufacture of evaluation and demonstration unit inventory for its new 6500
series etch systems. The Company expects that its existing cash balances,
anticipated cash flow from operations and funds available under its existing
lines of credit will satisfy its financing requirements for the next twelve
months. To the extent that such financial resources are insufficient to fund the
Company's activities, additional funds will be required. There can be no
assurance that additional financing will be available on reasonable terms or at
all. To the extent that additional capital is raised through the sale of
additional equity or convertible debt securities, the issuance of such
securities could result in additional dilution to the Company's stockholders.
DEPENDENCE ON KEY EMPLOYEES
The future success of the Company is dependent, in part, on its ability to
retain certain key personnel, including Robert V. Hery, President and Chief
Executive Officer, and Stephen P. DeOrnellas, Vice President, Technology and
Corporate Development and Chief Technical Officer. Many of these key personnel
would be difficult to replace. The Company also needs to attract additional
skilled personnel in all areas of its business to grow. The competition for
these personnel is intense, and the loss of any such persons, as well as the
failure to recruit additional key personnel in a timely manner, could have a
material adverse effect on the Company's business, financial condition and
operating results. There can be no assurance that the Company will be able to
retain its existing personnel or attract additional qualified employees in the
future.
CUSTOMER CONCENTRATION
Although the composition of the group comprising the Company's largest
customers may vary from year to year, the loss of a significant customer or any
reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the semiconductor manufacturing
industry, may have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's ability to increase
its sales in the future will depend, in part, upon its ability to obtain orders
from new customers as well as the financial condition and success of its
existing customers and the general economy of which there can be no assurance.
ADDITIONAL RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
Sales of the Company's systems in certain countries are billed in local
currency, and the Company has two lines of credit denominated in Japanese Yen.
The Company generally attempts to offset a portion of its U.S. dollar
denominated balance sheet exposures subject to foreign exchange rate
remeasurement each period held by its foreign subsidiaries whose books are
denominated in currencies other than U.S. dollars by purchasing currency options
and forward currency contracts for future delivery. There can be no assurance
18
<PAGE> 20
that the Company's future results of operations will not be adversely affected
by foreign currency fluctuations. In addition, the laws of certain countries in
which the Company's products are sold may not provide the Company's products and
intellectual property rights with the same degree of protection as the laws of
the United States.
CONTROL BY EXISTING STOCKHOLDERS
The Company's principal stockholders and the Company's executive officers
and directors beneficially owned approximately 56.3% of the Company's
outstanding shares of common stock as of March 31, 1997. Accordingly, these
stockholders are able to elect all of the Company's directors and to determine
the outcome of corporate actions requiring stockholder approval, such as mergers
and acquisitions, regardless of how other stockholders of the Company may vote.
Such a high level of ownership by such persons or entities may have a
significant effect in delaying, deferring or preventing a change in control of
the Company and may adversely affect the voting and other rights of holders of
common stock. In addition to the foregoing, the ability of the Company's Board
of Directors to issue preferred stock without further stockholder approval or to
exercise the anti-takeover provisions of its Shareholder Rights Plan in the
event of an unsolicited attempt to assume control of the Company could have the
effect of delaying, deferring or preventing a change in control of the Company.
VOLATILITY OF STOCK PRICE
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's operating
results, sales of the Company's common stock into the market place, failure to
meet or changes in analysts' expectations, natural disasters, outbreaks of
hostilities, general conditions in the semiconductor industry or the worldwide
economy, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in patents or other
intellectual property rights and developments in the Company's relationships
with its customers and suppliers could cause the price of the Company's common
stock to fluctuate, perhaps substantially. In addition, in recent years the
stock market in general, and the market for shares of small capitalization
stocks in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. There
can be no assurance that the market price of the Company's common stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance.
ITEM 2. PROPERTIES
The Company maintains its headquarters, encompassing its executive office,
manufacturing, engineering, research and development operations, in one leased
120,000 square foot facility in Petaluma, California. The Company currently
occupies 90,000 square feet of this building, with the remaining portion sublet
or being offered for sublet. The lease expires in March 2004. Other than certain
large pieces of capital equipment leased by the Company, the Company owns
substantially all of the machinery and equipment used in its facilities. The
Company believes that its existing facilities are adequate to meet its
requirements for several years.
The Company leases sales, service and process support space in Phoenix,
Arizona; Sunnyvale, California; Austin, Texas; Paris, France; Munich, Germany;
Kawasaki, Japan; Catania, Italy; Seoul, Korea and Hsin Chu City, Taiwan. The
Company also leases space for administrative offices in Hoofddorp, The
Netherlands.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended March 31, 1997.
19
<PAGE> 21
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers of the Company as of June 13, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --- -----------------------------------------------------
<S> <C> <C>
Robert V. Hery 54 Chairman of the Board, President and Chief Executive
Officer
David Curtis 43 Vice President, Finance and Administration, Chief
Financial Officer, Secretary and Treasurer
Stephen P. DeOrnellas 42 Vice President, Technology and Corporate Development
and Chief Technical Officer
Diane M. Fennell 52 Vice President, Marketing and Customer Applications
Support
George B. Landreth 42 Vice President, Product Development
James D. McKibben 46 Vice President, Worldwide Sales
Mark L. Siegel 59 Vice President, Worldwide Customer Support and
Operations
</TABLE>
Robert V. Hery has been a Director of the Company since 1990 and assumed
the additional roles of President and Chief Executive Officer in January 1991
and Chairman of the Board in March 1995. From 1987 to 1990, Mr. Hery was
President and Chief Executive Officer of AMOT Controls Corporation, an
international manufacturer of machinery control components used in explosive and
hazardous areas. From 1985 to 1987, Mr. Hery served as Vice President and
General Manager of KLA Instruments Corporation ("KLA"), a manufacturer of
semiconductor capital equipment, where he started the Wafer Inspection Systems
Division. Prior to 1985, Mr. Hery held numerous posts as a marketing
troubleshooter, marketing and new business development, manufacturing and
product development executive positions, principally in the computer industry.
David Curtis joined the Company in August 1991 as Vice President of Finance
and Administration and Chief Financial Officer and from May 1995 until June
1996, he assumed the additional role of Vice President of Operations. Prior to
joining the Company, Mr. Curtis served as Chief Financial Officer of AMOT
Controls Corporation from 1988 until 1991. Prior to 1991, he held consulting
positions with Pittiglio Rabin Todd and McGrath, an operations consulting firm
specializing in implementing planning and control processes in rapidly growing
technology companies and with Arthur Andersen & Co.'s systems consulting
division.
Stephen P. DeOrnellas joined the Company in July 1990 as Vice President of
Marketing and Technology, served as Vice President of Process Technology from
April 1995 until June 1996, at which time he was appointed Vice President,
Technology and Corporate Development and Chief Technical Officer. From 1989 to
1990 he was Vice President of Marketing for the Wafer Inspection Systems
Division of KLA. From 1981 to 1989 he held a variety of product development and
marketing management positions, including Vice President Marketing from 1987 to
1989, Vice President of Process Engineering from 1983 to 1987, and Senior
Process Engineer from 1981 to 1983, with Lam Research Corporation where he had
responsibility for the development and introduction of the Lam Autoetch and
Rainbow product lines.
Diane M. Fennell joined the Company in January 1997 as Vice President,
Marketing and Customer Applications Support. From 1995 to 1996, Ms. Fennell was
Group Manager of Product Management for Unit Instruments responsible for
introducing several new products. From 1991 to 1995, she owned and operated
Fennell Associates, Inc., a sales representative organization representing
multiple lines of semiconductor capital equipment and capital equipment
components to the semiconductor and capital equipment industries. From 1987 to
1991, Ms. Fennell held product marketing and sales support management positions
with LAM Research Corporation. Prior to 1987, she held several process
engineering and lab manager positions with Applied Materials, Inc., Temescal,
Signetics Corporation and Texas Instruments.
George B. Landreth joined the Company in November 1992 as Manager of
Mechanical Engineering where he was responsible for directing the development of
the Company's 6500 series critical etch systems platform. From June 1996 until
April 1997 he served as Director of Program Development, at which time he
20
<PAGE> 22
was promoted to Vice President, Product Development. Prior to joining the
Company, Mr. Landreth held product development engineering management and design
engineering positions with KLA, Silicon Valley Group, Inc., Optoscan
Corporation, Eaton Corporation, Siltec Corporation and Peterbilt Motors.
James D. McKibben joined the Company in June 1996 as Vice President,
Worldwide Sales. From July 1996 until January 1997 he assumed the additional
role of Vice President, Marketing and Customer Applications Support. Prior to
joining the Company, from 1995 to 1996 and from 1988 to 1992, Mr. McKibben was
Vice President, Marketing, Sales and Customer Support for MRS Technology, Inc.,
a lithography equipment manufacturer for flat panel displays. From 1993 to 1995,
he served as Director of Marketing and Sales for Semiconductor Systems, Inc., a
maker of capital equipment for the flat panel display and large area multichip
module markets. From 1992 to 1993, he was Regional Manager for Kulicke and Soffa
Industries, Inc., a maker of wire bonders and other back-end assembly equipment
for the IC industry. Prior to 1988, Mr. McKibben held several sales and service
management positions with Wild/Lietz, Inc., GCA Corporation and J.T. Baker
Chemical Company.
Mark L. Siegel joined the Company in June 1996 as Vice President,
Operations. In April 1997, he assumed the additional role of Vice President of
Worldwide Customer Support responsible for the Company's field service, spare
parts and refurbished systems businesses. From 1991 to 1996 he was Vice
President, Operations at Megatest Corporation up through its merger with
Teradyne Corporation. From 1989 to 1991 he served as President of Semiconductor
Systems, a unit of General Signal and a semiconductor capital equipment company.
From 1987 to 1989 he served as Vice President and General Manager for VLSI
Technology, Inc.'s ASIC Memory Division and from 1984 to 1987, was Vice
President and General Manager of Signetics Corporation's Application Specific
Products Division. Prior to 1984, Mr. Siegel held several senior management
positions with, Motorola, Inc., Xerox and Univac.
