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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-26824
TEGAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 68-0370244
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2201 SOUTH MCDOWELL BLVD. 94955-6020
P.O. BOX 6020 (ZIP CODE)
PETALUMA, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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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 March 31,
1998, as reported on the Nasdaq National Market was $37,639,389. As of March 31,
1998, 10,566,038 shares of the Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders to be held on September 15, 1998, will be filed with the Commission
within 120 days after the close of the Registrant's fiscal year and are
incorporated by reference in Part III.
Total Pages Index to Exhibits appears on page
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TABLE OF CONTENTS
PART I
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Item 1. Business.................................................... 2
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 18
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 7A Quantitative and Qualitative Disclosure about Market Risk... 23
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 23
Item 11. Executive Compensation...................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 24
Item 13. Certain Relationships and Related Transactions.............. 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 24
Signatures............................................................ 42
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PART I
ITEM 1. BUSINESS
Information contained or incorporated by reference herein contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology or which constitute projected financial information. The
following contains cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements. See "-- Additional Risk Factors."
THE COMPANY
Tegal Corporation ("Tegal" or the "Company") designs, manufactures, markets
and services plasma etch systems used in the fabrication of integrated circuits
("ICs") and related devices in the thin film head, small flat panel and printer
head applications. Etching constitutes one of the principal IC and related
device production process steps and must be performed numerous times in the
production of such devices.
The Company was formed in December 1989 to acquire the operations of the
former Tegal Corporation, a division of Motorola, Inc. ("Motorola"). The
predecessor company was founded in 1972 and acquired by Motorola in 1978.
SEMICONDUCTOR INDUSTRY BACKGROUND
Growth of Semiconductor and Semiconductor Equipment Industries
The semiconductor industry has experienced significant growth in recent
years. This growth has resulted from the increasing demand for ICs from
traditional IC markets, such as personal computers, telecommunications, consumer
electronics, automotive electronics and office equipment, as well as the
recently developing markets, such as multimedia, wireless communications and
portable and network computing. As a result of this increased demand,
semiconductor device manufacturers in recent years have expended significant
amounts of capital to build new semiconductor fabrication facilities ("fabs")
and to expand existing fabs. In spite of the continuing growth in demand for
semiconductors, the industry periodically experiences periods of excess supply
and excess capacity as additions to capacity are brought online in large
increments which exceed the short-term growth in demand for ICs such as occurred
in late 1995 and continues through the date of this report.
Growth in the semiconductor industry has been driven, in large part, by
advances in semiconductor performance at a decreasing cost per function.
Increasingly advanced semiconductor processing technologies allow semiconductor
manufacturers to produce ICs with smaller features, thereby increasing
processing speed and expanding device functionality and memory capacity. As ICs
have become more complex, however, both the number and price of state of the art
process tools required to manufacture ICs have increased significantly. As a
result, the cost of semiconductor manufacturing equipment is becoming an
increasingly large part of the total cost in producing advanced ICs. Today, the
average state of the art dynamic random access memory (DRAM) fab costs from $750
million to over $1.5 billion, with semiconductor manufacturing equipment costs
representing the majority of total fab costs.
Semiconductor Production Processes
To create an IC, semiconductor wafers are subjected to a large number of
complex process steps. The three primary steps in manufacturing ICs are (1)
deposition, in which a layer of insulating or conducting material is deposited
on the wafer surface, (2) photolithography, in which the circuit pattern is
projected onto a light sensitive material (the photoresist), and (3) etch, in
which the unmasked parts of the deposited material on the wafer are selectively
removed to form the IC circuit pattern.
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Each step of the manufacturing process for ICs requires specialized
manufacturing equipment. Today, plasma etch systems are used for the great
majority of etching processes. During a plasma etch process (also known as "dry
etch"), a semiconductor wafer is exposed to a plasma composed of a reactive gas,
such as chlorine, which etches away selected portions of the layer underlying
the patterned photoresist layer.
Segmentation of the Etch Market
The Company believes that the dry etch market is becoming increasingly
segmented. Certain dry etch technologies or processes are better suited for
etching different types of materials (films) and, as a result, the dry etch
market may be segmented according to the type of film being etched. In addition,
as ICs become increasingly complex, certain etch steps required to manufacture a
state of the art IC demand leading edge (or "critical") etch performance. For
example, to produce a 64-megabit DRAM device, semiconductor manufacturers are
required to etch certain device features at dimensions as small as 0.25 micron.
Nonetheless, even in the most advanced ICs, a significant number of production
steps can be performed with a significantly less demanding (or "non-critical")
etch performance. As a result, the Company believes the etch market has also
begun to segment according to the required level of etch performance -- critical
or non-critical.
Segmentation of the Etch Market by Film
The dry etch market is generally segmented into the following market
segments, defined according to the class of film being etched: polysilicon,
oxide (dielectric) and metal. According to VLSI Research Inc., the polysilicon,
oxide and metal segments of the dry etch market represented approximately 41%,
43% and 16%, respectively, of the total sales of dry etch systems in 1997. New
films are continually being developed in each of these three market segments.
Today, the semiconductor industry is faced with the need to develop and
adopt an unprecedented number of new films as conventional materials are running
out of the physical properties needed to support continuing shrinks in die size
and to provide improved performance. Certain of these films present unique etch
production problems. For example, the use of certain new films, such as
platinum, currently being used in the development of high-density DRAM devices,
and Lead Zirconium Titanate (PZT), currently being used in the development of
non-volatile, ferroelectric random access memory (FRAM) devices, is presenting
new challenges to semiconductor manufacturers. While these new films contribute
to improved IC performance and reduced die size, their unique properties make
them particularly difficult to etch and, therefore, require more advanced etch
process technologies. Similarly, corrosion of metal etched wafers within 48 to
72 hours after completion of the etch process has been a chronic problem for
semiconductor manufacturers, regardless of the line geometries involved. The
reaction byproducts of a chlorine based metal etch process tend to redeposit on
the wafer and corrode when exposed to water in the atmosphere. Removal of these
contaminants from the wafer is essential to prevent this corrosion.
Segmentation of the Etch Market into Critical and Non-Critical Production
Steps
Over time, the disparity in relative prices for etch systems capable of
etching at non-critical versus critical dimensions has grown significantly. The
Company believes that in 1993, the cost of an eight inch wafer-capable system
ranged from approximately $500,000 to $700,000. Given the relatively modest
price differential among etchers, manufacturers of ICs and similar devices
tended to purchase one system, (the one they believed provided the most
technologically advanced solution for their particular etch requirements), to
perform all their etching. In contrast, the cost today of an eight inch capable
etch system ranges from approximately $500,000, for reliable, non-critical
etchers, to more than $2.5 million, for advanced, state of the art critical
etchers. Consequently, the Company believes it is no longer cost effective to
use state of the art etchers to perform both critical and non-critical etching.
When critical etching is required in the production process, the Company
believes that the leading purchasing factor for a semiconductor manufacturer
will continue to be, ultimately, the product's etch performance. When
non-critical etching is required in the production process, the Company believes
the leading purchasing factor for a semiconductor manufacturer will be the
overall product cost, with particular emphasis on the system's sale price. In
either case, however, the semiconductor manufacturer is driven to make a
value-oriented purchasing decision which minimizes the
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overall etch system costs, while meeting the required etch process performance.
The Company believes that a well-implemented "mix and match" purchasing
philosophy already adopted by a significant number of semiconductor
manufacturers to minimize their expenditures for photolithography equipment,
could allow a semiconductor manufacturer to realize significant etch system
savings.
BUSINESS STRATEGY
Tegal believes it currently has one of the largest installed bases of etch
equipment in the industry and that over the years it has earned a reputation as
a supplier of reliable, value-oriented etch systems. The Company's systems are
sold throughout the world to both domestic and international customers. In
fiscal 1998, approximately 61% of the Company's revenues resulted from
international sales. To support its systems sales, the Company maintains local
service and support in every major geographic market in which it has an
installed base, backed up by a spares logistics system designed to provide
delivery within 24 hours anywhere in the world.
The Company's objective is to build on its technical knowledge, experience
and reputation in the etch industry, as well as its established sales, marketing
and customer service infrastructure, to be a leading supplier of etch systems
for both the critical and non-critical segments of the etch market. To meet this
objective, the Company is implementing a business strategy incorporating the
following elements:
- Use the performance capabilities of the Company's 6500 series systems to
penetrate the IC and related device markets for critical etch of specific
applications and films where Tegal's products provide unique performance
capabilities; and
- Increase sales of its non-critical etch systems by focusing sales and
marketing on specialty applications that are addressed by the Company's
900 series non-critical etchers such as thin film heads, small flat
panels, printer heads, and the conversion from wet to dry etch
technologies.
PRODUCTS
Critical Etch Products
The Company offers several models of its 6500 series critical etch products
configured to address film types and applications desired by the customer. In
1994, Tegal introduced its 6500 series etch system for sub-0.5 micron
polysilicon etching.
In 1995, the Company introduced its emerging films 6500 series etch system
for the etching of new high k dielectrics and associated materials used in
capacitors at sub-0.5 micron, for high-density DRAM devices and FRAMs. The
Company also introduced its metal etch system for sub-0.5 micron critical
etching of five layer composite films of aluminum/copper/silicon/titanium alloys
in 1995. In 1996, the Company introduced its isolation technology 6500 series
etch system aimed at transistor isolation needs caused by increased packing
densities used in memory devices employing design rules at or below 0.35 micron.
In 1997, the Company introduced its 6500 series etchers to the thin film head
market and started etching samples on the leading edge thin film head materials.
All 6500 series models offer one and two-chamber configurations. 6500 series
systems typically range in price between $1.8 million and $2.5 million.
The Company's 6500 series systems have been engineered to provide process
flexibility and competitive throughput for wafers up to eight inches, while
minimizing cost and space requirements. A dual chamber platform design allows
for either parallel or integrated etch processes. The Company seeks to maximize
the 6500 series systems' average throughput by incorporating a process chamber
technology and system architecture designed to minimize processing down-time
required for cleaning and maintenance. Each 6500 series system has a central
wafer handling system with full cassette vacuum loadlocks, noncontact optical
wafer alignment and a vacuum transport system. Individual process module
servicing is possible without shutting down the system or other chambers.
Contamination control features in the 6500 series systems include pick and place
wafer handling with no moving parts above the wafer, four-level vacuum isolation
from the atmosphere to the etch chamber, and individual high-throughput,
turbo-pumped vacuum systems for the cassettes, wafer handling platform and each
process module. These and other features of the 6500 series are
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designed to enable a semiconductor manufacturer to reduce wafer particle
contamination to a level which the Company believes exceeds industry standards
and to improve etch results and process flexibility.
In addition, the Company's 6500 series systems incorporate a software
system which has been designed and tested to minimize the risk of the system
operator "crashing" the system or interrupting wafer fabrication and to be easy
to use. This software system incorporates a software architecture designed to
operate in multiple interface modes, including operator, maintenance engineer,
process engineer and diagnostic modes. Features include icon-based touch screen
menus for ease of use. In addition, the software provides a quick-response
interface which allows the semiconductor manufacturer access to all necessary
system information for factory automation. The system includes data archiving
and remote, real time diagnostics.
Non-Critical Etch Products
The Company first introduced its 900 series etch system in 1984 as a
critical etch tool of that era. Over the years, the Company has repositioned the
900 series system as a non-critical etch system capable of performing the
less-demanding etch steps required in the production of an IC and related
devices. In 1994, the Company introduced an eight inch wafer capable 900 series
system (capable of etching five inch to eight inch wafers) that was a scaled-up
version of its three inch to six inch wafer capable non-critical etch system.
The 900 series non-critical etch systems are aimed at pad, zero layer,
non-selective nitride, backside, planarization and small flat panel display
applications and thin film etch applications used in the manufacture of
read-write heads for the disk drive industry. The Company's 900 series systems
typically sell for a price of $350,000 to $600,000.
The 900 series systems incorporate a single diode process chamber on a
non-loadlocked modular platform for reliability and ease of maintenance, which
the Company believes results in higher average throughput and lower operating
costs. Continued improvements in both reliability and performance have enabled
the Company to offer the 900 series systems as a solution for non-critical
applications involving line widths of 0.8 micron and greater.