21
<PAGE> 23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Since October 19, 1995, Tegal's common stock has been traded on the Nasdaq
National Market System under the symbol TGAL. The following table sets forth the
range of high and low sales prices for the Company's common stock for the
periods indicated since the Company's initial public offering on October 19,
1995.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C> <C> <C>
FISCAL YEAR 1996
Third Quarter........................................ 13 7/8 9 1/4
Fourth Quarter....................................... 10 1/2 6 7/8
FISCAL YEAR 1997
First Quarter........................................ 11 1/8 6 3/8
Second Quarter....................................... 8 4 5/8
Third Quarter........................................ 6 5/8 4 1/2
Fourth Quarter....................................... 9 1/8 4 3/4
</TABLE>
The approximate number of record holders of the Company's common stock as
of March 31, 1997 was 156. Tegal has not paid any cash dividends since its
inception and does not anticipate paying cash dividends in the foreseeable
future. Further, the Company's domestic lines of credit restrict the declaration
and payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue............................. $57,423 $62,046 $ 44,645 $ 38,022 $ 42,777
Gross profit........................ 25,901 28,577 20,583 16,508 19,458
Operating income (loss)............. 3,180 6,572 1,376 (1,072) 2,705
Income (loss) before income taxes... 4,180 6,186 949 (1,501) 1,792
Net income (loss)................... 3,140 5,566 828 (1,501) 1,526
Net income per share................ $ .29 $ .63 $ .11
Shares used in per share
computation...................... 10,710 8,899 7,373
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........... $30,323 $23,283 $ 2,351 $ 3,462 $ 7,396
Working capital..................... 45,392 41,726 11,432 11,297 11,690
Total assets........................ 63,524 64,672 33,744 27,468 24,008
Short-term notes payable to banks
and others....................... 252 243 8,164 3,947 0
Long-term obligations............... 301 356 4,338 3,749 3,295
Redeemable preferred stock.......... 0 0 21,695 22,382 22,207
Stockholders' equity (deficit)...... 50,542 47,626 (11,633) (12,018) (10,196)
</TABLE>
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
22
<PAGE> 24
variations thereon or comparable terminology or which constitute projected
financial information. The following contains cautionary statements identifying
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the years
indicated as a percentage of revenue:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Revenue............................................. 100.0% 100.0% 100.0%
Cost of sales....................................... 54.9 53.9 53.9
----- ----- -----
Gross profit........................................ 45.1 46.1 46.1
Operating expenses:
Research and development.......................... 18.3 16.1 18.1
Sales and marketing............................... 10.8 10.7 14.3
General and administrative........................ 10.5 8.7 10.7
----- ----- -----
Total operating expenses.................. 39.6 35.5 43.1
----- ----- -----
Operating income.................................... 5.5 10.6 3.0
Other income (expense), net......................... 1.7 (0.6) (1.0)
----- ----- -----
Income before income taxes.......................... 7.2 10.0 2.0
Provision for income taxes.......................... 1.7 1.0 0.3
----- ----- -----
Net income................................ 5.5% 9.0% 1.7%
===== ===== =====
</TABLE>
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
Revenue
The Company's revenue is derived from sales of new and refurbished systems,
spare parts and non-warranty service. Revenue increased 39.0 percent from $44.6
million in fiscal 1995 to $62.0 million in fiscal 1996, and declined 7.4 percent
to $57.4 million in fiscal 1997. Revenue growth in fiscal 1996 as compared to
fiscal 1995 occurred principally due to increased customer acceptance of the
Company's new 6500 series critical etch systems and its new eight inch wafer
capable non-critical etch systems. Spare parts sales grew substantially in
fiscal 1996 due to the Company shifting its sales from a distributor arrangement
to direct sales of spare parts in Taiwan and an expansion in the Company's
installed base of systems. The revenue decline in fiscal 1997 as compared to
fiscal 1996 was principally attributable to a decline in the number of
non-critical etch systems sold as the semiconductor industry curtailed its
capital equipment expenditures for capacity expansion in the face of an
industry-wide over-supply of manufacturing capacity. The Company's sales of
spare parts also declined in fiscal 1997 over fiscal 1996, which the Company
believes was primarily caused by customers depleting their supplies of spare
parts during the industry slowdown. Revenues derived from the sale of the
Company's 6500 series critical etch systems continued to increase as a result of
both increased unit sales and higher average selling prices in fiscal 1997,
partially offsetting the declines experienced in non-critical etch systems and
spare parts sales. International sales accounted for approximately 69 percent of
total revenue in fiscal 1997, and 63 percent in fiscal 1996 and 1995. The
Company expects that international sales will continue to account for a
significant portion of its revenue.
Gross Profit
The Company's gross profit as a percentage of revenue declined from 46.1
percent in fiscal 1995 and fiscal 1996 to 45.1 percent in fiscal 1997. The gross
profit percentage in fiscal 1996 was the same as that in fiscal 1995 as a result
of start-up inefficiencies on the new 6500 series etch system, which were
offset, in part, by improved manufacturing efficiencies associated with
spreading substantially fixed manufacturing overhead over a larger revenue
volume. The Company also had a more favorable product mix, due principally to an
23
<PAGE> 25
increase in sales of the Company's mature four- to six-inch wafer capable 900
series etch systems and spare parts, which carry higher gross profits. The one
point decline in gross profit as a percentage of revenue in fiscal 1997 over
fiscal 1996 was principally attributable to a change in product mix in which
sales of non-critical etch systems and spare parts, which carry higher gross
margins, declined and sales of the Company's 6500 series systems, which continue
to carry lower start-up related gross margins, increased.
The Company's gross profit as a percentage of revenue has been, and will
continue to be, affected by a variety of factors, including the mix and average
selling prices of systems sold and the costs to manufacture, service and support
new product introductions and enhancements. Gross margins for the Company's new
systems are typically lower than those of its more mature products due to the
inefficiencies associated with the start-up of manufacturing operations, smaller
vendor discounts due to lower order volumes and increased service installation
and warranty support. As a result of such factors, an anticipation that the
product mix change toward the lower margin 6500 series etch systems is likely to
continue, and an anticipation that demand for its non-critical etch systems is
not likely to recover until late calendar year 1997 or early 1998, the Company
does not expect that its gross margin for fiscal 1998 is likely to improve over
the fiscal 1997 level.
Research and Development
Research and development expenses consist primarily of salaries, prototype
material and other costs associated with the Company's research and product
development efforts. In absolute dollars, research and development expenses
increased from $8.1 million in fiscal 1995 to $10.0 million in fiscal 1996 and
$10.5 million in fiscal 1997. Nevertheless, research and development as a
percentage of revenue decreased from 18.1 percent in fiscal 1995 to 16.1 percent
in fiscal 1996 as revenues increased more rapidly than research and development
expenses and increased to 18.3 percent in fiscal 1997, as the Company continued
to enhance and support its new 6500 series systems in spite of the overall
revenue decline in fiscal 1997. The absolute dollar increase in fiscal 1996
expenses compared to fiscal 1995 was primarily attributable to the hiring of
additional personnel to staff ongoing and new product development, product
enhancement and applications engineering support, particularly for recently
introduced products and for increased prototype material spending. The absolute
dollar increase in fiscal 1997 expenses over fiscal 1996 expenses was
attributable to the hiring of additional personnel in the applications
engineering customer support area and increased spending on prototype material
for product enhancement programs. The Company anticipates that fiscal 1998
research and development expenses in absolute dollars will continue at or
increase slightly from fiscal 1997 levels to permit the Company to support new
product applications at its new 6500 series customer installations and to
further enhance that product line.
Sales and Marketing
Sales and marketing expenses primarily consist of salaries, commissions,
trade show promotion and advertising expenses. In absolute dollars, sales and
marketing expenses increased from $6.4 million in fiscal 1995 to $6.6 million in
fiscal 1996, and declined to $6.2 million in fiscal 1997. As a percentage of
revenue, sales and marketing expenses declined from 14.3 percent in fiscal 1995
to 10.7 percent in fiscal 1996 and remained at approximately the same level in
fiscal 1997 at 10.8 percent. The increase in sales and marketing expenses in
absolute dollars in fiscal 1996 over fiscal 1995 was attributable principally to
the growth in revenue offset, in part, by a reduction in third party
representative commissions as the Company shifted to a direct sales organization
in Taiwan and as the systems sales mix shifted toward customers and regions
where the Company sells via direct sales engineers, whose commission rates are
lower than those of third party sales representative organizations. The decline
in sales and marketing expenses in fiscal 1997 over fiscal 1996 was principally
due to a decline in systems sales volume, resulting in lower commission spending
and to reduced spending on advertising. The Company expects to increase its
absolute dollar spending on sales and marketing in fiscal 1998 to fund further
advertising and to hire several additional sales and marketing persons.
General and Administrative
General and administrative expenses consist of salaries, legal, accounting
and related administrative services and expenses associated with general
management, finance, information systems, human resources and investor relations
activities. General and administrative expenses in absolute dollars increased
from $4.8 million in fiscal 1995 to $5.4 million in fiscal 1996, and to $6.0
million in fiscal 1997. As a percentage of revenues, general and administrative
expenses decreased from 10.7 percent in fiscal 1995 to 8.7 percent in
24
<PAGE> 26
fiscal 1996, and increased to 10.5 percent of revenues in fiscal 1997. The
increase in general and administrative expenses in fiscal 1996 as compared to
fiscal 1995 was attributable to increased legal, auditing and insurance expenses
associated with the additional, ongoing expenses incurred as a public company,
which commenced in the second half of fiscal 1996, and to outside consulting and
training expenses incurred to upgrade the Company's business systems in the
second half of fiscal 1996. The increase in general and administrative expenses
in fiscal 1997 over fiscal 1996 was attributable to the Company incurring the
expenses of being a public company for the full year of fiscal 1997 that only
partially impacted fiscal year 1996. In addition, the Company incurred
approximately $0.2 million in the first quarter of fiscal 1997 to complete the
business system upgrade begun in late fiscal 1996. The Company anticipates that
its general and administrative expenses for fiscal 1998 will be approximately
the same as fiscal 1997 spending.
Other Income (Expense), Net
Other income (expense), net, consists principally of interest income,
interest expense, and gains and losses on foreign exchange and the sale of fixed
assets. The Company recorded net non-operating expenses of $0.4 million in
fiscal 1995 and 1996 and net non-operating income of $1.0 million in fiscal
1997. In fiscal 1995, such expenses were primarily attributable to interest
expense incurred on outstanding loan balances. In fiscal 1996, such expenses
reflected interest expenses incurred on loan balances outstanding through the
Company's IPO in the middle of fiscal 1996 and foreign exchange losses offset,
in part, by interest income on the unused portion of the proceeds from the
public offering. In fiscal 1997, net non-operating income was primarily
attributable to interest income on outstanding cash balances.
Provision for Income Taxes
The Company's effective tax rate was 12.8 percent, 10.0 percent and 25.0
percent in fiscal 1995, 1996 and 1997, respectively. Effective tax rates for
these three years have been materially lower than the statutory tax rate due to
extensive operating loss carryforwards generated in prior years. As a result of
a recent review of its tax position, the Company expects that its effective tax
rate for fiscal 1998 will not exceed 20 percent of income before income taxes.
Liquidity and Capital Resources
For fiscal 1997, the Company financed its operations through cash generated
from operations. In fiscal 1996, the Company financed its operations through
bank borrowings and net proceeds from its IPO.
Operating activities generated approximately $9.1 million in cash flow for
fiscal 1997 as the Company generated approximately $5.5 million from net income,
depreciation and amortization expenses, with the balance derived principally
from a reduction in working capital as the Company's second half of fiscal
1997's sales volume was lower than the comparable period in the prior year.
Operating activities generated approximately $0.2 million in cash flow for
fiscal 1996. Approximately $5.4 million of net cash was generated from net
income plus depreciation, senior term loan accretion, purchase credit
redemptions and accounts receivable reserve accruals, which was almost entirely
offset by increases in working capital due to the Company's increased sales
volume in that year.
Net cash used in investing activities in fiscal 1997 was $1.4 million for
capital expenditures including the purchase of analytical equipment used in
research and development, customer service and manufacturing, leasehold
improvements and computer equipment. Net cash used in investing activities for
fiscal 1996 was $2.1 million for similar purposes.
As of March 31, 1997, the Company had approximately $30.3 million of cash
and cash equivalents. In addition, the Company's other principal sources of
liquidity consisted of the unused portions of several bank borrowing facilities.
The Company has available two domestic bank lines of credit totaling $13.0
million that are available until August 15, 1997. At March 31, 1997, both
domestic credit lines were unused, providing $13.0 million of available
borrowing capacity. In April 1997, the Company executed commitment letters with
two banks to increase its domestic borrowing facilities to a maximum of $20.0
million for one year from the execution of loan documents. The Company expects
to execute those loan documents in August 1997. In addition to the foregoing
facilities, as of March 31, 1997, the Company's Japanese subsidiary had
available 569 million Yen (approximately $4.6 million at exchange rates
prevailing at March 31, 1997) unused under two lines of credit for a maximum of
600 million Yen (approximately $4.8 million at exchange rates prevailing
25
<PAGE> 27
at March 31, 1997) with two Japanese banks, secured by customer promissory notes
held by such subsidiary in advance of payment on customers' accounts receivable.
The Company believes that anticipated cash flow from operations, existing
cash and cash equivalent balances and funds available under its lines of credit
will be sufficient to meet the Company's cash requirements for at least the next
12 months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto appear on this Form
10-K according to the following Index of Consolidated Financial Statements:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of March 31, 1997 and 1996............. 30
Consolidated Statements of Operations for the years ended March 31,
1997, 1996 and 1995................................................. 31
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended March 31, 1997, 1996 and 1995........................... 32
Consolidated Statements of Cash Flows for the years ended March 31,
1997, 1996 and 1995................................................. 33
Notes to Consolidated Financial Statements............................ 34
Independent Accountants' Report....................................... 44
Independent Auditors' Report.......................................... 45
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
KPMG Peat Marwick, LLP ("KPMG") served as the Company's auditors and
advised the Company on federal, state and local tax matters from December 1989
through December 16, 1996. On December 17, 1996, the Company reported on a Form
8-K the following:
(i) On December 17, 1996, the Company dismissed KPMG as its
independent accountants.
(ii) The reports of KPMG on the financial statements of the Company
for each of the prior two fiscal years contained no adverse
opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle.
(iii) The Company's Audit Committee and full Board of Directors
participated in and approved the decision to change independent
accountants.
(iv) During the Company's two prior fiscal years and through the date
of the Form 8-K, the Company had no disagreements with KPMG on
any matter of accounting principles or practices, financial
statement disclosure or auditing scope and procedure, which
disagreements if not resolved to the satisfaction of KPMG would
have caused them to make reference thereto in their report on the
financial statements of the Company for such years, except for
the disagreement over auditing scope and procedure described
below.
In June 1996, the Company's management disagreed with KPMG over an
issue of auditing scope and procedure. KPMG asked the Company to
confirm an accounts receivable balance which Company management felt
did not need to be confirmed in the manner requested by KPMG.
However, the Company subsequently did obtain the required
confirmation. Nevertheless, the objection of Company management may
be deemed a disagreement over audit scope and procedure as defined by
SEC rules. The Company has subsequently received payment for all of
the invoice in question.
The Audit Committee met and discussed via teleconference the above
described disagreement over audit scope and procedure with KPMG on
August 5, 1996.
(iv) During the Company's two most recent fiscal years and through the
date of its Form 8-K, the Company had no reportable events (as
defined in Item 304 (a) (1) (v) of Regulation S-K).
26
<PAGE> 28
(vi) The Company requested that KPMG furnish it with a letter
addressed to the SEC stating whether or not it agreed with the
above statements. A copy of such letter, dated December 17, 1996,
was filed as Exhibit 16 to that Form 8-K.
(vii) The Company engaged Price Waterhouse LLP as its new independent
accountants as of December 17, 1996. During the two most recent
fiscal years and through the date of the Form 8-K, the Company
had not consulted with Price Waterhouse LLP on items which (1)
were or should have been subject to SAS 50 or (2) concerned the
subject matter of a disagreement or reportable event with KPMG
(as described in Item 304 (a) (2) Regulation S-K). The Company
has authorized KPMG to respond fully to the inquiries of Price
Waterhouse LLP, with respect to the disagreement summarized
above.
In connection with the filing of this Form 10-K, the Company requested KPMG
to consent to the inclusion of its reports on the Company's consolidated
financial statements and the related consolidated financial statement schedule
as of March 31, 1996 and for each of the years in the two year period then ended
to be incorporated by reference in the Company's Registration Statement on Form
S-8, which reports are included in this Form 10-K. Such consent is required with
respect to filings, including the Company's Form S-8, under the Securities Act
of 1933, as amended (the "1933 Act"). KPMG informed the Company that it would
not consent to the inclusion of its reports unless the Company indemnifies KPMG
against and from any and all losses, claims, damages or liabilities
(collectively, the "Claims") to which it may become subject in connection with
its consent under federal securities laws or other statutes, common law or
otherwise; provided, however, that KPMG would not be indemnified to the extent
such Claims result from a court adjudication finding KPMG guilty of professional
malpractice. In order to be able to file the Company's Form S-8, the Company has
agreed to KPMG's request for indemnification.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement under the caption
"Election of Directors."
The information required by this Item relating to the Company's executive
officers is included under the caption "Executive Officers of the Registrant" in
Part I, Item 4, of this Form 10-K Report.
The information regarding compliance with Section 16(a) of the Securities
and Exchange Act of 1934, as amended, is incorporated by reference to the
Company's Proxy Statement under the caption "Compliance with Section 16(a) of
the Exchange Act".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Certain Transactions."
27
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K Report:
(1) Financial Statements
See Index to Consolidated Financial Statements at page 26 of this
Report.
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included
herein:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts...................... S-1
Independent Accountants' Report on Schedule........................... S-2
Independent Auditors' Report on Schedule.............................. S-3
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required, not applicable, or the required information is
shown in the consolidated financial statements or related notes.
(3) Exhibits
The following exhibits are referenced or included in this report:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- --------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant, as amended (incorporated by
reference to Exhibits 3(i).1 and 3(i).2 included in Registrant's Registration
Statement on Form S-1 (File No. 33-84702) declared effective by the Securities
and Exchange Commission on October 18, 1995)
3.2 By-laws of Registrant (incorporated by reference to Exhibit 3(ii) included in
Registrant's Registration Statement on Form S-1 (File No. 33-84702) declared
effective by the Securities and Exchange Commission on October 18, 1995)
*4.1 Form of Certificate For Common Stock
*4.2 Information and Registration Rights Agreement between the Registrant and the
investors listed on Schedule A thereto dated December 19, 1989, as amended to
date
*4.3 Imperial Bank Warrant issued by the Registrant, dated as of March 14, 1995
*10.1 Amended and Restated Equity Incentive Plan
*10.2 1990 Stock Option Plan
*10.4 Employee Qualified Stock Purchase Plan
*10.5 Stock Option Plan for Outside Directors
*10.6 Amended and Restated Agreement of Purchase and Sale between the Registrant,
Nazem & Company III, L.P. and Motorola, Inc. dated December 18, 1989
*10.7 Restructuring Agreement between the Registrant and Motorola, Inc. Dated October
31, 1991
*10.8 Conversion Agreement between the Registrant and Motorola, Inc. dated August 31,
1994 and amendment thereto dated August 8, 1995
*10.10 Employment Letter Agreement between the Registrant and Stephen P. DeOrnellas
dated April 30, 1990
*10.11 Lease dated August 15, 1986, as amended, between the Registrant and South
McDowell Investments
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- --------------------------------------------------------------------------------
<S> <C>
*10.12 Technology License Agreement between the Registrant and Motorola, Inc. dated
December 19, 1989
*10.14 Security and Loan Agreement between the Registrant and Imperial Bank dated as of
August 15, 1995
*10.15 Supplemental Source Code License Agreement with the Registrant and Realtime
Performance, Inc. dated as of November 1, 1991
*10.16 Incentive Stock Option Agreement between the Registrant and Robert V. Hery dated
as of September 28, 1993
10.17 Lease Amendment dated March 10, 1997, between Registrant and South McDowell
Investments
11 Statement of Computation of Net Income Per Share
16 Letter of KPMG Peat Marwick dated December 17, 1996 incorporated by reference to
Exhibit 16 included in the Company's Form 8-K dated December 17, 1996
*21 List of Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
23.2 Consent of Independent Auditors
24.1 Power of Attorney (included on page 46 of this Report)
</TABLE>
- ---------------
* Incorporated by reference to identically numbered exhibits included in
Registrant's Registration Statement on Form S-1 (File No. 33-84702) declared
effective by the Securities and Exchange Commission on October 18, 1995.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the Company's fourth quarter
ended March 31, 1997.