CUSTOMERS
The Company sells its systems to semiconductor and related electronic
device component manufacturers throughout the world. Major customers over the
last three fiscal years have included the following:
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ABB Semiconductor AG Matsushita SGS-Thomson Microelectronics
Austria Mikro Systeme Micrel Semiconductor Shanghai Belling
International Motorola Siemens
Bosch NEC Siliconix
EMM Northern Telecom Sony
Hyundai Read Rite Toshiba
International Rectifier -- Rohm VLSI Technology
Hex Fet America Samsung Winbond
LG Semiconductor Seiko Epson
Linear Technology SEL
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Of these 26 customers, 14 ordered one or more systems from the Company in
fiscal 1998. The composition of the Company's top five customers has changed
from year to year, but net system sales to the Company's top five customers in
each of fiscal 1998, 1997 and 1996 accounted for 61.2%, 46.7% and 48.6%,
respectively, of the Company's total net system sales. Motorola, Samsung, Read
Rite and Hyundai represented 18.2%, 12.2%, 11.2% and 10.3%, respectively, of the
Company's net system sales in fiscal 1998. Winbond, Hyundai and Motorola
represented 16.8%, 13.6% and 10.2%, respectively, of the Company's net system
sales in fiscal 1997. Sony and Motorola represented 16.3% and 14.9%,
respectively, of the Company's net system sales in fiscal 1996. Other than the
above customers, no single customer represented more than 10% of the Company's
net system sales in fiscal 1998, 1997 or 1996. Although the composition of the
group comprising the Company's largest customers may vary from year to year, the
loss of a significant customer or any reduction in orders by any significant
customer, including reductions due to market, economic or
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competitive conditions in the semiconductor and related device manufacturing
industry, may have a material adverse effect on the Company.
BACKLOG
The Company schedules production of its systems based upon order backlog
and customer commitments. The Company includes in its backlog only orders for
which written authorizations have been accepted and shipment dates within the
next 12 months have been assigned. As of March 31, 1998 and 1997 the Company's
order backlog was approximately $3.4 million and $8.3 million, respectively.
Systems orders are subject to cancellation by the customer, but with substantial
penalties other than in the case of orders for evaluation systems or for systems
which have not yet incurred production costs. Orders may be subject to
rescheduling with limited or no penalty. Some orders are received for systems to
be shipped in the same quarter as the order is received. As a result, the
Company's backlog at any particular date is not necessarily indicative of actual
sales for any succeeding period.
MARKETING, SALES AND SERVICE
The Company sells its systems worldwide through a network of 14 direct
sales representatives and 16 independent sales representatives in 17 sales
offices located throughout the world. In the United States, the Company markets
its systems through direct sales personnel located in its Petaluma, California
headquarters, two regional sales offices and through two independent sales
representatives. In addition, the Company provides field service and
applications engineers out of three regional offices and its Petaluma
headquarters in order to ensure dedicated technical and field process support
throughout the United States on short notice.
The Company maintains sales, service, and process support capabilities in
Japan, Taiwan, Germany and the United Kingdom service/support operations in
Austria, China, France and Italy. In addition to its international direct sales
and support organizations, the Company markets its systems through independent
sales representatives in China, Israel, Italy, Korea and Singapore.
International sales, which consist of export sales from the United States
either directly to the end user or to one of the Company's foreign subsidiaries,
accounted for 61.3%, 69.0% and 63.2% of total revenue for fiscal 1998, 1997 and
1996, respectively. The Company generally sells its systems on 30-to-60 day
credit terms to its domestic and European customers. Customers in Pacific Rim
countries, other than Japan, are generally required to deliver a letter of
credit payable in U.S. dollars upon system shipment. Sales to other
international customers, including Japan, are either billed in local currency or
U.S. dollars. The Company anticipates that international sales will continue to
account for a significant portion of revenue in the foreseeable future.
International sales are subject to certain risks, including the imposition of
government controls, fluctuations in the U.S. dollar (which could increase the
sales price in local currencies of the Company's systems in foreign markets),
changes in export license and other regulatory requirements, tariffs and other
market barriers, political and economic instability, potential hostilities,
restrictions on the export or import of technology, difficulties in accounts
receivable collection, difficulties in managing distributors or representatives,
difficulties in staffing and managing international operations and potentially
adverse tax consequences. There can be no assurance that any of these factors
will not have a material adverse effect on the Company.
The Company generally warrants its new systems for 12 months and its
refurbished systems for six months from shipment. Installation is included in
the price of the system. The Company's field process engineers provide customers
with call-out repair and maintenance services for a fee. Customers may also
enter into repair and maintenance service contracts covering the Company's
systems. The Company trains customers' service engineers to perform routine
service for a fee and provides telephone consultation services generally free of
charge.
The sales cycles for the Company's systems vary depending upon whether the
system is an initial design-in, reorder or used equipment. Initial design-in
sales cycles are typically 12 to 18 months, particularly for 6500 series
systems. In contrast, reorder sales cycles are typically four to six months, and
used system sales cycles are generally one to three months. The initial
design-in sales cycle begins with the generation of a sales lead, which is
followed by qualification of the lead, an analysis of the customer's particular
applications needs and
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problems, one or more presentations to the customer (frequently including
extensive participation by the Company's senior management), two to three wafer
sample demonstrations, followed by customer testing of the results and extensive
negotiations regarding the equipment's process and reliability specifications.
Initial design-in sales cycles are monitored by senior management for correct
strategy approach and prioritization. The Company may, in some instances, need
to provide the customer with an evaluation critical etch system for three to six
months prior to the receipt of a firm purchase order.
RESEARCH AND DEVELOPMENT
The market for semiconductor capital equipment is characterized by rapid
technological change. The Company believes that continued and timely development
of new systems and enhancements to existing systems is necessary for it to
maintain its competitive position. Accordingly, the Company devotes a
significant portion of its personnel and financial resources to research and
development programs and seeks to maintain close relationships with its
customers in order to be responsive to their system needs.
The Company's research and development encompasses the following areas:
plasma technology, process characterization and development, material sciences
applicable to the etch environment, system design and architecture,
electro-mechanical design and software engineering. Management emphasizes
advanced plasma and reactor chamber modeling capabilities in order to accelerate
bringing advanced chamber designs to market. The Company employs
multi-discipline teams to facilitate short engineering cycle times and rapid
product development.
As of March 31, 1998, the Company had 65 full-time employees dedicated to
equipment design engineering, process support and research and development.
Research and development expenses for fiscal 1998, 1997 and 1996 were $11.0
million, $10.5 million and $10.0 million, respectively, and represented 26.6%,
18.3% and 16.1% of total revenue, respectively. Such expenditures were used for
the development of new systems and processes, continued enhancement and
customization of existing systems, etching customer samples in the Company's
demonstration labs and providing process engineering support at customer sites.
MANUFACTURING
The Company's etch systems are produced at its headquarters in Petaluma,
California. The Company's manufacturing activities consist of assembling and
testing components and sub-assemblies which are then integrated into finished
systems. The Company has structured its production facility to be driven either
by orders or by forecasts and has adopted a modular system architecture to
increase assembly efficiency and design flexibility. The Company has also
implemented "just-in-time" manufacturing techniques in its assembly processes.
The Company believes that improvements in manufacturing processes have allowed
the Company to reduce significantly its non-critical system manufacturing cycle
times. Non-critical system manufacturing cycle times, which typically took
nearly three months in 1990, now take approximately 14 days. The Company's cycle
times for its critical etch products are currently two to three months. The
Company seeks to improve these cycle times as the Company continues to
manufacture its 6500 series systems.
The Company procures certain components and sub-assemblies included in its
systems from a limited group of suppliers, and occasionally from a single source
supplier. In particular, the Company is dependent upon MECS Corporation
("MECS"), a robotic equipment supplier, as the sole source for the robotic arm
used in all of its 6500 series systems. The Company currently has no existing
supply contract with MECS, and the Company currently purchases all robotic
assemblies from MECS on a purchase order basis. Disruption or termination of
certain of these sources, including its robotic sub-assembly source, could have
an adverse effect on the Company's operations. While the Company believes that
alternative sources could be obtained and qualified to supply these components
or sub-assemblies, a prolonged inability to obtain such components or
sub-assemblies, receipt of defective components or sub-assemblies, as well as
difficulties or delays in shifting to alternative sources, could have a material
adverse effect on the Company's operating results and could damage customer
relationships.
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ENVIRONMENTAL MATTERS
The Company is subject to a variety of governmental regulations related to
the use, storage, handling, discharge or disposal of toxic, volatile or
otherwise hazardous chemicals used in the manufacturing process. The Company
believes that it is currently in compliance in all material respects with these
regulations and that it has obtained all necessary environmental permits to
conduct its business, which permits generally relate to the discharge of
hazardous wastes. Nevertheless, the failure to comply with present or future
regulations could result in fines being imposed on the Company, suspension of
production, alteration of the Company's manufacturing processes, or cessation of
operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur other expenses to comply with environmental
regulations. Any failure by the Company to control the use, disposal or storage
of, or adequately restrict the discharge of, hazardous substances could subject
the Company to future liabilities.
COMPETITION
The semiconductor capital equipment industry is highly competitive. The
Company believes that the principal competitive factor in the critical segment
of the etch industry is technical performance of the system, followed closely by
the existence of customer relationships, the overall system price, the ability
to provide service and technical support on a global basis and other related
cost factors. The Company believes that the principal competitive factor in the
non-critical segment of the etch industry is system price, followed closely by
the technical performance of the system, the existence of established customer
relationships, the ability to provide service and technical support on a global
basis and other related cost factors.
The Company believes that to be competitive, it will require significant
financial resources in order to offer a broad range of systems, to maintain
customer service and support centers worldwide and to invest in research and
development. Many of the Company's existing and potential competitors,
including, among others, Applied Materials, Inc., Lam Research Corporation,
Hitachi Ltd. and Tokyo Electron Limited, have substantially greater financial
resources, more extensive engineering, manufacturing, marketing and customer
service and support capabilities, larger installed bases of current generation
etch and other production equipment and broader process equipment offerings as
well as greater name recognition than the Company. The Company expects its
competitors to continue to improve the design and performance of their current
systems and processes and to introduce new systems and processes with improved
price and performance characteristics. No assurance can be given that the
Company will be able to compete successfully in the United States or worldwide.
INTELLECTUAL PROPERTY
The Company holds an exclusive license to 25 United States patents,
including its dual frequency tri-electrode control system, and 28 corresponding
foreign patents covering various aspects of its systems. The Company holds a
patent for its etch-rinse-strip-rinse process sequence directly, which process
has been designed to address the post-etch corrosion problems faced by
semiconductor manufacturers. The Company has also applied for eight additional
United States patents and 16 additional foreign patents. The Company believes
that the duration of such patents generally exceed the life cycles of the
technologies disclosed and claimed therein. The Company believes that although
the patents it has exclusively licensed or holds directly will be of value, they
will not determine the Company's success, which depends principally upon its
engineering, marketing, service and manufacturing skills. However, in the
absence of patent protection, the Company may be vulnerable to competitors who
attempt to imitate the Company's systems or processes and manufacturing
techniques and processes. In addition, other companies and inventors may receive
patents that contain claims applicable to the Company's systems and processes.
The sale of the Company's systems covered by such patents could require licenses
that may not be available on acceptable terms, if at all. The Company also
relies on trade secrets and other proprietary technology that it seeks to
protect, in part, through confidentiality agreements with employees, vendors,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by others.
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The original version of the system software for the Company's 6500 series
systems was jointly developed by the Company and Realtime Performance, Inc., a
third party software vendor. Tegal holds a perpetual, non-exclusive, nonroyalty
bearing license to use and enhance this software. The enhanced version of the
software currently used on the Company's 6500 series systems has undergone
multiple releases of the original software, and such enhancements were developed
exclusively by the Company. Neither the software vendor nor any other party has
any right to use the Company's current release of the system software.
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, there can be no
assurance that the Company will be able to protect its technology adequately or
that competitors will not be able to develop similar technology independently.
There can be no assurance that any patent applications that the Company may file
will be issued or that foreign intellectual property laws will protect the
Company's intellectual property rights. There can be no assurance that any
patent licensed by or issued to the Company will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide competitive
advantages to the Company. Furthermore, there can be no assurance that others
will not independently develop similar systems, duplicate the Company's systems
or design around the patents licensed by or issued to the Company.
On March 31, 1998, the Company filed a suit in the United States District
Court in the Eastern District of Virginia against Tokyo Electron Limited and
several of its U.S. subsidiaries (collectively, "TEL") alleging that TEL's
current generation of etch equipment infringes certain of the Company's patents.
The Company is seeking, among other things, injunctive relief barring TEL from
importing or selling such products. No assurance can be given as to the outcome
of such legal proceedings or as to the effect of any such outcome on the
Company.