29
<PAGE> 31
TEGAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1996
------- -------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $30,323 $23,283
Accounts receivable, less allowance for doubtful accounts of $764 and
$453................................................................ 12,322 16,191
Inventory.............................................................. 13,154 16,947
Prepaid expenses and other current assets.............................. 2,274 1,995
------- -------
Total current assets........................................... 58,073 58,416
Property and equipment, net.............................................. 5,298 6,027
Other assets, net........................................................ 153 229
------- -------
$63,524 $64,672
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.......................................................... $ 252 $ 243
Accounts payable....................................................... 3,442 4,700
Accrued expenses and other current liabilities......................... 8,987 11,747
------- -------
Total current liabilities...................................... 12,681 16,690
Long term portion of capital lease obligations........................... 301 356
------- -------
Total liabilities.............................................. 12,982 17,046
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.01 par value; 5,000,000 shares authorized.......... -- --
Common stock; $0.01 par value; 35,000,000 shares authorized; 10,279,721
and 10,064,404 shares issued and outstanding........................ 103 101
Additional paid-in capital............................................. 54,821 54,455
Cumulative translation adjustment...................................... 23 615
Accumulated deficit.................................................... (4,405) (7,545)
------- -------
Total stockholders' equity..................................... 50,542 47,626
------- -------
$63,524 $64,672
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 32
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenue....................................................... $57,423 $62,046 $44,645
Cost of sales................................................. 31,522 33,469 24,062
------- ------- -------
Gross profit........................................ 25,901 28,577 20,583
------- ------- -------
Operating expenses:
Research and development.................................... 10,531 10,000 8,065
Sales and marketing......................................... 6,182 6,622 6,366
General and administrative.................................. 6,008 5,383 4,776
------- ------- -------
Total operating expenses............................ 22,721 22,005 19,207
------- ------- -------
Operating income.................................... 3,180 6,572 1,376
Other income (expenses), net.................................. 1,000 (386) (427)
------- ------- -------
Income before income taxes............................... 4,180 6,186 949
Provision for income taxes.................................... 1,040 620 121
------- ------- -------
Net income.......................................... $ 3,140 $ 5,566 $ 828
======= ======= =======
Net income per share.......................................... $ .29 $ .63 $ .11
======= ======= =======
Shares used in per share computation.......................... 10,710 8,899 7,373
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 33
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
--------------------- PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENTS DEFICIT EQUITY (DEFICIT)
---------- ------ ---------- ---------- ----------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1994..... 457,097 $ 5 $ 106 $ 548 $ (12,677) $(12,018)
Common stock issued.......... 39,398 -- 17 -- -- 17
Exercise of common stock
warrants.................. 154,285 2 -- -- -- 2
Cumulative translation
adjustment................ -- -- -- 391 -- 391
Accretion of Series B
preferred stock........... -- -- -- -- (853) (853)
Net income................... -- -- -- -- 828 828
----------- ----- -------- ---- -------- --------
Balances at March 31, 1995..... 650,780 7 123 939 (12,702) (11,633)
Common stock issued under
option and stock purchase
plans..................... 358,245 3 124 -- -- 127
Net proceeds from IPO........ 3,179,300 32 34,153 -- -- 34,185
Contribution of paid-in
capital through conversion
of Motorola preferred
stock..................... -- -- 891 -- -- 891
Conversion of redeemable
preferred stock to common
stock at IPO.............. 5,876,079 59 19,164 -- -- 19,223
Cumulative translation
adjustment................ -- -- -- (324) -- (324)
Accretion of Series B
preferred stock........... -- -- -- -- (409) (409)
Net income................... -- -- -- -- 5,566 5,566
----------- ----- -------- ---- -------- --------
Balances at March 31, 1996..... 10,064,404 101 54,455 615 (7,545) 47,626
Common stock issued under
option and stock purchase
plans..................... 215,317 2 366 -- -- 368
Cumulative translation
adjustment................ -- -- -- (592) -- (592)
Net income................... -- -- -- -- 3,140 3,140
----------- ----- -------- ---- -------- --------
Balances at March 31, 1997..... 10,279,721 $103 $ 54,821 $ 23 $ (4,405) $ 50,542
=========== ===== ======== ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 34
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 3,140 $ 5,566 $ 828
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Deferred tax asset............................................... (638) (900) --
Depreciation and amortization.................................... 2,349 1,435 1,050
Accretion of senior term loan.................................... -- 303 485
Purchase credit for preferred stock redemptions.................. (1,587) (1,857) (1,540)
Allowance for doubtful accounts and sales return allowances...... 311 (22) 261
Changes in operating assets and liabilities:
Accounts receivable........................................... 3,559 (1,540) (3,647)
Inventory..................................................... 3,967 (6,509) (3,681)
Prepaid expenses and other current assets..................... 435 207 (53)
Accounts payable and other current liabilities................ (2,467) 3,474 1,717
------- ------- -------
Net cash provided by (used in) operating activities......... 9,069 157 (4,580)
------- ------- -------
Cash flows used in investing activities for the purchases of property
and equipment......................................................... (1,427) (2,067) (1,037)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock................................ 368 34,312 19
Borrowings under (repayments of) notes payable........................ 9 (7,922) 4,217
Repayment of capital lease financing.................................. (386) (224) (121)
Repayment of long-term debt........................................... -- (3,000) --
------- ------- -------
Net cash provided by (used in) financing activities........... (9) 23,166 4,115
Effect of exchange rates on cash and cash equivalents................... (593) (324) 391
------- ------- -------
Net increase (decrease) in cash and cash equivalents.................... 7,040 20,932 (1,111)
Cash and cash equivalents at beginning of year.......................... 23,283 2,351 3,462
------- ------- -------
Cash and cash equivalents at end of year................................ $30,323 $23,283 $ 2,351
======= ======= =======
Supplemental disclosures of cash paid during the year:
Interest.............................................................. $ 118 $ 605 $ 348
======= ======= =======
Income taxes.......................................................... $ 1,727 $ 45 $ 90
======= ======= =======
Supplemental disclosure of noncash investing and financing activities:
Accretion of Series B preferred stock................................. $ -- $ 409 $ 853
======= ======= =======
Transfer of demo lab equipment from inventory to fixed assets......... $ 127 $ 2,230 $ --
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 35
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Tegal Corporation (the "Company") designs, manufactures, markets, and
services plasma etch systems used in the fabrication of integrated circuits.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. Intercompany transactions and balances are
eliminated in consolidation. Accounts denominated in foreign currencies are
translated using the foreign currencies as the functional currencies. Assets and
liabilities of foreign operations are translated to U.S. dollars at current
rates of exchange and revenues and expenses are translated using weighted
average rates. Gains and losses from foreign currency translation are included
as a separate component of other income (expense).
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles. This
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could vary
from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to fiscal 1997
financial statement presentation.
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, 1997 and 1996, all of the Company's investments are classified
as cash equivalents on the balance sheet. The investment portfolio at March 31,
1997 and 1996, is comprised of money market funds. At March 31, 1997 and 1996,
the fair value of the Company's investments approximated cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including
accounts receivable, approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of temporary cash investments,
and accounts receivable. Substantially all of the Company's temporary
investments are invested in money market funds. The Company's accounts
receivable are derived primarily from sales to customers located in the U.S.,
Europe, and the Far East. The Company performs ongoing credit evaluations of its
customers and generally requires no collateral. The Company maintains reserves
for potential credit losses. Write-offs during the periods presented have been
insignificant. As of March 31, 1997, two customers accounted for approximately
22% and 14% of the accounts receivable balance. As of March 31, 1996, two
customers accounted for approximately 21% and 11% of the accounts receivable
balance.
34
<PAGE> 36
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
INVENTORY
Inventory is stated at the lower of cost or market, with cost being
determined under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets,
ranging from three to seven years. Leasehold improvements are stated at cost and
are amortized using the straight-line method over the shorter of the estimated
useful life of the improvements or the lease term.
FOREIGN EXCHANGE HEDGING
At March 31, 1997, the Company had forward exchange contracts maturing at
various dates throughout fiscal 1998 to exchange 468,000 Yen into $4,290. The
Company uses hedge accounting to account for these contracts as they are a hedge
against currency exposures related to firm sales commitments. The fair value of
these instruments at March 31, 1997 was 532,000 Yen. The counterparties to these
contracts consist of U.S. financial institutions.
The Company enters into foreign exchange options to hedge partially net
accounts receivable or payable U.S. dollar positions on the books of its
subsidiaries which are subject to periodic remeasurement. Foreign exchange
options permit, but do not require, the Company to exchange currencies at a
future date with another party at a contracted exchange rate. The expense of the
premiums paid for such options is amortized on a straight-line basis over the
term of the option (generally two to three months in duration) as a foreign
currency expense. Gains on the options that offset any losses on the underlying
balance sheet exposures are recognized as a foreign exchange gain over the term
of the options. To date, foreign currency gains on foreign exchange options have
been immaterial, and the only expenses incurred have been the premium cost of
the options. At March 31, 1997, the Company had no foreign exchange options
outstanding.
REVENUE RECOGNITION
Product revenue is recognized generally upon shipment, except in Japan
where revenue is generally recognized upon delivery. A provision for
installation costs and estimated future warranty costs is recorded at the time
revenue is recognized. Service revenue is recognized on a monthly basis as
billed, unless services are paid for in advance according to service contracts,
in which case revenue is deferred and recognized over the service period using
the straight-line method.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares for the year ended March 31, 1997 consist of stock options
using the treasury stock method except when antidilutive. Common equivalent
shares for the years ended March 31, 1996 and 1995 consist of common stock
issuable upon the conversion of the Company's mandatorily redeemable convertible
preferred stock using the as if converted method and stock options and warrants
using the treasury stock method, except when antidilutive. Pursuant to the
requirements of the Securities and Exchange Commission, common stock equivalent
shares relating to stock options and warrants using the treasury stock method,
and the mandatorily redeemable convertible preferred stock using the as if
converted method, issued subsequent to September 30, 1994 through the initial
public offering date (October 18, 1995), are included in the computation of net
income per share for the years ended March 31, 1996 and 1995 as if they were
outstanding for the entire period.