On June 10, 1996, Lucent Technologies Inc. ("Lucent") filed a claim with
the United States District Court for the Northern District of California
alleging patent infringement by Austria Mikro Systeme International AG and AMS
Austria Mikro Systeme International, Inc. ("AMS") for the sale of integrated
circuits manufactured with the Company's dry plasma etch systems. On March 7,
1995, the Company executed an indemnification agreement with AMS, covering
certain uses of select equipment sold to AMS. Lucent and AMS have settled the
U.S. claim and AMS is now seeking indemnification from the Company through an
arbitration proceeding with respect to the U.S. claim. The Company has been
informed that Lucent has filed a claim for patent infringement in Germany
against AMS for the sale of integrated circuits manufactured with the Company's
dry plasma etch systems. AMS has requested indemnification for the German
matter. The Company believes that the claims made by AMS are without merit and
that the ultimate outcome of such claims is unlikely to have a material adverse
effect on the Company. No assurance can be given, however, as to the outcome of
such legal proceedings or as to the effect of any such outcome on the Company's
results of operations or financial condition.
As is typical in the semiconductor industry, the Company has received
notices from time to time from third parties alleging infringement claims. In
July 1991, the Company was advised by General Signal Corporation ("GSC") that
the Company may need a license under certain U.S. patents owned by GSC relating
to "cluster tool" equipment. The Company's 6500 series systems are generally
configured with multiple process chambers and, therefore, may be deemed "cluster
tool" equipment. A number of companies which were contacted by GSC with regard
to licensing these patents formed an ad-hoc committee to investigate the
validity of the GSC patents. As a result of such investigation, in November 1992
the committee members, including the Company, jointly notified GSC that they
believe the subject patents are invalid and that, accordingly, no license is
necessary. In the fall of 1994, GSC filed suit against Applied Materials, a non-
member of the ad-hoc investigative committee, alleging infringement of such
patents. To date, GSC has taken no action against the Company in connection with
the licensing of these patents. There can be no assurance that GSC will not take
any such action in the future or, if any such action is taken, as to the outcome
of such action.
Although there are currently no other pending claims or lawsuits by or
against the Company regarding possible infringement claims, there can be no
assurance that infringement claims by other third parties, or claims for
indemnification resulting from infringement claims, will not be asserted in the
future or that such
9
<PAGE> 11
assertions, if proven to be true, will not materially adversely affect the
Company. In the future, additional litigation may be necessary to enforce
patents issued or exclusively licensed to the Company, to protect trade secrets
or know-how exclusively licensed to or owned by the Company or to defend the
Company against claimed infringement of the rights of others and to determine
the scope and validity of the proprietary rights of others. Existing litigation
and any future litigation could result in substantial cost and diversion of
effort by the Company, which by itself could have a material adverse effect on
the Company's financial condition and operating results. Further, adverse
determinations in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent the
Company from manufacturing or selling its systems, any of which could have a
material adverse effect on the Company. In addition, there can be no assurance
that a license under a third party's intellectual property rights will be
available on reasonable terms, if at all.
EMPLOYEES
As of March 31, 1998, the Company had a total of 263 employees consisting
of 248 full-time permanent employees and 15 temporary or contract personnel,
including 65 in engineering, research and development, 47 in manufacturing, 115
in marketing, sales and customer service and support and 36 in executive and
administrative positions. Many of the Company's employees are highly skilled,
and the Company's success will depend in part upon its ability to attract,
retain and develop such employees. Skilled employees, especially employees with
extensive technological backgrounds, are currently in great demand. There can be
no assurance that the Company will be able to attract or retain the skilled
employees which may be necessary to continue its research and development,
manufacturing or marketing programs. The loss of any such persons, as well as
the failure to recruit additional key personnel in a timely manner, could have a
material adverse effect on the Company.
None of the Company's employees are represented by a labor union or covered
by a collective bargaining agreement. The Company considers its employee
relations to be good.
ADDITIONAL RISK FACTORS
Dependence on Recently Introduced Systems for Critical Etch Markets
The Company's 6500 series systems, its generation of critical etch systems,
have been designed for sub-0.35 micron critical etch applications in emerging
films, polysilicon and metal which the Company believes to be the leading edge
of critical etch applications. The Company's 6500 series systems which have been
installed are currently being used primarily for research and development
activities or in pilot production. For the 6500 series systems to achieve market
acceptance, the Company's customers must utilize these systems for volume
production. Achieving market acceptance of the Company's 6500 series systems is
very important to the Company's future financial results.
Because new product development commitments must be made well in advance of
sales, new product decisions must anticipate both the future requirements for
etch processes needed by semiconductor manufacturers and the equipment required
to address such applications. There can be no assurance that the market for
critical etch emerging film, polysilicon or metal etch systems will develop as
quickly or to the degree the Company expects. There can be no assurance whether
or when the 6500 series systems will achieve market acceptance. In addition, the
selling cycles of these new systems are typically lengthy.
In connection with the development and production of the 6500 series, the
Company has increased its operating expenses and is likely to invest in
increased inventory levels in the future. The failure to complete the commercial
introduction of this generation of systems in a timely manner could result in,
among other things, an increase in operating expenses and inventory obsolescence
without corresponding sales, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
If the 6500 series does not achieve significant sales or volume production
due to a lack of customer acceptance, inability to correct technical,
manufacturing or other difficulties which may develop with this
10
<PAGE> 12
series, or for any other reason, the Company's business, financial condition and
results of operations would be materially adversely affected.
Impediments to Customer Acceptance
A substantial investment is required to install and integrate capital
equipment into a semiconductor production line. The Company believes that once a
device manufacturer has selected a particular vendor's capital equipment, that
manufacturer generally relies upon that vendor's equipment for that specific
production line application and, to the extent possible, subsequent generations
of that vendor's systems. Accordingly, it may be extremely difficult to achieve
significant sales to a particular customer once another vendor's capital
equipment has been selected by that customer unless there are compelling reasons
to do so, such as significant performance or cost advantages. In addition,
certain of the Company's competitors may seek to sell, as an attractively priced
package, etch equipment together with other process equipment, such as
deposition equipment. Furthermore, some semiconductor manufacturers have already
made initial buying decisions for the next generation of sub-0.35 micron etch
requirements. Any failure to gain access and achieve sales to new customers will
adversely affect the successful commercial acceptance of the Company's 6500
series systems and would have a material adverse effect on the Company.
In addition, the Company believes that its future long term success also
depends on its ability to increase sales of its etch systems, particularly its
generation 6500 series, to Japanese semiconductor manufacturers. The Japanese
semiconductor market represents a substantial percentage of the worldwide market
and may pose additional challenges to penetrate successfully. The Company
believes that it must invest substantial resources in order to increase its
penetration of the Japanese semiconductor market and that, even with such
investments, there can be no assurance that it will be successful in increasing
its penetration of this market.
Fluctuations in Quarterly Operating Results
The Company's revenue and operating results have fluctuated and are likely
to continue to fluctuate significantly from quarter to quarter, and there can be
no assurance as to future profitability.
The Company's 900 series etch systems typically sell for prices ranging
between $350,000 and $600,000, while prices of the Company's 6500 series
critical etch systems typically range between $1.8 million and $2.5 million. To
the extent the Company is successful in selling its 6500 series systems, the
sale of a small number of these systems will probably account for a substantial
portion of revenue in future quarters, and a transaction for a single system
could have a substantial impact on revenue and gross margin for a given quarter.
The Company's backlog at the beginning of each quarter does not normally
include all systems sales needed to achieve planned revenue for the quarter.
Consequently, the Company depends on obtaining orders for shipment within a
particular quarter to achieve its revenue objectives for that period. Because
the Company builds a portion of its systems according to forecast, the absence
of significant backlog for an extended period of time could hinder the Company's
ability to plan expense, production and inventory levels, which could materially
adversely affect its operating results. Furthermore, a substantial portion of
the Company's net revenue has historically been realized near the end of the
quarter. Accordingly, the failure to receive anticipated orders or delays in
shipments near the end of a quarter, due, for example, to unanticipated customer
delays, cancellations or manufacturing difficulties, may cause quarterly net
revenue to fall significantly short of the Company's objectives, which could
materially adversely affect the Company's operating results.
The timing of new systems and technology announcements and releases by the
Company and others may also contribute to fluctuations in quarterly operating
results, including cases in which new systems or technology offerings cause
customers to defer ordering systems from the Company's existing product lines.
The Company's revenue and operating results may also fluctuate due to the timing
and mix of systems sold, the volume of service provided and spare parts
delivered in a particular quarter and changes in pricing by the Company, its
competitors or suppliers. The impact of these and other factors on the Company's
revenue and operating results in any future periods are, and will continue to
be, difficult for the Company to forecast.
11
<PAGE> 13
The need for continued investment in research and development, for capital
equipment requirements and for extensive ongoing customer service and support
capability worldwide result in significant fixed costs which will be difficult
to reduce in the event that the Company does not meet its sales objectives. The
Company's expense levels are based, in part, on expectations of future revenue.
If revenue in a particular quarter does not meet expectations, fixed operating
expenses will adversely affect results of operations. A variety of factors
influence the level of revenue in a particular quarter. Those factors include
the timing and mix of systems sales, the introduction or announcement of new
systems by the Company or the Company's competitors, management decisions to
commence or discontinue product lines, the Company's ability to design,
introduce and manufacture new systems on a timely basis, the timing of research
and development expenditures and expenses attendant to the further development
of marketing, process support and service capabilities, specific economic
conditions in the semiconductor industry or major global semiconductor markets,
general economic conditions and exchange rate fluctuations. The impact of these
and other factors on the Company's revenue and operating results in any future
periods are, and will continue to be, difficult for the Company to forecast.
Cyclicality of the Semiconductor Industry
The Company's business depends upon the capital expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and systems utilizing integrated circuits.
The semiconductor industry is highly cyclical and historically has experienced
periodic downturns, which often have had a material adverse effect on the
semiconductor industry's demand for semiconductor capital equipment, including
etch systems manufactured by the Company. The semiconductor industry is
currently experiencing such a slowdown. The current and prior semiconductor
industry downturns have adversely affected the Company's revenue, gross margins
and results of operations. In addition, the need for continued investment in
research and development, substantial capital equipment requirements, and
extensive ongoing customer service and support requirements worldwide will
continue to limit the Company's ability to reduce expenses in response to any
such downturn or slowdown. The Company's revenue, gross margin and results of
operations may continue to be materially adversely affected by the current
slowdown or by future downturns or slowdowns in the rate of capital investment
in the semiconductor industry. Moreover, although the semiconductor industry may
experience growth that causes significant growth in the semiconductor capital
equipment industry, there can be no assurance that such growth can be sustained
or that the Company will be positioned to benefit from such growth.
Domestic and International Economic Conditions
The Company's business is subject to general economic conditions, both in
the United States and abroad. A significant decline in economic conditions in
any significant geographic area could have a material adverse effect on the
Company. For example, there is currently an economic crisis in Asia, which has
led to weak demand for the Company's products in certain Asian
economies -- notably Korea and Japan. Furthermore, current price cutting by U.S.
personal computer manufacturers are putting pressure on semiconductor
manufacturers to contain spending on capital equipment. The Company anticipates
that such economic events may continue to adversely affect the Company's results
of operations, and a further decline of economic conditions could, in the
future, affect demand for the Company's products, which could have a material
adverse effect on the Company's sales and operating results.
Rapid Technological Change; Importance of Timely Product Introduction
The semiconductor manufacturing industry is subject to rapid technological
change and new system introductions and enhancements. The Company believes that
its future success depends on its ability to continue to enhance its existing
systems and their process capabilities, and to develop and manufacture in a
timely manner new systems with improved process capabilities. The industry also
is subject to fundamental changes in equipment requirements, such as the prior
shift from six inch wafer equipment to eight inch wafer equipment and the
anticipated shift from eight inch wafer equipment to twelve inch wafer
equipment.
The Company must manage system transitions successfully, as introductions
of new systems could adversely affect sales of existing systems, including its
6500 series. There can be no assurance that the
12
<PAGE> 14
Company will be successful in the introduction and volume manufacture of new
systems or that the Company will be able to develop and introduce, in a timely
manner, new systems or enhancements to its existing systems and processes which
satisfy customer needs or achieve market acceptance. The failure of the Company
to accomplish any of the above would adversely affect the Company's business,
financial condition and results of operations. In addition, the Company may
incur substantial unanticipated costs to ensure product functionality and
reliability early in its products' life cycles. If new products have quality or
reliability problems, the Company could experience reduced orders, delays in
collecting accounts receivable, higher manufacturing costs, and additional
service and warranty expenses, any of which could have a material adverse effect
on the Company's business, financial condition and operating results.
Lengthy Sales Cycle
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to add new manufacturing capacity or to
expand existing manufacturing capacity, both of which typically involve a
significant capital commitment. The Company often experiences delays in
finalizing system sales following initial system qualification while the
customer evaluates and receives approvals for the purchase of the Company's
systems and completes a new or expanded facility. Due to these and other
factors, the Company's systems typically have a lengthy sales cycle (often 12 to
18 months in the case of critical etch systems) during which the Company may
expend substantial funds and management effort. Lengthy sales cycles subject the
Company to a number of significant risks, including inventory obsolescence and
fluctuations in operating results over which the Company has little or no
control.