35
<PAGE> 37
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. The Company's policy is
to grant options with an exercise price equal to the closing market price of the
Company's stock on the grant date. Accordingly, no compensation cost for stock
option grants has been recognized in the Company's statements of operations. The
Company provides additional pro forma disclosures as required under Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" (see Note 7).
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per share." This statement
is effective for the Company's fiscal year ending March 31, 1998. The Statement
redefines earnings per share under generally accepted accounting principals.
Under the new standard, primary earnings per share is replaced by basic earnings
per share and fully diluted earnings per share is replaced by diluted earnings
per share. If the Company had adopted this Statement earnings per share would
have been:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Basic earnings per share $ 0.31 $ 1.19 $ 1.55
Diluted earnings per share $ 0.29 $ 0.63 $ 0.11
</TABLE>
NOTE 2. BALANCE SHEET AND INCOME STATEMENT DETAIL
Inventory consisted of:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Raw materials $ 3,988 $ 4,036
Work in process 2,126 3,173
Finished goods and spares 7,040 9,738
------- -------
$13,154 $16,947
======= =======
</TABLE>
Property and equipment consisted of:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Machinery and equipment $ 7,090 $ 6,670
Demo lab equipment 2,542 2,230
Leasehold improvements 2,452 2,279
------- -------
12,084 11,179
Less accumulated depreciation and amortization (6,786) (5,152)
------- -------
$ 5,298 $ 6,027
======= =======
</TABLE>
Machinery and equipment at March 31, 1997 and 1996 includes approximately
$1,370 and $1,006, respectively of assets under leases that have been
capitalized. Accumulated depreciation for such equipment approximated $700 and
$315, respectively.
36
<PAGE> 38
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
A summary of accrued expenses and other current liabilities follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Accrued compensation costs............................... $ 1,554 $ 1,532
Income taxes payable..................................... 1,221 944
Product warranty......................................... 2,251 2,586
Motorola credit liability................................ -- 1,587
Other.................................................... 3,961 5,098
------- -------
$ 8,987 $11,747
======= =======
</TABLE>
Other income (expenses), net, consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
Interest income................................... $1,250 $ 526 $ 72
Interest expense.................................. (118) (870) (802)
Foreign currency exchange gain (loss), net........ (186) (383) 92
Other............................................. 54 341 211
------ ----- -----
$1,000 $(386) $(427)
====== ===== =====
</TABLE>
NOTE 3. NOTES PAYABLE TO BANKS AND OTHERS
The Company has two lines of credit totaling $13,000 with a U.S. bank. Both
lines bear interest at prime (8.25 percent as of March 31, 1997), are secured by
a blanket security in all of the Company's assets, and are available until
August 15, 1997. No amount was outstanding on either of these two lines of
credit at March 31, 1997 and 1996. The lines of credit restrict the declaration
and payment of cash dividends and include, among other terms and conditions,
requirements that the Company maintain certain financial ratios and covenants.
The Company was in compliance with such covenants as of March 31, 1997 and 1996.
The Company's Japanese subsidiary has two lines of credit available for
300,000 Yen each (approximately $4,839 at exchange rates prevailing as of March
31, 1997), bearing interest at 0.125 percent, in excess of Japanese prime (1.625
percent as of March 31, 1997). Both lines of credit are available until November
1997, and are secured by Japanese customer promissory notes provided in advance
of payment. Outstanding balances on these lines in U.S. dollars as of March 31,
1997 and 1996, were $252 and $243, respectively.
NOTE 4. INCOME TAXES
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Domestic..................................... $3,400 $4,173 $1,392
Foreign...................................... 780 2,013 (443)
------ ------ ------
$4,180 $6,186 $ 949
====== ====== ======
</TABLE>
37
<PAGE> 39
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current:
U.S. federal............................... $1,143 $1,100 $ 9
State and local............................ 432 200 7
Foreign.................................... 103 220 105
------ ------ ------
1,678 1,520 121
------ ------ ------
Deferred:
U.S. federal............................... (589) (900) --
State and local............................ (49) -- --
------ ------ ------
(638) (900) --
------ ------ ------
Total...................................... $1,040 $ 620 $ 121
====== ====== ======
</TABLE>
The income tax provision differs from the amount computed by applying the
statutory U.S. federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Income tax provision at U.S. statutory
rate....................................... $1,424 $2,103 $ 323
State taxes net of federal benefit........... 254 132 --
Foreign losses not utilized.................. -- -- 32
Reversal of deferred tax assets previously
reserved................................... (178) -- --
Reduction in valuation allowance............. (460) (1,700) (250)
Other........................................ -- 85 16
------ ------ ------
Income tax expense......................... $1,040 $ 620 $ 121
====== ====== ======
</TABLE>
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Revenue recognized for tax and deferred for book......... $ 556 $ 1,078
Non-deductible accruals and reserves..................... 2,910 2,739
Foreign net operating loss carryforward.................. 1,601 1,612
Uniform cap adjustment................................... 330 120
Other.................................................... 83 113
------- -------
5,480 5,662
Valuation allowance...................................... (4,302) (4,762)
------- -------
Net deferred tax asset......................... $ 1,178 $ 900
======= =======
</TABLE>
The Company has recorded net deferred tax assets of approximately $1,178
and $900 at March 31, 1997 and 1996, respectively. Management's evaluation of
the recoverability of the Company's deferred tax is based upon the Company's
ability to carry back temporary differences for future tax deductions against
previously taxed income.
38
<PAGE> 40
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
At March 31, 1997, the Company has operating loss carryforwards in foreign
jurisdictions amounting to approximately $4,000, which begin to expire on March
31, 1998.
NOTE 5. LEASE COMMITMENTS
The Company has several noncancelable operating leases and capital leases,
primarily for general office, production, and warehouse facilities, that expire
over the next five years. Future minimum lease payments under these leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
1998............................................... $ 401 $1,700
1999............................................... 236 1,632
2000............................................... 58 1,564
2001............................................... 32 1,446
2002............................................... 3 7
----- ------
Total minimum lease payments....................... $ 730 $6,349
======
Less amount representing interest.................. (77)
-----
$ 653
=====
</TABLE>
The above schedule of minimum payments excludes minimum annual sublease
rentals payable to the Company totaling $145 through January 31, 1998, under
operating subleases. In addition, most leases provide for the Company to pay
real estate taxes and other maintenance expenses. Rent expense for operating
leases was $2,406, $2,613, and $2,441 during the years ended March 31, 1997,
1996, and 1995, respectively.
NOTE 6. PREFERRED STOCK
On October 24, 1995, the Company closed an initial public offering ("IPO")
of its common stock. Under the terms of the IPO, all of the then outstanding
Series A, C, and D mandatorily redeemable preferred stock was converted into
5,876,079 shares of common stock. In addition, in accordance with a Conversion
Agreement between the Company and Motorola dated August 31, 1994, as amended
August 8, 1995, all of the then outstanding Series B redeemable preferred stock
was converted into an obligation to Motorola in the form of a credit liability
(payable in cash and through the issuance of purchase credits on sales of
products or services to Motorola).
NOTE 7. EMPLOYEE BENEFIT PLANS
Equity Incentive Plan
Pursuant to the Amended and Restated Equity Incentive Plan ("Equity
Incentive Plan"), options and stock purchase rights to purchase 3,500,000 shares
of common stock may be granted to management and consultants. The exercise price
of options and the purchase price of stock purchase rights generally is the fair
value of the Company's common stock on the date of grant. At the date of
issuance of the stock options, all options are exercisable; however the Company
has the right to repurchase any stock acquired pursuant to the exercise of stock
options upon termination of employment or consulting agreement at the original
exercise price for up to four years from the date the options were granted, with
the repurchase rights ratably expiring over that period of time. Incentive stock
options are exercisable for up to 10 years from the grant date of the option.
Nonqualified stock options are execisable for up to 15 years from the grant date
of the option.
39
<PAGE> 41
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
1990 Stock Option Plan
Pursuant to the terms of the Company's 1990 Stock Option Plan ("Option
Plan"), options and stock purchase rights to purchase 550,000 shares of common
stock may be granted to employees of the Company or its affiliates. Incentive
stock options are exercisable for a period of up to 10 years from the date of
grant of the option and nonqualified stock options are exercisable for a period
of up to 10 years and 2 days from the date of grant of the option. At the date
of issuance of the stock options, all options are exercisable, however, the
Company has the right to repurchase any stock acquired pursuant to the exercise
of stock options upon termination of employment at the original exercise price
for up to four years from the date the options were granted, with the repurchase
rights ratably expiring over that period of time.
Directors Stock Option Plan
Pursuant to the terms of the Directors Plan, up to 300,000 shares of common
stock may be granted to Directors. Under the Directors Plan each Outside
Director who was a member of the Board at the date of the IPO received 30,000
shares of which 10,000 shares vested immediately and the right to purchase the
remaining 20,000 shares vesting over the next three years in equal annual
installments on the anniversary of such effective date. Any shares granted
subsequent to the date of the "IPO" will vest annually over four years,
contingent upon continued service as a director.
The following table summarizes the Company's stock option activity for the
three plans described above and weighted average exercise price within each
transaction type for each of the years ended March 31, 1997, 1996, and 1995
(number of shares in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----------------- ----------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
year................................... 1,163 $4.90 996 $ 0.40 997 $0.40
Options canceled......................... (183) 9.52 (65) 0.27 (28) 0.43
Options granted.......................... 595 5.50 590 10.25 34 0.53
Options exercised........................ (162) 0.33 (358) 0.36 (7) 0.27
----- ----- ----- ------ --- -----
Options outstanding March 31............. 1,413 $4.36 1,163 $ 4.90 996 $0.40
===== ===== ===== ====== === =====
</TABLE>
At March 31, 1997, the repurchase right associated with 512,135 of the
options outstanding had elapsed. Additionally, the Company had the right to
repurchase 152,255 shares related to options which were exercised.
Significant option groups outstanding at March 31, 1997, and related
weighted average exercise price of options granted for which the Company no
longer has the right to repurchase and contractual life information are as
follows (share information in thousands):
<TABLE>
<CAPTION>
OPTIONS NO
LONGER SUBJECT
SHARES TO REPURCHASE
OUTSTANDING RIGHTS
EXERCISE PRICE -------------- -------------- REMAINING
RANGE # PRICE # PRICE LIFE (YEARS)
- ------------------ --- ------ --- ------ ------------
<S> <C> <C> <C> <C> <C>
$.24 - $.53 446 $ .45 378 $ .44 4.72
$4.75 - $5.50 644 5.25 30 5.23 10.18
$6.25 55 6.25 23 6.25 10.16
$6.88 - $8.00 196 7.04 46 6.89 8.84
$12.00 72 $12.00 35 $12.00 9.13
</TABLE>
40
<PAGE> 42
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
As described in Note 1, the Company has adopted the disclosure provisions
as required by SFAS 123. Accordingly, no compensation cost has been recognized
in the Company's statements of operations as all options were granted at an
exercise price equal to the market value of the Company's common stock at the
date of grant.
As required by SFAS 123 for pro forma disclosure purposes only, the Company
has calculated the estimated grant date fair value using the Black-Scholes
Model. The Black-Scholes model, as well as other currently accepted option
valuation models, was developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the calculated grant date fair value.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for the Company's stock option awards:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Expected life (years)......................... 4 years 4 years
Risk-free interest rate....................... 6.07% 5.97%
Volatility.................................... 60% 60%
Dividend yield................................ 0% 0%
</TABLE>
The weighted average estimated grant date fair value, as defined by SFAS
123, for options granted during 1997 and 1996 was $3.67 and $4.90 per option,
respectively. The estimated fair value, as defined by SFAS 123, attributable to
options canceled and reissued during 1997 was $1.53 per option. In addition,
included in pro forma net income for fiscal year 1997 is an adjustment of $104
related to the cancellation of vested options not exercised due to employee
terminations. There is no such adjustment in fiscal year 1996.
Stock Purchase Plan
Since 1996, the Company has offered an Employee Qualified Stock Purchase
Plan ("Employee Plan") under which rights are granted to purchase shares of
common stock at 85% of the lesser of the market value of such shares at the
beginning of a twelve month offering period or at the end of that twelve month
period. For 1997 forward, the offering period has been reduced from twelve
months to six months. Under the Employee Plan, the Company is authorized to
grant options to purchase up to 250,000 shares of common stock. 53,633 common
shares were purchased under the Employee Plan in fiscal 1997 at a price of
$4.46. No shares were purchased in fiscal 1996. Shares available for future
purchase under the Employee Plan were 196,367 at March 31, 1997.
Compensation cost (included in pro forma net income and net income per
share amounts only) for the grant date fair value, as defined by SFAS 123, of
the purchase rights granted under the Employee Plan was calculated using the
Black-Scholes model. Included in the pro forma net income for fiscal year 1996
is compensation expense related to purchase rights granted during the period
December 15, 1995 through March 31, 1996. Fiscal year 1997 reflects purchase
rights earned for the full fiscal year. The weighted average estimated grant
date fair value per share for rights granted under the Plan, as defined by SFAS
123, for stock purchased under the Employee Stock Purchase Plan during 1997, was
$3.69.
41
<PAGE> 43
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
Pro Forma Net Income and Net Income Per Share
Had the Company recorded compensation costs based on the estimated grant
date fair value (as defined by SFAS 123) for awards granted under its stock
option plans and stock purchase plan, the Company's net income and earnings per
share would have been reduced to the pro forma amounts below for the years ended
March 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Pro forma net income........................... $1,865 $5,155
Pro forma net income per share................. $0.18 $0.58
</TABLE>
The pro forma effect on net income and net income per share takes into
consideration pro forma compensation related only to grants made after December
15, 1995. Consequently, the pro forma effect on net income and net income per
share for 1997 and 1996 is not necessarily representative of the pro forma
effect on net income in future years.
Savings and Investment Plan
The Company has established a defined contribution plan that covers
substantially all U.S. employees who are regularly scheduled to work 20 or more
hours per week. Employee contributions of up to 4% of each covered employee's
compensation will be matched by the Company based upon a percentage to be
determined annually by the Board of Directors. Employees may contribute up to
15% of their compensation, not to exceed a prescribed maximum amount. The
Company made contributions to the plan of $28, $27, and $21 in the years ended
March 31, 1997, 1996, and 1995, respectively.
NOTE 8. SHAREHOLDER RIGHTS PLAN
On June 11, 1996, the Board of Directors ("Board") adopted a Preferred
Shares Rights Agreement ("Agreement") and pursuant to the Agreement authorized
and declared a dividend of one preferred share purchase right ("Right") for each
common share outstanding of the Company at the close of business on July 1,
1996. The Rights are designed to protect and maximize the value of the
outstanding equity interests in the Company in the event of an unsolicited
attempt by an acquiror to take over the Company, in a manner or under terms not
approved by the Board. Each Right becomes exercisable to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock at an
exercise price of $45.00 upon certain circumstances associated with an
unsolicited takeover attempt and expires on June 11, 2006. The Company may
redeem the Rights at a price of $0.01 per Right.
NOTE 9. CUSTOMERS AND FOREIGN OPERATIONS
The Company's sales are primarily to domestic and international
semiconductor manufacturers. The top five customers accounted for approximately
46%, 42%, and 42% of the Company's total net sales for the years ended March 31,
1997, 1996, and 1995, respectively. Two customers accounted for approximately
17% and 10%, respectively, of net sales for the year ended March 31, 1997, two
customers accounted for approximately 14% and 13%, respectively, of net sales
for the year ended March 31, 1996, and two customers accounted for 15% and 14%,
respectively, of the Company's net sales for the year ended March 31, 1995.
42
<PAGE> 44
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
The Company's operations by geographical region were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Revenues:
Sales to unaffiliated customers:
United States:
Customers in United States........... $ 17,795 $ 22,816 $16,644
Customers in Asia.................... 18,640 10,928 10,070
Europe................................. 10,061 13,769 13,465
Japan.................................. 10,927 14,533 4,466
-------- -------- -------
Total external sales.............. $ 57,423 $ 62,046 $44,645
======== ======== =======
Intercompany sales among geographic areas:
From United States..................... $ 10,052 $ 19,401 $ 8,474
From Europe............................ 684 562 739
Consolidation eliminations............. (10,736) (19,963) (9,213)
-------- -------- -------
Net intercompany sales............ $ -- $ -- $ --
======== ======== =======
</TABLE>
Intercompany sales among the Company's geographic areas are recorded on the
basis of intercompany prices established by the Company.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Operating income (loss):
United States............................. $ 2,378 $ 4,465 $ 2,502
Europe.................................... 115 594 (158)
Japan..................................... 687 1,513 (968)
-------- -------- ------
Operating income....................... $ 3,180 $ 6,572 $ 1,376
======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
-------- --------
<S> <C> <C> <C>
Identifiable assets at year-end:
United States............................. $ 62,494 $ 68,108
Europe.................................... 8,345 11,842
Japan..................................... 4,215 9,684
Consolidation eliminations................ (11,530) (24,962)
-------- --------
Total identifiable assets................... $ 63,524 $ 64,672
======== ========
</TABLE>
43
<PAGE> 45
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Tegal Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) on page 28 present fairly, in all material
respects, the financial position of Tegal Corporation and its subsidiaries at
March 31, 1997 and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles. These
consolidated financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
The consolidated financial statements of Tegal Corporation for the years ended
March 31, 1996 and March 31, 1995, included herein, were audited by other
independent accountants whose report dated April 23, 1996 expresses an
unqualified opinion on those statements.
Price Waterhouse LLP
San Jose, California
April 23, 1997
44
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tegal Corporation:
We have audited the accompanying consolidated balance sheet of Tegal
Corporation and subsidiaries as of March 31, 1996, and related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the two-year period ended March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tegal
Corporation and subsidiaries as of March 31, 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
ended March 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Palo Alto, California
April 23, 1996
45
<PAGE> 47
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.
Dated: June 24, 1997
TEGAL CORPORATION
By: /s/ ROBERT V. HERY
------------------------------------
Robert V. Hery
Chairman, President & Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert V. Hery and David Curtis, jointly
and severally, his attorneys-in-fact, each with the powers of substitution, for
him in any and all capacities, to sign any amendments to this Report of Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- --------------
<S> <C> <C>
/s/ ROBERT V. HERY Chairman, President, Chief Executive June 24, 1997
- ------------------------------------- Officer and Director
Robert V. Hery (Principal Executive Officer)
/s/ DAVID CURTIS Chief Financial Officer June 24, 1997
- ------------------------------------- (Principal Financial Officer)
David Curtis
/s/ WILLIAM F. O'SHEA Corporate Controller June 24, 1997
- ------------------------------------- (Principal Accounting Officer)
William F. O'Shea
/s/ FRED NAZEM Director June 24, 1997
- -------------------------------------
Fred Nazem
/s/ JEFFREY KRAUSS Director June 24, 1997
- -------------------------------------
Jeffrey Krauss
/s/ THOMAS R. MIKA Director June 24, 1997
- -------------------------------------
Thomas R. Mika
/s/ EDWARD A. DOHRING Director June 24, 1997
- -------------------------------------
Edward A. Dohring
</TABLE>
46
<PAGE> 48
SCHEDULE II
TEGAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1995, 1996, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ---------------------------------------- ---------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1995:
Product warranty...................... $1,786 $2,608 $ (239) $ (3,000) $ 1,155
Doubtful accounts..................... 15 253 -- (7) 261
Sales returns and allowances.......... 177 -- 389 (381) 185
Cash discounts........................ 22 84 -- (77) 29
Year ended March 31, 1996:
Product warranty...................... 1,155 3,634 (4) (2,199) 2,586
Doubtful accounts..................... 261 262 (94) (68) 361
Sales returns and allowances.......... 185 298 (171) (229) 83
Cash discounts........................ 29 87 (78) (29) 9
Year ended March 31, 1997:
Product warranty...................... 2,586 4,406 (118) (4,623) 2,251
Doubtful accounts..................... 361 13 -- (54) 320
Sales returns and allowances.......... 83 592 (1) (230) 444
Cash discounts........................ 9 51 -- (19) 41
</TABLE>
S-1
<PAGE> 49
INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE
The Board of Directors
Tegal Corporation:
Our audit of the consolidated financial statements for the year ended March
31, 1997 referred to in our report dated April 23, 1997, appearing on page 44 in
the 1997 Annual Report on Form 10-K also included an audit of the Financial
Statement Schedule for the year ended March 31, 1997 listed in Item 14 (a) of
this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
April 23, 1997
S-2
<PAGE> 50
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors
Tegal Corporation:
Under date of April 23, 1996, we reported on the consolidated balance sheet
of Tegal Corporation and subsidiaries as of March 31, 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the two-year period ended March 31, 1996. These
consolidated financial statements and our report thereon are included herein. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying index in Item 14, as of and for each of
the years in the two-year period ended March 31, 1996. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this consolidated financial
statement schedule based on our audits.