Future Capital Needs
The development, manufacture and marketing of etch systems are highly
capital intensive. In order to be competitive, the Company must continue to make
significant expenditures for, among other things, capital equipment and the
manufacture of evaluation and demonstration unit inventory for its 6500 series
etch systems. The Company expects that its existing cash balances, anticipated
cash flow from operations and funds available under its existing lines of credit
will satisfy its financing requirements for the next twelve months. To the
extent that such financial resources are insufficient to fund the Company's
activities, additional funds will be required. There can be no assurance that
additional financing will be available on reasonable terms or at all. To the
extent that additional capital is raised through the sale of additional equity
or convertible debt securities, the issuance of such securities could result in
additional dilution to the Company's stockholders.
Dependence on Key Employees
The future success of the Company is dependent, in part, on its ability to
retain certain key personnel. Many of these key personnel would be difficult to
replace. The Company also needs to attract additional skilled personnel in all
areas of its business to grow. The competition for these personnel is intense,
and the loss of any such persons, as well as the failure to recruit additional
key personnel in a timely manner, could have a material adverse effect on the
Company's business, financial condition and operating results. There can be no
assurance that the Company will be able to retain its existing personnel or
attract additional qualified employees in the future.
Customer Concentration
Although the composition of the group comprising the Company's largest
customers may vary from year to year, the loss of a significant customer or any
reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the semiconductor manufacturing
industry, may have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's ability to increase
its sales in the future will depend, in part, upon its ability to obtain orders
from new customers as well as the financial condition and success of its
existing customers and the general economy of which there can be no assurance.
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<PAGE> 15
Additional Risks Associated with International Sales and Operations
Sales of the Company's systems in certain countries are billed in local
currency, and the Company has two lines of credit denominated in Japanese Yen.
The Company generally attempts to offset a portion of its U.S. dollar
denominated balance sheet exposures subject to foreign exchange rate
remeasurement each period held by its foreign subsidiaries whose books are
denominated in currencies other than U.S. dollars by purchasing currency options
and forward currency contracts for future delivery. There can be no assurance
that the Company's future results of operations will not be adversely affected
by foreign currency fluctuations. In addition, the laws of certain countries in
which the Company's products are sold may not provide the Company's products and
intellectual property rights with the same degree of protection as the laws of
the United States.
Control by Existing Stockholders
The Company's principal stockholders and the Company's executive officers
and directors beneficially owned approximately 56.0% of the Company's
outstanding shares of common stock as of March 31, 1998. Accordingly, these
stockholders are able to elect all of the Company's directors and to determine
the outcome of corporate actions requiring stockholder approval, such as mergers
and acquisitions, regardless of how other stockholders of the Company may vote.
Such a high level of ownership by such persons or entities may have a
significant effect in delaying, deferring or preventing a change in control of
the Company and may adversely affect the voting and other rights of holders of
common stock. In addition to the foregoing, the ability of the Company's Board
of Directors to issue preferred stock without further stockholder approval or to
exercise the anti-takeover provisions of its Shareholder Rights Plan in the
event of an unsolicited attempt to assume control of the Company could have the
effect of delaying, deferring or preventing a change in control of the Company.
See "-- Recent Development."
Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's operating
results, sales of the Company's common stock into the market place, failure to
meet or changes in analysts' expectations, natural disasters, outbreaks of
hostilities, general conditions in the semiconductor industry or the worldwide
economy, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in patents or other
intellectual property rights and developments in the Company's relationships
with its customers and suppliers could cause the price of the Company's common
stock to fluctuate, perhaps substantially. In addition, in recent years the
stock market in general, and the market for shares of small capitalization
stocks in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. There
can be no assurance that the market price of the Company's common stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance. See "-- Recent Development."
Year 2000 Compliance
The Company utilizes a significant number of computer software programs and
operating systems across its entire organization. To the extent that the
Company's software applications contain source code that is unable to interpret
appropriately the upcoming calendar year "2000" and beyond, some level of
modification or replacement of such applications will be necessary. The Company
is working to identify its applications that are not "Year 2000" compliant and
plans to modify or replace such applications, as necessary. Given information
known at this time about the Company's systems that are non-compliant, coupled
with the Company's ongoing, normal course-of-business efforts to upgrade or
replace critical systems, as necessary, management does not expect Year 2000
compliance costs to have any material adverse impact on the Company. Any costs
related to the Company's Year 2000 compliance efforts will be expensed as
incurred. No assurance can be given, however, that all of the Company's systems
will be Year 2000 compliant or that compliance costs or the impact of the
Company's failure to achieve substantial Year 2000 compliance will not have a
material adverse effect on the Company.
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RECENT DEVELOPMENT
The Company is a party to an Amended and Restated Information and
Registration Rights Agreement dated as of March 31, 1990, as amended (the
"Registration Rights Agreement"), with the holders of certain of its securities
issued prior the Company's initial public offering in October 1995. One of these
holders, Benefit Capital Management Corporation ("Benefit"), as Investment
Manager for The Prudential Insurance Company of America, Separate Account No.
VCA-GA-5298, has exercised its rights under the Registration Rights Agreement to
demand registration of the sale or other transfer ("disposition") of 1,745,813
shares (the "Benefit Shares") of the Company's common stock, pursuant to a
registration statement on Form S-3 (the "Registration Statement"). The
Registration Statement was filed with the Securities and Exchange Commission on
May 8, 1998. As of March 31, 1998, the Benefit Shares represented approximately
16.5% of the issued and outstanding shares of the Company's common stock.
Under the terms of the Registration Rights Agreement, the Company is
required to keep the Registration Statement effective until the earlier of 120
days from effectiveness of the Registration Statement or until Benefit has
completed the distribution of the Benefit Shares as described in the
Registration Statement. There is no limit to the number of times that Benefit
may demand registration of the Benefit Shares.
ITEM 2. PROPERTIES
The Company maintains its headquarters, encompassing its executive office,
manufacturing, engineering, research and development operations, in one leased
120,000 square foot facility in Petaluma, California. The Company currently
occupies 90,000 square feet of this building, with the remaining portion sublet
or being offered for sublet. The lease expires in March 2004. Other than certain
large pieces of capital equipment leased by the Company, the Company owns
substantially all of the machinery and equipment used in its facilities. The
Company believes that its existing facilities are adequate to meet its
requirements for several years.
The Company leases sales, service and process support space in Phoenix,
Arizona; Sunnyvale, California; Austin, Texas; Manassas, Virginia; Paris,
France; Munich, Germany; Kawasaki, Japan; Catania, Italy; Seoul, Korea and Hsin
Chu City, Taiwan. The Company also leases space for administrative offices in
Heemstede, The Netherlands.
ITEM 3. LEGAL PROCEEDINGS
Except as provided in Item 1. Business -- Intellectual Property, there are
no material legal proceedings pending to which the Company is a party.
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<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended March 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers and directors of the Company as of March 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert V. Hery........... 56 Chairman of the Board and Director
Michael L. Parodi........ 49 President, Chief Executive Officer and Director
David Curtis............. 44 Vice President, Finance and Administration, Chief
Financial Officer, Secretary and Treasurer
Stephen P. DeOrnellas.... 43 Vice President, Technology and Corporate Development
and Chief Technical Officer
Diane M. Fennell......... 53 Vice President, Marketing and Customer Applications
Support
George B. Landreth....... 43 Vice President, Product Development
James D. McKibben........ 47 Vice President, Worldwide Sales and Marketing
Mark L. Siegel........... 59 Vice President, Worldwide Customer Support and
Operations
</TABLE>
Robert V. Hery has been a Director of the Company since 1990 and assumed
the additional roles of President and Chief Executive Officer of the Company in
January 1991 and the Chairman of the Board in March 1995. Effective as of
December 17, 1997, Mr. Hery resigned as the President and Chief Executive
Officer of the Company. Mr. Hery remains Chairman of the Board of Directors of
the Company. From 1987 to 1990, Mr. Hery was President and Chief Executive
Officer of AMOT Controls Corporation, an international manufacturer of machinery
control components used in explosive and hazardous areas. From 1985 to 1987, Mr.
Hery served as Vice President and General Manager of KLA Instruments Corporation
("KLA"), a manufacturer of semiconductor capital equipment, where he started the
Wafer Inspection Systems Division. From 1984 to 1985, Mr. Hery was a consultant
to high-technology start-ups as Acting Chief Executive Officer and marketing
troubleshooter. From 1983 to 1984, he served as Vice President of Marketing and
New Business Development, and prior to that, from 1979 to 1983, he served as
Vice President of Operations, responsible for product development,
manufacturing, quality and cost control functions of MAI Basic Four, a
manufacturer of minicomputer equipment. From 1975 to 1979, Mr. Hery was Vice
President of Research and Product Development for Dataproducts Corporation, a
manufacturer of computer peripherals equipment. From 1965 to 1975, Mr. Hery held
various management positions in product development with NCR Corporation and the
communications division of Motorola.
Michael L. Parodi joined the Company as Director, President and Chief
Executive Officer in December 1997. From 1991 to 1996, Mr. Parodi was Chairman
of the Board, President and Chief Executive Officer of Semiconductor Systems,
Inc. ("SSI"), a manufacturer of photolithography processing equipment sold to
the semiconductor and thin film head markets until SSI was merged with FSI
International ("FSI"). Mr. Parodi remained with FSI as Executive Vice President
and General Manager of SSI from the time of the merger to December 1997,
integrating SSI into FSI. In 1990, Mr. Parodi led the acquisition of SSI from
General Signal Corporation. Prior to 1990, Mr. Parodi held various senior
engineering and operations management positions with General Signal Corporation,
Signetics Corporation, Raytheon Company, Fairchild Semiconductor Corporation and
National Semiconductor Corporation. Mr. Parodi currently is a member of the
Semiconductor Equipment and Materials International and the U.S. Display
Consortium Boards of Directors.
David Curtis joined the Company in August 1991 as Vice President of Finance
and Administration and Chief Financial Officer and from May 1995 until June
1996, he assumed the additional role of Vice President of Operations. Prior to
joining the Company, Mr. Curtis served as Chief Financial Officer of AMOT
Controls Corporation from 1988 until 1991. Prior to 1991, he held consulting
positions with Pittiglio Rabin Todd and
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<PAGE> 18
McGrath, an operations consulting firm specializing in implementing planning and
control processes in rapidly growing technology companies and with Arthur
Andersen & Co.'s systems consulting division.
Stephen P. DeOrnellas joined the Company in July 1990 as Vice President of
Marketing and Technology, served as Vice President of Process Technology from
April 1995 until June 1996, at which time he was appointed Vice President,
Technology and Corporate Development and Chief Technical Officer. From 1989 to
1990 he was Vice President of Marketing for the Wafer Inspection Systems
Division of KLA. From 1981 to 1989 he held a variety of product development and
marketing management positions, including Vice President Marketing from 1987 to
1989, Vice President of Process Engineering from 1983 to 1987, and Senior
Process Engineer from 1981 to 1983, with Lam Research Corporation where he had
responsibility for the development and introduction of the Lam Autoetch and
Rainbow product lines.
Diane M. Fennell joined the Company in January 1997 as Vice President,
Marketing and Customer Applications Support. From 1995 to 1996, Ms. Fennell was
Group Manager of Product Management for Unit Instruments responsible for
introducing several new products. From 1991 to 1995, she owned and operated
Fennell Associates, Inc., a sales representative organization representing
multiple lines of semiconductor capital equipment and capital equipment
components to the semiconductor and capital equipment industries. From 1987 to
1991, Ms. Fennell held product marketing and sales support management positions
with LAM Research Corporation. Prior to 1987, she held several process
engineering and lab manager positions with Applied Materials, Inc., Temescal,
Signetics Corporation and Texas Instruments.
George B. Landreth joined the Company in November 1992 as Manager of
Mechanical Engineering where he was responsible for directing the development of
the Company's 6500 series critical etch systems platform. From June 1996 until
April 1997 he served as Director of Program Development, at which time he was
promoted to Vice President, Product Development. Prior to joining the Company,
Mr. Landreth held product development engineering management and design
engineering positions with KLA, Silicon Valley Group, Inc., Optoscan
Corporation, Eaton Corporation, Siltec Corporation and Peterbilt Motors.