In our opinion, the consolidated financial statement schedule, referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Palo Alto, California
April 23, 1996
S-3
<PAGE> 51
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------------------------------------------------------------------
<S> <C>
10.17 Lease Amendment dated March 10, 1997 between Registrant and South McDowell
Investments
11 Statement Regarding Computation of Net Income Per Share
23.1 Consent of Independent Accountants
23.2 Consent of Independent Auditors
24.1 Powers of Attorney (included on page 46)
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.17
LEASE AMENDMENT
THIS LEASE AMENDMENT (this "Amendment") is entered into as of this 10th
day of March, 1997, by and between SOUTH MCDOWELL INVESTMENTS, a California
general partnership, ("Landlord"), and TEGAL CORPORATION, a Delaware corporation
("Tenant").
RECITALS
A. On or about August 15, 1986, Justin M. Jacobs, Jr., dba Landbank
Investments as predecessor-in-interest to Landlord ("Landbank") and Tenant
entered into that certain Lease (the "Original Lease"), whereby Landlord leased
to Tenant and Tenant leased from Landlord that certain premises commonly known
as 2201 South McDowell Blvd. (the "Premises"), as more specifically described in
the Original Lease.
B. The Original Lease was amended by that certain Amendment dated as of
August 31, 1987, by and between Landlord, as successor-in-interest to Landbank,
and Tenant (the "First Amendment").
C. The Original Lease was further amended by that letter amendment
dated as of September 11, 1987, by and between Landlord and Tenant (the "Second
Amendment").
D. The Original Lease was further amended by that certain Amendment
dated as of December 17, 1987, by and between Landlord and Tenant (the "Third
Amendment").
E. The Original Lease was further amended by that letter amendment
dated as of January 15, 1988, by and between Landlord and Tenant (the "Fourth
Amendment").
F. The Original Lease was further amended by that certain Amendment
dated as of March 8, 1988, by and between Landlord and Tenant (the "Fifth
Amendment). The Original Lease together with the First Amendment, the Second
Amendment, the Third Amendment, the Fourth Amendment, and the Fifth Amendment
are collectively referred to herein as the "Lease."
G. Landlord and Tenant desire to amend the Lease as provided in this
Amendment.
NOW THEREFORE, for good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. Term.
Section 2 of the Original Lease is hereby modified to extend the end of
the term to March 9, 2004 (the "Extended Expiration Date").
<PAGE> 2
SECTION 2. Rent.
(a) Section 5 of the Original Lease hereby modified to provide that
commencing with the Effective Date of this Amendment, Tenant agrees to pay to
Landlord at such place as Landlord may from time to time designate without
deduction, offset, abatement, prior notice or demand, and Landlord agrees to
accept as Basic Rent for the leased Premises:
<TABLE>
<CAPTION>
Period Monthly Rent Annual Rent
------ ------------ -----------
<S> <C> <C>
March 10, 1997, through March 9, 1998 $ 102,000 $1,224,000
March 10, 1998, through March 9, 1999 $ 102,000 $1,224,000
March 10, 1999, through March 9, 2000 $ 126,000 $1,512,000
March 10, 2000, through March 9, 2001: $ 126,000 $1,512,000
</TABLE>
(b) Commencing on March 10, 2001 (the "Initial Adjustment Date"), and
thereafter on the anniversary date thereof (each an "Adjustment Date"), the
Basic Rent shall be increased in an amount equal to the greater of (i) one
percent (1%) of the Basic Rent payable for the month immediately preceding such
Adjustment Date; or (ii) an amount calculated by multiplying the Basic Rent for
the month immediately preceding the Adjustment Date, by a fraction, the
numerator of which shall be the Index (as hereinafter defined), published
nearest but prior to the Adjustment Date, and the denominator of which shall be
(A) as to the adjustment occurring on the Initial Adjustment Date, the Index
published nearest but prior to the commencement of the twelve (12) month period
immediately preceding the Initial Adjustment Date, and (B) as to each adjustment
occurring after the Initial Adjustment Date, the Index published nearest but
prior to the commencement of the twelve (12) month period immediately preceding
such Adjustment Period, provided however that the annual adjustment due to an
increase in the Index shall not exceed six percent (6%) of the Basic Rent
payable for the month immediately preceding such adjustment Date.
(c) The term Index as used in this Amendment shall mean Consumer Price
Index, All Urban Consumers, All Items, San Francisco-Oakland-San Jose (1982-84
equals 100), or the successor of such index, published by the Bureau of Labor
Statistics of the United States Department of Labor. If the Bureau of Labor
Statistics revises the Index, the parties agree that the Bureau of Labor
Statistics shall be the sole judge of the comparability of successive indexes.
If that agency, however, fails to supply indexes that it deems comparable, or if
no succeeding index is published, the parties shall then negotiate to determine
an appropriate alternative published price index. If they are unable to agree on
an alternative index within thirty (30) days after the request to do so is made
by one party to the other, then either party may request that each appoint a
person, within fifteen (15) days after the request, to select an alternative
published price index. The two persons so appointed, within fifteen (15) days
after the later of them is appointed, shall appoint a third person to act with
them in the selection of an alternative price index. If Landlord or Tenant fails
to appoint one of the first two, then the person appointed by the other party
shall determine the alternative published price index. If the two persons
appointed fail to appoint a third, upon the request of either Landlord or
Tenant, the vacancy shall be filled by an impartial person appointed by the
presiding judge of the court of general jurisdiction for the county in which the
Premises are located, with that judge acting in the judge's individual rather
than judicial capacity. If any appointee declines or is unable to serve, the
appointee shall be replaced by another person appointed in the same manner.
2
<PAGE> 3
Within thirty (30) days after the appointment process is completed, and on the
basis of all pertinent facts, the appointees, by majority vote, shall select an
alternative published price index and advise Landlord and Tenant in writing of
the selection. All fees and expenses incurred in the appointment of the persons
shall be shared equally by Landlord and Tenant.
SECTION 3. Condition.
Tenant shall continue its tenancy of the Premises, on an "as-is" basis,
without any allowance for retrofitting or tenant improvements. Nothing contained
in the foregoing sentence shall be deemed to relieve Landlord of its ongoing
maintenance obligations under the Lease.
SECTI0N 4. Removal of Alterations.
(a) Upon written request by Tenant therefor, such request to be made
within six months of the Effective Date, Landlord shall notify Tenant as to
which of the tenant improvements specifically identified in such request and
installed by Tenant after the original build-out of the Premises (other than
such improvements identified on Exhibit "M" to the Lease), Landlord shall
require Tenant to remove following the termination of the Lease.
(b) From and after the Effective Date, as and when Tenant requests the
right to make alterations to the Premises (the "Requested Alterations"),
Landlord shall identify, within ten (10) business days after the receipt by
Landlord of Tenant's request and plans describing such Requested Alterations
(collectively an "Alteration Request"), which of the Requested Alterations shall
be required to be removed at the termination of the Lease, provided that
Tenant's request specifically requests Landlord to so identify which of the
Requested Alterations Landlord desires to have removed at the termination of the
Lease. In the event that Landlord fails to respond, within ten (10) business
days after the receipt by Landlord of an Alteration Request, Tenant shall notify
Landlord in writing of Landlord's failure to so respond (the "Second Notice")
and if Landlord fails thereafter to respond within five (5) business days after
receiving the Second Notice, Landlord shall be deemed to have waived its right
to require Tenant to remove the Requested Alterations. It is expressly agreed
that a request by Landlord for additional information shall be deemed a
"response" for purposes of this Section 4.
SECTION 5. Insurance.
From and after February 1, 1998, Section 12.c of the Lease shall be
deemed deleted. Except as provided in this Section 5, Tenant shall not be
relieved from obtaining and maintaining at Tenant's sole cost and expense the
various policies of insurance required to be obtained and maintained by Tenant
pursuant to Section 12 of the Lease.
SECTION 6. Motorola Guarantee.
The guarantee of the Lease (the "Guaranty") by Motorola Inc., a
Delaware corporation ("Motorola"), shall remain in full force and effect until
January 31, 1998, after which it shall terminate and be of no further force or
effect. As of February 1, 1998, any obligations or liabilities of Motorola under
the Guaranty, the Lease or this Amendment shall cease. This Amendment shall be
conditioned
3
<PAGE> 4
upon the consent by Motorola hereto. Landlord shall provide to Motorola on or
before the execution of this Amendment, a letter in the form attached hereto and
incorporated herein as Exhibit A.
SECTION 7. Repair and Maintenance.
The second sentence of Section 9.A. of the Original Lease is hereby
deleted and replaced with the following:
"Landlord may engage contractors of its choice to perform the
obligations required of it by this Section, and the necessity of any
expenditure to perform such obligations shall be at the reasonable
discretion of Landlord."
SECTION 8. Lease Termination.
Notwithstanding anything else contained herein to the contrary, Tenant
shall have the right to terminate the Lease as to the whole Premises effective
March 10, 2001, which right shall be exercisable by delivery of written notice
of such election to Landlord no later than March 10, 2000. Thereafter, Tenant
shall have the right to terminate the Lease as to the whole Premises on each
anniversary thereafter, provided that Tenant provides Landlord notice of such
election no later than fifteen months prior to such anniversary.
SECTION 9. Option to Extend.
Landlord grants to Tenant the option to extend the term of this Lease
(the "Option") for one (1) period of five (5) years, commencing on the day
immediately following the Extended Expiration Date, upon each and all of the
following terms and conditions:
(a) Tenant shall give to Landlord written notice of the exercise
of the Option no earlier than twenty-four (24) months prior to
the Extended Expiration Date, and no later than twelve (12)
months prior to the Extended Expiration Date, time being of
the essence. If said notification of the exercise of said
option is not so given then the Option shall automatically
expire.