James D. McKibben joined the Company in June 1996 as Vice President,
Worldwide Sales. From July 1996 until January 1997 he assumed the additional
role of Vice President, Marketing and Customer Applications Support. Since
September 1997, he has re-assumed the additional role of Vice President,
Marketing. Prior to joining the Company, from 1995 to 1996 and from 1988 to
1992, Mr. McKibben was Vice President, Marketing, Sales and Customer Support for
MRS Technology, Inc., a lithography equipment manufacturer for flat panel
displays. From 1993 to 1995, he served as Director of Marketing and Sales for
SSI. From 1992 to 1993, he was Regional Manager for Kulicke and Soffa
Industries, Inc., a maker of wire bonders and other back-end assembly equipment
for the IC industry. Prior to 1988, Mr. McKibben held several sales and service
management positions with Wild/Lietz, Inc., GCA Corporation and J.T. Baker
Chemical Company.
Mark L. Siegel joined the Company in June 1996 as Vice President,
Operations. In April 1997, he assumed the additional role of Vice President of
Worldwide Customer Support responsible for the Company's field service, spare
parts and refurbished systems businesses. From 1991 to 1996 he was Vice
President, Operations at Megatest Corporation up through its merger with
Teradyne Corporation. From 1989 to 1991 he served as President of SSI, a unit of
General Signal. From 1987 to 1989 he served as Vice President and General
Manager for VLSI Technology, Inc.'s ASIC Memory Division and from 1984 to 1987,
was Vice President and General Manager of Signetics Corporation's Application
Specific Products Division. Prior to 1984, Mr. Siegel held several senior
management positions with, Motorola, Xerox and Univac.
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<PAGE> 19
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>
FISCAL YEAR 1996
Third Quarter........................................... 13 7/8 9 1/4
Fourth Quarter.......................................... 10 1/2 6 7/8
FISCAL YEAR 1997
First Quarter........................................... 11 1/8 6 3/8
Second Quarter.......................................... 8 4 5/8
Third Quarter........................................... 6 5/8 4 1/2
Fourth Quarter.......................................... 9 1/8 4 3/4
FISCAL YEAR 1998
First Quarter........................................... 8 3/4 5
Second Quarter.......................................... 10 1/4 6
Third Quarter........................................... 11 1/2 4
Fourth Quarter.......................................... 7 1/2 4
</TABLE>
The approximate number of record holders of the Company's common stock as
of March 31, 1998 was 136. Tegal has not paid any cash dividends since its
inception and does not anticipate paying cash dividends in the foreseeable
future. Further, the Company's domestic lines of credit restrict the declaration
and payment of cash dividends.
18
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
-------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue.................................. $41,472 $57,423 $62,046 $ 44,645 $ 38,022
Gross profit............................. 17,095 25,901 28,577 20,583 16,508
Operating income (loss).................. (6,673) 3,180 6,572 1,376 (1,072)
Income (loss) before income taxes........ (5,545) 4,180 6,186 949 (1,501)
Net income (loss)........................ (5,545) 3,140 5,566 828 (1,501)
Net income (loss) per share:(1)
Basic................................. (0.53) 0.31 1.14 (0.05) (5.67)
Diluted............................... (0.53) 0.29 0.64 (0.05) (5.67)
Shares used in per share computation:
Basic................................. 10,380 10,124 4,506 502 357
Diluted............................... 10,380 10,764 8,760 502 357
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $25,660 $30,323 $23,283 $ 2,351 $ 3,462
Working capital.......................... 39,574 45,392 41,726 11,432 11,297
Total assets............................. 55,146 63,524 64,672 33,744 27,468
Short-term notes payable to banks and
others................................ 285 252 243 8,164 3,947
Long-term obligations.................... 101 301 356 4,338 3,749
Redeemable preferred stock............... 0 0 0 21,695 22,382
Stockholders' equity (deficit)........... 44,804 50,542 47,626 (11,633) (12,018)
</TABLE>
- ---------------
(1) The Company adopted Statement of Accounting Standard No. 128 ("FAS 128"),
Earnings Per Share ("EPS"), which was issued in February 1997. FAS 128
requires presentation of both basic and diluted EPS on the income statement.
For all periods presented, basic EPS is computed by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS is computed using the
weighted average number of common and potential common stock equivalent
shares outstanding during the period, except when antidilutive. In computing
diluted EPS, the average stock price for the period is used in determining
the number of shares assumed to be purchased from the exercise of stock
options.
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information contained herein contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, which can
be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology or which constitute projected
financial information. The following contains cautionary statements identifying
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the years
indicated as a percentage of revenue:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenue............................................. 100.0% 100.0% 100.0%
Cost of sales....................................... 58.8 54.9 53.9
----- ----- -----
Gross profit........................................ 41.2 45.1 46.1
Operating expenses:
Research and development.......................... 26.6 18.3 16.1
Sales and marketing............................... 14.7 10.8 10.7
General and administrative........................ 16.0 10.5 8.7
----- ----- -----
Total operating expenses.................. 57.3 39.6 35.5
----- ----- -----
Operating income.................................... (16.1) 5.5 10.6
Other income (expense), net......................... 2.7 1.7 (0.6)
----- ----- -----
Income before income taxes.......................... (13.4) 7.2 10.0
Provision for income taxes.......................... 0.0 1.7 1.0
----- ----- -----
Net income................................ (13.4)% 5.5% 9.0%
===== ===== =====
</TABLE>
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
The Company's revenue is derived from sales of new and refurbished systems,
spare parts and non-warranty service. Revenue declined 27.7 percent in fiscal
1998 from fiscal 1997 (to $41.5 million from $57.4 million). Revenue declined
7.4 percent in fiscal 1997 from fiscal 1996 (to $57.4 million from $62.0
million). The revenue decline in fiscal 1998 as compared to fiscal 1997 and the
decline in backlog from $8.3 million as of March 31, 1997 to $3.4 million as of
March 31, 1998 were principally attributable to a decline in the number of 900
and 6500 series etch systems sold as the semiconductor industry further
curtailed its capital equipment expenditures in the face of a continued industry
slowdown. The Company believes that sales of its 6500 series systems were
adversely affected in its fourth quarter by the Asian financial crisis which
became apparent in the fall of 1997. The revenue decline in fiscal 1997 as
compared to fiscal 1996 was principally attributable to a decline in the number
of 900 series etch systems sold as the semiconductor industry curtailed its
capital equipment expenditures for capacity expansion in the face of an
industry-wide over-supply of manufacturing capacity. The Company's sales of
spare parts also declined in fiscal 1997 over fiscal 1996, which the Company
believes was primarily caused by customers depleting their supplies of spare
parts during the industry slowdown. Revenues derived from the sale of the
Company's 6500 series critical etch systems increased as a result of both
increased unit sales and higher average selling prices in fiscal 1997, partially
offsetting the declines experienced in 900 series etch systems and spare parts
sales. International sales accounted for approximately 61, 69 and 63 percent of
total revenue in fiscal 1998, 1997 and 1996, respectively. The Company expects
that international sales will continue to account for a significant portion of
its revenue.
20
<PAGE> 22
Gross Profit
The Company's gross profit as a percentage of revenue declined to 41.2
percent in fiscal 1998 from 45.1 percent in fiscal 1997 and 46.1 percent in
fiscal 1996. The gross margin decline in fiscal 1998 as compared to fiscal 1997
was principally attributable to a decline in gross margins in the service
business as the Company invested in additional field service engineering support
for its major 6500 series systems customers that was above and beyond
contractually required installation and warranty support. The Company believes
that such investments are required to support customer's decisions to reorder
its 6500 series systems in the future. The one percent decline in gross profit
as a percentage of revenue in fiscal 1997 as compared to fiscal 1996 was
principally attributable to a change in product mix in which sales of
non-critical etch systems and spare parts, which carry higher gross margins,
declined and sales of the Company's 6500 series systems, which continue to carry
lower start-up related gross margins, increased.
The Company's gross profit as a percentage of revenue has been, and will
continue to be, affected by a variety of factors, including the mix and average
selling prices of systems sold and the costs to manufacture, service and support
new product introductions and enhancements. Gross margins for the Company's new
systems are typically lower than those of its more mature products due to the
inefficiencies associated with the start-up of manufacturing operations, smaller
vendor discounts due to lower order volumes and increased service installation
and warranty support. As a result of such factors and an anticipation that the
semiconductor industry slowdown will continue for several more quarters, the
Company does not expect that its gross margin for fiscal 1999 is likely to
improve over the fiscal 1998 level.
Research and Development
Research and development expenses consist primarily of salaries, prototype
material and other costs associated with the Company's research and product
development efforts. In absolute dollars, research and development expenses
increased to $11.0 million in fiscal 1998 from $10.5 million in fiscal 1997 and
$10.0 million in fiscal 1996. Research and development as a percentage of
revenue increased to 26.6 percent in fiscal 1998 from 18.3 percent in fiscal
1997 and 16.1 percent in fiscal 1996, as the Company continued to enhance and
support its new 6500 series systems in spite of the overall revenue decline in
both fiscal years. The absolute dollar increase in fiscal 1998 and 1997 expenses
over fiscal 1996 expenses was attributable to the hiring of additional personnel
in the applications engineering customer support area and increased spending on
prototype material for product enhancement programs. The Company anticipates
that fiscal 1999 research and development expenses in absolute dollars will
continue at or increase slightly from fiscal 1998 levels to permit the Company
to support new product applications at its new 6500 series customer
installations and to further enhance that product line.
Sales and Marketing
Sales and marketing expenses primarily consist of salaries, commissions,
trade show promotion and advertising expenses. In absolute dollars, sales and
marketing expenses declined to $6.1 million in fiscal 1998 from $6.2 million in
fiscal 1997 and $6.6 million in fiscal 1996. As a percentage of revenue, sales
and marketing expenses increased to 14.7 percent in fiscal 1998 from 10.8
percent in fiscal 1997 and 1996. The decline in sales and marketing expenses in
fiscal 1998 and fiscal 1997 over fiscal 1996 was principally due to declines in
systems sales volumes, resulting in lower commission spending and to reduced
spending on advertising. The Company expects to maintain or increase slightly
its absolute dollar spending on sales and marketing in fiscal 1999 to fund
public relations, advertising and sales literature expenses.
General and Administrative
General and administrative expenses consist of salaries, legal, accounting
and related administrative services and expenses associated with general
management, finance, information systems, human resources and investor relations
activities. General and administrative expenses in absolute dollars increased to
$6.6 million in fiscal 1998 from $6.0 million in fiscal 1997 and $5.4 million in
fiscal 1996. As a percentage of revenues, general and administrative expenses
increased to 16.0 percent in fiscal 1998 from 10.5 percent in
21
<PAGE> 23
fiscal 1997 and 8.7 percent in fiscal 1996. The increase in general and
administrative expenses in fiscal 1998 over fiscal 1997 was primarily
attributable to the Company incurring additional legal fees and expenses in
connection with its patent disputes with AMS and TEL. The increase in general
and administrative expenses in fiscal 1997 over fiscal 1996 was attributable to
the Company incurring the expenses of being a public company for the full year
of fiscal 1997 that only partially impacted fiscal year 1996. In addition, the
Company incurred approximately $0.2 million in the first quarter of fiscal 1997
to complete the business system upgrade begun in late fiscal 1996. The Company
anticipates that its general and administrative expenses for fiscal 1999 will be
significantly higher than fiscal 1998 spending due primarily to additional legal
costs associated with its intellectual property.
Other Income (Expense), Net
Other income (expense), net, consists principally of interest income,
interest expense, and gains and losses on foreign exchange and the sale of fixed
assets. The Company recorded net non-operating income of $1.1 million and $1.0
million in fiscal 1998 and 1997, respectively. Net non-operating expenses of
$0.4 million were recorded in fiscal 1996. In fiscal 1998 and 1997, net
non-operating income was primarily attributable to interest income on
outstanding cash balances. In fiscal 1996, such expenses reflected interest
expenses incurred on loan balances outstanding until the Company's initial
public offering ("IPO") in the middle of fiscal 1996 and foreign exchange losses
offset, in part, by interest income on the unused portion of the proceeds from
the public offering.
Provision for Income Taxes
The Company's effective tax rate was 0.0 percent, 25.0 percent and 10.0
percent in fiscal 1998, 1997 and 1996, respectively. Effective tax rates for
fiscal 1996 and 1997 were materially lower than the statutory tax rate due to
extensive operating loss carryforwards generated in prior years.
Liquidity and Capital Resources
For fiscal 1998, the Company financed its operations from available cash
balances. In fiscal 1997, the Company financed its operations through cash
generated from operations. In fiscal 1996, the Company financed its operations
through bank borrowings and net proceeds from its IPO.
Net cash used in operations was $2.1 million in fiscal 1998, due
principally to a net loss of $3.1 million after adjusting for depreciation, a
decline in accrued expenses and an increase in inventories offset, in part, by a
decline in accounts receivable. Net cash provided by operations was $9.1 million
in fiscal 1997, due principally to net income in the period net of non-cash
depreciation expense totaling $5.5 million and a decrease in accounts receivable
and inventories offset, in part, by a decrease in accounts payable. Operating
activities generated approximately $0.2 million in cash flow for fiscal 1996.