(b) At the time the notification of exercise of the Option is
given and on the Extended Expiration Date, Tenant shall not be
in material default under any of Tenant's material obligations
under the Lease and no event shall have occurred which with
the giving of notice or the passage of time would constitute a
material default on the part of Tenant under the Lease;
(c) The Basic Rent for each year of the Option Term shall be
determined in accordance with Section 2(b) hereof,
(d) All of the terms and conditions of the Lease shall remain the
same, except that Tenant's right to terminate the Lease
pursuant to Section 8 hereof, shall terminate, and be of no
further force or effect.
4
<PAGE> 5
SECTION 10. Assignment and Subletting.
(a) The third sentence of Section 14.A.(1) of the Original Lease is
hereby deleted and replaced with the following:
"If Landlord falls to respond in writing to Tenant's request for
Landlord's consent to a Transfer within ten (10) business days after
receipt of such request, then Landlord shall be deemed to have
consented to such Transfer."
(b) The first sentence of Section 14.A.(2) of the Original Lease is
hereby deleted and replaced with the following:
"Tenant shall give Landlord prior written notice of any desired
Transfer and of the proposed terms of such Transfer including but not
limited to (i) the name and legal composition of the proposed
transferee; (ii) a current financial statement of the transferee,
and/or its parent, covering the preceding three (3) years, and (if
readily available) an audited financial statement of the transferee for
a period ending not more than one year prior to the proposed effective
date of the transfer, all of which statements shall be prepared in
accordance with generally accepted accounting principles; (iii) the
nature of the proposed transferee's business to be carried on in the
Premises; (iv) a description of all consideration to be given on
account of the Transfer; and (v) such other information as may be
reasonably requested by Landlord."
SECTION 11. Deleted Provisions.
Sections 29, 30, 31, and 36 are hereby deleted in their entirety.
SECTION 12. Brokers.
(a) Tenant represents and warrants to Landlord that no real estate
broker, agent or finder negotiated or was instrumental in negotiating or
representing Tenant in the negotiation of this Amendment or the consummation
hereof except for Meridian Commercial, Inc ("Broker"). Tenant shall be
responsible for the payment of the commission or fee, if any, owed to Broker
pursuant to a separate fee agreement between Broker and Tenant. Tenant shall pay
the commission or fee of any other broker, agent or finder, including but not
limited to, Michael Lieberman and Jerry Angel, acting for or on behalf of, or
claiming to act for or on behalf of, Tenant or claiming any commissions or fees
on the basis of contacts or dealings with Tenant and not disclosed herein by
Tenant and Tenant shall indemnify and hold Landlord harmless from and against
any claims made by any such broker, agent or finder of Tenant and any and all
costs and damages suffered by Landlord as a consequence thereof, including
without limitation attorneys' fees.
(b) Landlord represents and warrants to Tenant that no real estate
broker, agent or finder negotiated or was instrumental in negotiating or
representing Landlord in the negotiation of this Amendment or the consummation
hereof. Landlord shall pay the commission or fee of any broker, agent or finder
acting for or on behalf of, or claiming to act for or on behalf of, Landlord or
claiming
5
<PAGE> 6
any commissions or fees on the basis of contacts or dealings with Landlord and
not disclosed herein by Landlord and Landlord shall indemnify and hold Tenant
harmless from and against any claims made by any such broker, agent or finder of
Landlord and any and all costs and damages suffered by Tenant as a consequence
thereof, including without limitation attorneys' fees.
SECTION 13. Conditions Precedent.
This Amendment shall be conditioned upon the following conditions
precedent:
(a) Approval of this Amendment by Landlord's lender;
(b) Consent to this Amendment by Motorola; and
(c) Approval of this Amendment by Tenant's Board of Directors and the
provision to Landlord of a certified resolution of Tenant's Board of Directors
evidencing such approval.
SECTION 14. No Other Modifications.
Except as otherwise modified herein, all terms and conditions of the
Lease shall be unmodified and remain in full force and effect.
6
<PAGE> 7
SECTION 15. Conflicts.
In the event there shall be any conflict between the provisions of the
Lease and its Exhibit and this Amendment, the provisions of the Amendment shall
control.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first set forth above.
LANDLORD:
SOUTH MCDOWELL INVESTMENTS,
a California general partnership
By: /s/ Jane Crocker
----------------------------------
Jane Crocker, its General Partner
TENANT.
TEGAL CORPORATION,
a Delaware Corporation
By: /s/ David Curtis
----------------------------------
David Curtis, its Vice President of Finance
By: /s/ Robert V. Hery
----------------------------------
Robert V. Hery, its Chairman, President and CEO
MOTOROLA, INC. hereby consents to this Amendment.
MOTOROLA, INC.,
a Delaware corporation
By: /s/ William E. Spencer
----------------------------
Name: William E. Spencer
Title: Vice President
7
<PAGE> 8
EXHIBIT A
SOUTH MCDOWELL INVESTMENTS
P.O. 1433
MENLO PARK, CA 94026
January 27, 1997
Motorola, Inc.
1303 E. Algonquin Rd.
Schaumburg, ILL 60196
Attn: Theodore W. Schaffner, Vice President
& Corporate Director of Business Development
Gentlemen:
Reference is made to the Lease (the "Lease"), dated as of August 15,
1986, between Justin M. Jacobs, Jr., doing business as Landbank Investments
("Landbank"), as Landlord, and Tegal Corporation, as Tenant, under which the
Landlord leased to Tenant the premises commonly known as 2201 South McDowell
Boulevard, Petaluma, California 94955.
Whereas, Motorola, Inc. ("Motorola") has guaranteed the performance of
Tegal Corporation under the Lease; and
Whereas, South McDowell Investments, as successor-in-interest to
Landbank and as the present Landlord under the Lease, and Tegal Corporation
intend to amend the Lease and extend its term (the "Amendment"); and
Whereas, Motorola has requested certain assurances about the status of
the Lease and Motorola's guarantee after the effective date of the amendment.
NOW, THEREFORE, South McDowell Investments represents to Motorola as
follows:
1. The Lease is presently in full force and effect as amended August
31, 1987, September 11, 1987, December 17, 1987, January 15, 1988, and March 8,
1988.
2. Tegal Corporation is not in default in the payment of rent and, to
the best of Landlord's knowledge, without investigation or inquiry, in the
performance of its other obligations, or otherwise, under the Lease.
3 . To the best of Landlord's knowledge, without investigation or
inquiry, no event has occurred or presently exists which would give South
McDowell Investments the right to proceed against or call upon Motorola to
perform or fulfill its guarantee of the Lease (the "Guaranty").
4. To the best of Landlord's knowledge, South McDowell Investments is
not in default
<PAGE> 9
Motorola, Inc.
January 27, 1997
Page 2
in the performance of any of its obligations under the Lease.
5. The Guaranty shall terminate and be of no further force or effect as
of 12:00 p.m. midnight, January 31, 1998. and at that time, all obligations and
liabilities of Motorola under the Guaranty and the Lease shall cease,
notwithstanding that the term of the Lease has been extended to January 31, 2004
by agreement between Tegal Corporation and South McDowell Investments.
6. A true and correct copy of the Amendment is attached hereto and
incorporated herein as Exhibit A. It Is not Landlord's present understanding or
intent that the Amendment (i) imposes any additional obligations which will be
covered by the Guaranty, or (ii) increases the liability of Motorola in any
respect under the Guaranty.
Sincerely,
SOUTH MCDOWELL INVESTMENTS,
a California general partnership
By:
----------------------------------
Jane Crocker
General Partner
cc: Norman E. MacKay, Esq
Alexander E. Hamilton, Esq.
<PAGE> 1
EXHIBIT 11
TEGAL CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION
OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Net income...................................................... $ 3,140 $5,566 $ 828
------- ------ ------
Weighted average shares outstanding during the period........... 10,138 4,692 534
Preferred stock on an "as if" converted basis................... -- 3,309 5,876
Common shares issued and stock options granted in accordance
with Staff Accounting Bulletin No. 83......................... -- 1 774
Common stock equivalent......................................... 572 897 189
------- ------ ------
Shares used in per share computation............................ 10,710 8,899 7,373
======= ====== ======
Net income per share............................................ $ 0.29 $ 0.63 $ 0.11
======= ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-462 and 333-12473) of Tegal Corporation of our
report dated April 23, 1997 appearing on page 44 of Tegal Corporation's Annual
Report on Form 10-K. We also consent to the incorporation by reference of our
report on the Financial Statement Schedule, which appears on page S-2 of this
annual report on Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
June 24, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Tegal Corporation:
We consent to incorporation by reference in the registration statements
(No. 333-462 and 333-12473) on Form S-8 of Tegal Corporation of our reports
dated April 23, 1996, relating to the consolidated financial statements of Tegal
Corporation as of March 31, 1996, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the two-year period ended March 31, 1996, and the related schedule, which
reports appear in the March 31, 1997, annual report on Form 10-K of Tegal
Corporation.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Palo Alto, California
June 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1996 MAR-31-1995
<PERIOD-START> APR-01-1996 APR-01-1995 APR-01-1994
<PERIOD-END> MAR-31-1997 MAR-31-1996 MAR-31-1995
<CASH> 30,323 23,283 0
<SECURITIES> 0 0 0
<RECEIVABLES> 13,086 16,644 0
<ALLOWANCES> 764 453 0
<INVENTORY> 13,154 16,947 0
<CURRENT-ASSETS> 58,073 58,416 0
<PP&E> 12,084 11,179 0
<DEPRECIATION> 6,786 5,152 0
<TOTAL-ASSETS> 63,524 64,672 0
<CURRENT-LIABILITIES> 12,681 16,690 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 103 101 0
<OTHER-SE> 50,439 47,525 0
<TOTAL-LIABILITY-AND-EQUITY> 63,524 64,672 0
<SALES> 57,423 62,046 44,645
<TOTAL-REVENUES> 57,423 62,046 44,645
<CGS> 31,522 33,469 24,062
<TOTAL-COSTS> 31,522 33,469 24,062
<OTHER-EXPENSES> 10,531 10,000 8,065
<LOSS-PROVISION> 13 262 253
<INTEREST-EXPENSE> 118 870 802
<INCOME-PRETAX> 4,180 6,186 949
<INCOME-TAX> 1,040 620 121
<INCOME-CONTINUING> 3,140 5,566 828
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,140 5,566 828
<EPS-PRIMARY> .29 .63 .11
<EPS-DILUTED> .29 .63 .11
</TABLE>