Approximately $5.4 million of net cash was generated from net income plus
depreciation, senior term loan accretion, purchase credit redemptions and
accounts receivable reserve accruals, which was almost entirely offset by
increases in working capital due to the Company's increased sales volume in that
year. Included in net cash from operations were purchase credits for preferred
stock redemptions of $0, $1.6 million and $1.9 million in fiscal 1998, 1997 and
1996, respectively. Such credits apply to prior financing from Motorola which
has been fully repaid.
Net capital expenditures totaled $1.3 million, $1.4 million and $2.1
million in fiscal 1998, 1997 and 1996, respectively. Capital expenditures in all
three years were incurred principally for demonstration equipment, leasehold
improvements and to acquire design tools, analytical equipment and computers.
Net cash provided by financing activities totaled $0.1 million for fiscal
1998, due principally to proceeds from the exercise of employee stock options
and the Company's stock purchase plan offset, in part, by the repayment of
borrowings under the Company's two Japanese promissory note borrowing
facilities. Net cash used in financing activities for fiscal 1997 were
immaterial. Net cash provided by financing activities totaled $23.3 million in
fiscal 1996, due principally to the sale of the Company's common stock from its
IPO that year.
22
<PAGE> 24
As of March 31, 1998, the Company had approximately $25.7 million of cash
and cash equivalents. In addition to cash and cash equivalents, the Company's
other principal sources of liquidity consisted of unused portions of several
bank borrowing facilities. At March 31, 1998, the Company had an aggregate
borrowing capacity of $20.0 million available under a domestic line of credit
secured by substantially all of the Company's assets. The facility is available
until August 15, 1998. In addition to the foregoing facility, as of March 31,
1998, the Company's Japanese subsidiary had available a 562 million Yen
(approximately $4.2 million at exchange rates prevailing on March 31, 1998)
unused portion of two Japanese bank lines of credit totaling 600 million Yen
(approximately $4.5 million at exchange rates prevailing on March 31, 1998)
secured by Japanese customer promissory notes held by such subsidiary in advance
of payment on customers' accounts receivable.
The Company believes that anticipated cash flow from operations, funds
available under its lines of credit and existing cash and cash equivalent
balances will be sufficient to meet the Company's cash requirements for the next
twelve months.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto appear on this Form
10-K according to the following Index of Consolidated Financial Statements:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of March 31, 1998 and
1997...................................................... 26
Consolidated Statements of Operations for the years ended
March 31, 1998, 1997 and 1996............................. 27
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended March 31, 1998, 1997 and 1996......... 28
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996............................. 29
Notes to Consolidated Financial Statements.................. 30
Independent Accountants' Report............................. 40
Independent Auditors' Report................................ 41
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement under the caption
"Election of Directors."
23
<PAGE> 25
The information required by this Item relating to the Company's executive
officers is included under the caption "Executive Officers of the Registrant" in
Part I, Item 4, of this Form 10-K Report.
The information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the Company's
Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the captions "Principal Stockholders" and
"Ownership of Stock by Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements
See Index to Consolidated Financial Statements on page 23 of this Form
10-K.
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included herein:
<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
*10.1 Amended and Restated Equity Incentive Plan
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
*10.2 1990 Stock Option Plan
*10.4 Employee Qualified Stock Purchase Plan
*10.5 Stock Option Plan for Outside Directors
*10.6 Amended and Restated Agreement of Purchase and Sale between
the Registrant, Nazem & Company III, L.P. and Motorola, Inc.
dated December 18, 1989
*10.7 Restructuring Agreement between the Registrant and Motorola,
Inc. Dated October 31, 1991
*10.8 Conversion Agreement between the Registrant and Motorola,
Inc. dated August 31, 1994 and amendment thereto dated
August 8, 1995
10.10 Employment Agreement between the Registrant and Stephen P.
DeOrnellas dated December 16, 1997
*10.11 Lease dated August 15, 1986, as amended, between the
Registrant and South McDowell Investments
*10.12 Technology License Agreement between the Registrant and
Motorola, Inc. dated December 19, 1989
10.14 Security and Loan Agreement between the Registrant, Imperial
Bank and Sanwa Bank dated as of August 15, 1997
*10.15 Supplemental Source Code License Agreement with the
Registrant and Realtime Performance, Inc. dated as of
November 1, 1991
*10.16 Incentive Stock Option Agreement between the Registrant and
Robert V. Hery dated as of September 28, 1993
10.18 Employment Agreement between Registrant and Michael L.
Parodi dated as of December 17, 1997
*21 List of Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
23.2 Consent of Independent Auditors
24.1 Power of Attorney (included on page 42 of this Report)
27.1 Financial Data Schedule for the year ended March 31, 1998
27.2 Financial Data Schedule - Six Months Ended September 30,
1997
27.3 Financial Data Schedule - Three Months Ended June 31, 1997
27.4 Financial Data Schedule - Year Ended March 31, 1997
27.5 Financial Data Schedule - Nine Months Ended December 31,
1996
27.6 Financial Data Schedule - Six Months Ended September 30,
1996
27.7 Financial Data Schedule - Three Months Ended June 30, 1996
27.8 Financial Data Schedule - Year Ended March 31, 1996
</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, 1998. On May 8, 1998, the Company filed a Form 8-K announcing the
filing of a registration statement on Form S-3 to register shares of the
Company's Common Stock beneficially owned by a stockholder of the Company. The
selling stockholder exercised its demand registration rights pursuant to a
certain registration rights agreement with the Company.
25
<PAGE> 27
TEGAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $25,660 $30,323
Accounts receivable, less allowance for doubtful accounts 7,482 12,322
of $542 and $764.......................................
Inventory................................................. 14,424 13,154
Prepaid expenses and other current assets................. 2,249 2,274
------- -------
Total current assets.............................. 49,815 58,073
Property and equipment, net................................. 4,982 5,298
Other assets, net........................................... 349 153
------- -------
$55,146 $63,524
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 285 $ 252
Accounts payable.......................................... 2,691 3,442
Accrued expenses and other current liabilities............ 7,265 8,987
------- -------
Total current liabilities......................... 10,241 12,681
Long term portion of capital lease obligations.............. 101 301
------- -------
Total liabilities................................. 10,342 12,982
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.01 par value; 5,000,000 shares -- --
authorized.............................................
Common stock; $0.01 par value; 35,000,000 shares 106 103
authorized; 10,566,038 and 10,279,721 shares issued and
outstanding............................................
Additional paid-in capital................................ 55,177 54,821
Cumulative translation adjustment......................... (529) 23
Accumulated deficit....................................... (9,950) (4,405)
------- -------
Total stockholders' equity........................ 44,804 50,542
------- -------
$55,146 $63,524
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenue..................................................... $41,472 $57,423 $62,046
Cost of sales............................................... 24,377 31,522 33,469
------- ------- -------
Gross profit...................................... 17,095 25,901 28,577
------- ------- -------
Operating expenses:
Research and development.................................. 11,048 10,531 10,000
Sales and marketing....................................... 6,107 6,182 6,622
General and administrative................................ 6,613 6,008 5,383
------- ------- -------
Total operating expenses.......................... 23,768 22,721 22,005
------- ------- -------
Operating income.................................. (6,673) 3,180 6,572
Other income (expenses), net................................ 1,128 1,000 (386)
------- ------- -------
Income before income taxes........................ (5,545) 4,180 6,186
Provision for income taxes.................................. -- 1,040 620
------- ------- -------
Net income (loss)................................. $(5,545) $ 3,140 $ 5,566
======= ======= =======
Net income (loss) per share:
Basic............................................. $ (.54) $ .31 $ 1.14
Diluted........................................... $ (.54) $ .29 $ .64
Shares used in per share computation:
Basic............................................. 10,364 10,124 4,506
Diluted........................................... 10,364 10,764 8,760
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------- PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENTS DEFICIT EQUITY (DEFICIT)
---------- ------ ---------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1995.... 650,780 $ 7 $ 123 $ 939 $(12,702) $(11,633)
Common stock issued under
option and stock purchase
plans.................... 358,245 3 124 -- -- 127
Net proceeds from IPO....... 3,179,300 32 34,153 -- -- 34,185
Contribution of paid-in
capital through
conversion of Motorola
preferred stock.......... -- -- 891 -- -- 891
Conversion of redeemable
preferred stock to common
stock at IPO............. 5,876,079 59 19,164 -- -- 19,223
Cumulative translation
adjustment............... -- -- -- (324) -- (324)
Accretion of Series B
preferred stock.......... -- -- -- -- (409) (409)
Net income.................. -- -- -- -- 5,566 5,566
---------- ---- ------- ----- -------- --------
Balances at March 31, 1996.... 10,064,404 101 54,455 615 (7,545) 47,626
Common stock issued under
option and stock purchase
plans.................... 215,317 2 366 -- -- 368
Cumulative translation
adjustment............... -- -- -- (592) -- (592)
Net income.................. -- -- -- -- 3,140 3,140
---------- ---- ------- ----- -------- --------
Balances at March 31, 1997.... 10,279,721 103 54,821 23 (4,405) 50,542
Common stock issued under
option and stock purchase
plans.................... 286,317 3 356 -- -- 359
Cumulative translation
adjustment............... -- -- -- (552) -- (552)
Net income (loss)........... -- -- -- -- (5,545) (5,545)
---------- ---- ------- ----- -------- --------
Balances at March 31, 1998.... 10,566,038 $106 $55,177 $(529) $ (9,950) $ 44,804
========== ==== ======= ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(5,545) $ 3,140 $ 5,566
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred tax asset................................... -- (638) (900)
Depreciation and amortization........................ 2,299 2,349 1,435
Accretion of senior term loan........................ -- -- 303
Purchase credit for preferred stock redemptions...... -- (1,587) (1,857)
Allowance for doubtful accounts and sales return
allowances........................................ (222) 311 (22)
Changes in operating assets and liabilities:
Accounts receivable............................... 5,062 3,559 (1,540)
Inventory......................................... (1,952) 3,967 (6,509)
Prepaid expenses and other current assets......... (171) 435 207
Accounts payable and other current liabilities.... (2,343) (2,467) 3,474
------- ------- -------
Net cash provided by (used in) operating
activities................................... (2,872) 9,069 157
------- ------- -------
Cash flows used in investing activities for the purchases of
property and equipment.................................... (1,283) (1,427) (2,067)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 359 368 34,312
Borrowings under (repayments of) notes payable............ 33 9 (7,922)
Repayment of capital lease financing...................... (348) (386) (224)
Repayment of long-term debt............................... -- -- (3,000)
------- ------- -------
Net cash provided by (used in) financing
activities................................... 44 (9) 23,166
------- ------- -------
Effect of exchange rates on cash and cash equivalents....... (552) (593) (324)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (4,663) 7,040 20,932
Cash and cash equivalents at beginning of year.............. 30,323 23,283 2,351
------- ------- -------
Cash and cash equivalents at end of year.................... $25,660 $30,323 $23,283
======= ======= =======
Supplemental disclosures of cash paid during the year:
Interest.................................................. $ 68 $ 118 $ 605
======= ======= =======
Income taxes.............................................. $ -- $ 1,727 $ 45
======= ======= =======
Supplemental disclosure of noncash investing and financing
activities:
Accretion of Series B preferred stock..................... $ -- $ -- $ 409
======= ======= =======
Transfer of demo lab equipment from inventory to fixed
assets................................................. $ 682 $ 127 $ 2,230
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 31
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Tegal Corporation (the "Company") designs, manufactures, markets, and
services plasma etch systems used in the fabrication of integrated circuits
("ICs") and related devices in the thin film head, small flat panel and printer
head applications. Etching constitutes one of the principal IC and related
device production process steps and must be performed numerous times in the
production of such devices.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. Intercompany transactions and balances are
eliminated in consolidation. Accounts denominated in foreign currencies are
translated using the foreign currencies as the functional currencies. Assets and
liabilities of foreign operations are translated to U.S. dollars at current
rates of exchange and revenues and expenses are translated using weighted
average rates. Gains and losses from foreign currency translation are included
as a separate component of other income (expense).
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles. This
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could vary
from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments having a maturity
of three months or less on the date of purchase to be cash equivalents.
At March 31, 1998 and 1997, all of the Company's investments are classified
as cash equivalents on the balance sheet. The investment portfolio at March 31,
1998 and 1997 is comprised of money market funds. At March 31, 1998 and 1997,
the fair value of the Company's investments approximated cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including
accounts receivable, approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of temporary cash investments and
accounts receivable. Substantially all of the Company's temporary investments
are invested in money market funds. The Company's accounts receivable are
derived primarily from sales to customers located in the U.S., Europe, and the
Far East. The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company maintains reserves for potential
credit losses. Write-offs during the periods presented have been insignificant.
As of March 31, 1998, two customers accounted for approximately 24% and 16% of
the accounts receivable balance. As of March 31, 1997, two customers accounted
for approximately 22% and 14% of the accounts receivable balance.
30
<PAGE> 32
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
INVENTORY
Inventory is stated at the lower of cost or market, with cost being
determined under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets,
ranging from three to seven years. Leasehold improvements are stated at cost and
are amortized using the straight-line method over the shorter of the estimated
useful life of the improvements or the lease term.
FOREIGN EXCHANGE HEDGING
At March 31, 1998, the Company had forward exchange contracts maturing at
various dates throughout fiscal 1999 to exchange 62,000 Yen into $473 and 14,000
New Taiwanese Dollars (NTD) into $425 which also represented the fair value of
these instruments at March 31, 1998. The Company uses hedge accounting to
account for these contracts as they are a hedge against currency exposures
related to firm sales commitments. The counterparties to these contracts consist
of U.S. financial institutions.
The Company enters into foreign exchange options to hedge partially net
accounts receivable or payable U.S. dollar positions on the books of its
subsidiaries which are subject to periodic remeasurement. Foreign exchange
options permit, but do not require, the Company to exchange currencies at a
future date with another party at a contracted exchange rate. The expense of the
premiums paid for such options is amortized on a straight-line basis over the
term of the option (generally two to three months in duration) as a foreign
currency expense. Gains on the options that offset any losses on the underlying
balance sheet exposures are recognized as a foreign exchange gain over the term
of the options. To date, foreign currency gains on foreign exchange options have
been immaterial, and the only expenses incurred have been the premium cost of
the options. At March 31, 1998, the Company had no foreign exchange options
outstanding.
REVENUE RECOGNITION
Product revenue is recognized generally upon shipment, except in Japan
where revenue is generally recognized upon delivery. A provision for
installation costs and estimated future warranty costs is recorded at the time
revenue is recognized. Service revenue is recognized on a monthly basis as
billed, unless services are paid for in advance according to service contracts,
in which case revenue is deferred and recognized over the service period using
the straight-line method.
EARNINGS PER SHARE
The Company adopted Statement of Accounting Standard No. 128 ("FAS 128"),
Earnings Per Share ("EPS"), which was issued in February 1997. FAS 128 requires
presentation of both basic and diluted EPS on the income statement. For all
periods presented, basic EPS is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS is computed using the weighted average number of
common and potential common stock equivalent shares outstanding during the
period, except when antidilutive. In computing diluted EPS, the average stock
price for the period is used in determining the number of shares assumed to be
purchased from the exercise of stock options.
31
<PAGE> 33
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. The Company's policy is
to grant options with an exercise price equal to the closing market price of the
Company's stock on the grant date. Accordingly, no compensation cost for stock
option grants has been recognized in the Company's statements of operations. The
Company provides additional pro forma disclosures as required under Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" (see Note 7).
NOTE 2. BALANCE SHEET AND INCOME STATEMENT DETAIL
Inventory consisted of:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Raw materials............................................ $ 2,050 $ 3,988
Work in process.......................................... 2,053 2,126
Finished goods and spares................................ 10,321 7,040
------- -------
$14,424 $13,154
======= =======
</TABLE>
Property and equipment consisted of:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Machinery and equipment.................................. $ 7,990 $ 7,090
Demo lab equipment....................................... 3,216 2,542
Leasehold improvements................................... 2,818 2,452
------- -------
14,024 12,084
Less accumulated depreciation and amortization........... (9,042) (6,786)
------- -------
$ 4,982 $ 5,298
======= =======
</TABLE>
Machinery and equipment at March 31, 1998 and 1997 includes approximately
$1,388 and $1,370, respectively, of assets under leases that have been
capitalized. Accumulated depreciation for such equipment approximated $1,045 and
$700, respectively.
A summary of accrued expenses and other current liabilities follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Accrued compensation costs............................... $ 1,591 $ 1,554
Income taxes payable..................................... 996 1,221
Product warranty......................................... 2,256 2,251
Other.................................................... 2,422 3,961
------- -------
$ 7,265 $ 8,987
======= =======
</TABLE>
32
<PAGE> 34
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
Other income (expenses), net, consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Interest income................................... $1,329 $1,250 $ 526
Interest expense.................................. (68) (118) (870)
Foreign currency exchange gain (loss), net........ (138) (186) (383)
Other............................................. 5 54 341
------ ------ -----
$1,128 $1,000 $(386)
====== ====== =====
</TABLE>
NOTE 3. EARNINGS PER SHARE
FAS 128 requires the reconciliation of the numerators and the denominators
of the basic and diluted per share computation as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- --------------------------- ---------------------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss):......... $(5,545) $3,140 $5,566
Less accretion of Series
B Preferred Stock........ (409)
Basic EPS:
Net income available to
common stockholders......
------- ------ ------
$(5,545) 10,364 $(0.54) $3,140 10,124 $0.31 $5,157 4,506 $1.14
------- ====== ------ ===== ------ =====
Effects of dilutive
securities:
Stock Options............ 640 826
Preferred Stock.......... 409 3,428
Diluted EPS:
------- ------ ------ ------ ------ -----
Net income (loss)........ $(5,545) 10,364 $(0.54) $3,140 10,764 $0.29 $5,566 8,760 $0.64
------- ------ ====== ------ ------ ===== ------ ----- =====
</TABLE>
Options to purchase 2,036,000 shares of common stock were outstanding at
March 31, 1998, but were not included in the computation of diluted EPS as the
Company was in a loss situation and to do so would have been antidilutive.
Options to purchase 53,000 and 310,000 were outstanding at March 31, 1997 and
1996, respectively, but were not included in the computation of diluted EPS as
their average exercise price was higher than the average market price of the
stock.
NOTE 4. NOTES PAYABLE TO BANKS AND OTHERS
The Company has a line of credit totaling $20,000 with two U.S. banks. The
line bears interest at prime (8.50 percent as of March 31, 1998), is secured by
a blanket security in all of the Company's assets, and is available until August
15, 1998. No amount was outstanding on this line of credit at March 31, 1998 and
1997. The line of credit restricts the declaration and payment of cash dividends
and includes, among other terms and conditions, requirements that the Company
maintain certain financial ratios and covenants. The Company was in compliance
with such covenants as of March 31, 1998 and 1997.
The Company's Japanese subsidiary has two lines of credit available for
300,000 Yen each (approximately $4,504 at exchange rates prevailing as of March
31, 1998), bearing interest at .0125 percent, in excess of Japanese prime (1.625
percent as of March 31, 1998). Both lines of credit are available until November
33
<PAGE> 35
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
1998, and are secured by Japanese customer promissory notes provided in advance
of payment. Outstanding balances on these lines in U.S. dollars as of March 31,
1998 and 1997, were $285 and $252, respectively.
NOTE 5. INCOME TAXES
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Domestic........................................ $(6,760) $3,400 $4,173
Foreign......................................... 1,215 780 2,013
------- ------ ------
$(5,545) $4,180 $6,186
======= ====== ======
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Current:
U.S. federal.................................. $ (939) $1,143 $1,100
State and local............................... -- 432 200
Foreign....................................... -- 103 220
------- ------ ------
(939) 1,678 1,520
------- ------ ------
Deferred:
U.S. federal.................................. 939 (589) (900)
State and local............................... -- (49) --
------- ------ ------
939 (638) (900)
------- ------ ------
Total................................. $ -- $1,040 $ 620
======= ====== ======
</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,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Income tax provision at U.S. statutory rate..... $(1,885) $1,424 $2,103
State taxes net of federal benefit.............. (323) 254 132
Utilization of foreign losses................... (633) -- --
Reversal of deferred tax assets previously
reserved...................................... -- (178) --
Utilization of net operating losses............. 1,621 -- --
Increase (reduction) in valuation allowance..... 1,161 (460) (1,700)
Other........................................... 59 -- 85
------- ------ ------
Income tax expense............................ $ -- $1,040 $ 620
======= ====== ======
</TABLE>
34
<PAGE> 36
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Revenue recognized for tax and deferred for book......... $ 378 $ 556
Non-deductible accruals and reserves..................... 2,702 2,910
Foreign net operating loss carryforward.................. 968 1,601
Credits.................................................. 1,550 --
Uniform cap adjustment................................... 130 330
Other.................................................... (26) 83
------- -------
5,702 5,480
Valuation allowance...................................... (5,463) (4,302)
------- -------
Net deferred tax asset......................... $ 239 $ 1,178
======= =======
</TABLE>
The Company has recorded net deferred tax assets of approximately $239 and
$1,178 at March 31, 1998 and 1997, respectively. Management's evaluation of the
recoverability of the Company's deferred tax is based upon the Company's ability
to carry back temporary differences for future tax deductions against previously
taxed income.
At March 31, 1998, the Company has operating loss carryforwards in foreign
jurisdictions amounting to approximately $2,400, which begin to expire on March
31, 1999.
NOTE 6. LEASE COMMITMENTS
The Company has several noncancelable operating leases and capital leases,
primarily for general office, production, and warehouse facilities, that expire
over the next five years. Future minimum lease payments under these leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
1999............................................. $223 $1,846
2000............................................. 66 1,799
2001............................................. 32 1,718
2002............................................. 3 34
2003............................................. -- --
---- ------
Total minimum lease payments..................... $324 $5,397
======
Less amount representing interest................ (31)
----
$293
====
</TABLE>
The above schedule of minimum payments excludes minimum annual sublease
rentals payable to the Company totaling $391 through January 31, 2001, under
operating subleases. In addition, most leases provide for the Company to pay
real estate taxes and other maintenance expenses. Rent expense for operating
leases was $1,949, $2,406, and $2,613 during the years ended March 31, 1998,
1997, and 1996, respectively.
35
<PAGE> 37
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 7. EMPLOYEE BENEFIT PLANS
Equity Incentive Plan
Pursuant to the Amended and Restated Equity Incentive Plan ("Equity
Incentive Plan"), options and stock purchase rights to purchase 3,500,000 shares
of common stock may be granted to management and consultants. The exercise price
of options and the purchase price of stock purchase rights generally is the fair
value of the Company's common stock on the date of grant. At the date of
issuance of the stock options, all options are exercisable; however the Company
has the right to repurchase any stock acquired pursuant to the exercise of stock
options upon termination of employment or consulting agreement at the original
exercise price for up to four years from the date the options were granted, with
the repurchase rights ratably expiring over that period of time. Incentive stock
options are exercisable for up to 10 years from the grant date of the option.
Nonqualified stock options are exercisable for up to 15 years from the grant
date of the option. As of March 31, 1998, 612,303 shares were available for
issuance under the Equity Incentive Plan.
1990 Stock Option Plan
Pursuant to the terms of the Company's 1990 Stock Option Plan ("Option
Plan"), options and stock purchase rights to purchase 550,000 shares of common
stock may be granted to employees of the Company or its affiliates. Incentive
stock options are exercisable for a period of up to 10 years from the date of
grant of the option and nonqualified stock options are exercisable for a period
of up to 10 years and 2 days from the date of grant of the option. At the date
of issuance of the stock options, all options are exercisable; however, the
Company has the right to repurchase any stock acquired pursuant to the exercise
of stock options upon termination of employment at the original exercise price
for up to four years from the date the options were granted, with the repurchase
rights ratably expiring over that period of time. As of March 31, 1998, 56,788
shares were available for issuance under the Option Plan.
Directors Stock Option Plan
Pursuant to the terms of the Stock Option Plan for Outside Directors
("Directors Plan"), up to 300,000 shares of common stock may be granted to
Directors. Under the Directors Plan, each Outside Director who was a member of
the Board at the date of the Company's initial public offering ("IPO") received
30,000 shares, of which 10,000 shares vested immediately and the right to
purchase the remaining 20,000 shares vesting over the next three years in equal
annual installments on the anniversary of such effective date. Any shares
granted subsequent to the date of the IPO will vest annually over four years,
contingent upon continued service as a director. As of March 31, 1998, 180,000
shares were available for issuance under the Directors Plan.
The following table summarizes the Company's stock option activity for the
three plans described above and weighted average exercise price within each
transaction type for each of the years ended March 31, 1998, 1997, and 1996
(number of shares in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
year.................................... 1,413 $4.36 1,163 $4.90 996 $0.40
Options canceled.......................... (101) 6.07 (183) 9.52 (65) 0.27
Options granted........................... 942 6.01 595 5.50 590 10.25
Options exercised......................... (219) 0.47 (162) 0.33 (358) 0.36
------ ----- ----- ----- ----- -----
Options outstanding March 31.............. 2,036 $5.46 1,413 $4.36 1,163 $4.90
====== ===== ===== ===== ===== =====
</TABLE>
36
<PAGE> 38
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
At March 31, 1998, the repurchase right associated with 542,534 of the
options outstanding had elapsed.
Significant option groups outstanding at March 31, 1998, and related
weighted average exercise price of options granted for which the Company no
longer has the right to repurchase and contractual life information are as
follows (share information in thousands):
<TABLE>
<CAPTION>
OPTIONS NO LONGER
SHARES SUBJECT TO
OUTSTANDING REPURCHASE RIGHTS
-------------- ------------------ REMAINING
EXERCISE PRICE RANGE # PRICE # PRICE LIFE (YEARS)
- --------------------- ----- ------ ------ --------- ------------
<S> <C> <C> <C> <C> <C>
$.24 - $.53 229 $ .49 221 $ .48 5.58
$4.25 - $5.50 1,104 4.77 152 5.23 9.67
$6.13 - $6.25 129 6.20 25 6.25 11.43
$6.88 - $8.75 507 8.14 92 6.97 11.42
$12.00 67 12.00 53 12.00 8.13
</TABLE>
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>
1998 1997
------- -------
<S> <C> <C>
Expected life (years)..................................... 4 years 4 years
Risk-free interest rate................................... 6.16% 6.07%
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 1998 and 1997 was $2.66 and $3.67 per option,
respectively. The estimated fair value, as defined by SFAS 123, attributable to
options canceled and reissued during 1998 and 1997 were $0 and $1.53 per option,
respectively. In addition, included in pro forma net income for fiscal year 1998
and 1997 is an adjustment of $81 and $104, respectively, related to the
cancellation of vested options not exercised due to employee terminations.
Stock Purchase Plan
Since 1996, the Company has offered an Employee Qualified Stock Purchase
Plan ("Employee Plan") under which rights are granted to purchase shares of
common stock at 85% of the lesser of the market value of such shares at the
beginning of a twelve month offering period or at the end of that twelve month
period. Beginning in 1997, the offering period has been reduced from twelve
months to six months. Under the Employee Plan, the Company is authorized to
grant options to purchase up to 250,000 shares of common
37
<PAGE> 39
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
stock. 61,371 common stock shares were purchased in fiscal 1998 and 53,633
common shares were purchased in 1997. Shares available for future purchase under
the Employee Plan were 134,996 at March 31, 1998.
Compensation cost (included in pro forma net income and net income per
share amounts only) for the grant date fair value, as defined by SFAS 123, of
the purchase rights granted under the Employee Plan was calculated using the
Black-Scholes model. Included in the pro forma net income for fiscal year 1996
is compensation expense related to purchase rights granted during the period
December 15, 1995 through March 31, 1996. Fiscal years 1997 and 1998 reflect
purchase rights earned for the full fiscal year. The weighted average estimated
grant date fair value per share for rights granted under the Employee Plan, as
defined by SFAS 123, for stock purchased under the Employee Plan during 1998,
was $1.47.
Pro Forma Net Income and Net Income Per Share
Had the Company recorded compensation costs based on the estimated grant
date fair value (as defined by SFAS 123) for awards granted under its stock
option plans and stock purchase plan, the Company's net income and earnings per
share would have been reduced to the pro forma amounts below for the years ended
March 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Pro forma net income............................ $(6,674) $1,865 $5,155
Pro forma net income (loss) per share:
Basic......................................... $ (0.64) $ 0.18 $ 1.14
Diluted....................................... $ (0.64) $ 0.17 $ 0.59
</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 1998 and 1997 is not necessarily representative of the pro forma
effect on net income in future years.
Savings and Investment Plan
The Company has established a defined contribution plan that covers
substantially all U.S. employees who are regularly scheduled to work 20 or more
hours per week. Employee contributions of up to 4% of each covered employee's
compensation will be matched by the Company based upon a percentage to be
determined annually by the Board of Directors ("Board"). Employees may
contribute up to 15% of their compensation, not to exceed a prescribed maximum
amount. The Company made contributions to the plan of $31, $28, and $27 in the
years ended March 31, 1998, 1997, and 1996, respectively.
NOTE 8. SHAREHOLDER RIGHTS PLAN
On June 11, 1996, the Board adopted a Preferred Shares Rights Agreement
("Agreement") and pursuant to the Agreement authorized and declared a dividend
of one preferred share purchase right ("Right") for each common share of the
Company's outstanding shares at the close of business on July 1, 1996. The
Rights are designed to protect and maximize the value of the outstanding equity
interests in the Company in the event of an unsolicited attempt by an acquiror
to take over the Company, in a manner or under terms not approved by the Board.
Each Right becomes exercisable to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock at an exercise price of $45.00
upon certain circumstances associated with an unsolicited takeover attempt and
expires on June 11, 2006. The Company may redeem the Rights at a price of $0.01
per Right.
38
<PAGE> 40
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998, 1997, AND 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 9. CUSTOMERS AND FOREIGN OPERATIONS
The Company's sales are primarily to domestic and international
semiconductor manufacturers. The top five customers accounted for approximately
41%, 46%, and 42% of the Company's total net sales for the years ended March 31,
1998, 1997, and 1996, respectively. Two customers accounted for approximately
16% and 8%, respectively, of net sales for the year ended March 31, 1998, two
customers accounted for approximately 17% and 10%, respectively, of net sales
for the year ended March 31, 1997, and two customers accounted for 14% and 13%,
respectively, of the Company's net sales for the year ended March 31, 1996.
The Company's operations by geographical region were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
Sales to unaffiliated customers:
United States:
Customers in United States.............. $16,045 $17,795 $22,816
Customers in Asia....................... 11,110 18,640 10,928
Europe.................................... 8,667 10,061 13,769
Japan..................................... 5,650 10,927 14,533
------- ------- -------
Total external sales................. $41,472 $57,423 $62,046
======= ======= =======
Intercompany sales among geographic areas:
From United States........................... $ 9,057 $10,052 $19,401
From Europe.................................. 940 684 562
Consolidation eliminations................... (9,997) (10,736) (19,963)
------- ------- -------
Net intercompany sales............... $ -- $ -- $ --
======= ======= =======
</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,
-----------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Operating income (loss):
United States................................ $(7,425) $2,378 $4,465
Europe....................................... 478 115 594
Japan........................................ 274 687 1,513
------- ------ ------
Operating income..................... $(6,673) $3,180 $6,572
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Identifiable assets at year-end:
United States........................................... $55,326 $62,494
Europe.................................................. 8,819 8,345
Japan................................................... 4,424 4,215
Consolidation eliminations.............................. (13,423) (11,530)
------- -------
Total identifiable assets....................... $55,146 $63,524
======= =======
</TABLE>
39
<PAGE> 41
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Tegal Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) on page 24 present fairly, in all material
respects, the financial position of Tegal Corporation and its subsidiaries at
March 31, 1998 and 1997 and the results of its operations and cash flows for
each of the two years in the period ended March 31, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The consolidated financial statements of Tegal Corporation for the year
ended March 31, 1996 included herein, were audited by other independent
accountants whose report dated April 23, 1996 expresses an unqualified opinion
on those statements.
/s/ Price Waterhouse LLP
San Jose, California
April 24, 1998
40
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tegal Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Tegal Corporation and
subsidiaries for the year ended March 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Tegal Corporation and subsidiaries for the year ended March 31, 1996,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Mountain View, California
April 23, 1996
41
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEGAL CORPORATION
By: /s/ MICHAEL L. PARODI
------------------------------------
Michael L. Parodi
President & Chief Executive Officer
Dated: May 18, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael L. Parodi and David Curtis,
jointly and severally, his attorneys-in-fact, each with the powers of
substitution, for him in any and all capacities, to sign any amendments to this
Report of Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT V. HERY Chairman and Director May 18, 1998
- -----------------------------------------------------
Robert V. Hery
/s/ MICHAEL L. PARODI President, Chief Executive May 18, 1998
- ----------------------------------------------------- Officer and Director (Principal
Michael L. Parodi Executive Officer)
/s/ DAVID CURTIS Chief Financial Officer May 18, 1998
- ----------------------------------------------------- (Principal Financial Officer)
David Curtis
/s/ WILLIAM F. O'SHEA Corporate Controller (Principal May 18, 1998
- ----------------------------------------------------- Accounting Officer)
William F. O'Shea
/s/ FRED NAZEM Director May 18, 1998
- -----------------------------------------------------
Fred Nazem
/s/ JEFFREY KRAUSS Director May 18, 1998
- -----------------------------------------------------
Jeffrey Krauss
/s/ THOMAS R. MIKA Director May 18, 1998
- -----------------------------------------------------
Thomas R. Mika
/s/ EDWARD A. DOHRING Director May 18, 1998
- -----------------------------------------------------
Edward A. Dohring
</TABLE>
42
<PAGE> 44
SCHEDULE II
TEGAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1996, 1997, 1998
(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, 1996:
Product warranty..................... $1,155 $3,634 $ (4) $(2,199) $2,586
Doubtful accounts.................... 261 262 (94) (68) 361
Sales returns and allowances......... 185 298 (171) (229) 83
Cash discounts....................... 29 87 (78) (29) 9
Year ended March 31, 1997:
Product warranty..................... 2,586 4,406 (118) (4,623) 2,251
Doubtful accounts.................... 361 13 -- (54) 320
Sales returns and allowances......... 83 532 (1) (211) 403
Cash discounts....................... 9 51 -- (19) 41
Year ended March 31, 1998:
Product warranty..................... 2,251 2,706 (31) (2,670) 2,256
Doubtful accounts.................... 320 154 -- (177) 297
Sales returns and allowances......... 444 214 -- (420) 238
Cash discounts....................... 41 31 -- (65) 7
</TABLE>
S-1
<PAGE> 45
INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE
The Board of Directors
Tegal Corporation:
Our audit of the consolidated financial statements for the years ended
March 31, 1998 and 1997 referred to in our report dated April 23, 1998,
appearing on page 40 in the 1998 Annual Report on Form 10-K also included an
audit of the Financial Statement Schedule for each of the years in the two-year
period ended March 31, 1998 listed in Item 14(a) of this Form 10-K. In our
opinion, the Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ Price Waterhouse LLP
San Jose, California
April 24, 1998
S-2
<PAGE> 46
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors
Tegal Corporation:
Under date of April 23, 1996, we reported on the consolidated statements of
operations, stockholders' equity (deficit), and cash flows of Tegal Corporation
and subsidiaries for the year ended March 31, 1996, which are included herein.
In connection with our audit of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying index in Item 14, as of and for the year
ended March 31, 1996. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this consolidated financial statement schedule based on our audits.
In our opinion, the consolidated financial statement schedule, referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG Peat Marwick LLP
Mountain View, California
April 23, 1996
S-3
<PAGE> 47
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.10 Employment Agreement between Registrant and Stephen P.
DeOrnellas dated December 16, 1997
10.14 Security and Loan Agreement between the Registrant, Imperial
Bank and Sanwa Bank dated as of August 15, 1997
10.18 Employment Agreement between Registrant and Michael L.
Parodi dated as of December 17, 1997
23.1 Consent of Independent Accountants
23.2 Consent of Independent Auditors
24.1 Power of Attorney (included on page 42)
27.1 Financial Data Schedule for the year ended March 31, 1998
27.2 Financial Data Schedule - Six Months Ended September 30,
1997
27.3 Financial Data Schedule - Three Months Ended June 31, 1997
27.4 Financial Data Schedule - Year Ended March 31, 1997
27.5 Financial Data Schedule - Nine Months Ended December 31,
1996
27.6 Financial Data Schedule - Six Months Ended September 30,
1996
27.7 Financial Data Schedule - Three Months Ended June 30, 1996
27.8 Financial Data Schedule - Year Ended March 31, 1996
</TABLE>
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT, dated as of 12-16-97, is entered into
between Tegal Corporation ("Company") and Steve DeOrnellas (the "Employee").
RECITALS:
A. WHEREAS, Employee is currently in the job position of Chief
Technical Officer and Vice President of Corporate Development, and Company
desires to retain Employee in that position, and
B. WHEREAS, the Employee is willing to continue employment with the
Company on the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual
covenants set forth in this Agreement, Company and Employee agree as follows:
1. TERM OF EMPLOYMENT. Subject to the termination provisions
hereinafter set forth, the Company will continue to employ the Employee, and the
Employee accepts continued employment with the Company, for a period of three
years ("Term") commencing on the date this Agreement is signed (the "Effective
Date").
2. DUTIES. The Employee will serve as Chief Technical Officer and
Vice President of Corporate Development of the Company and will discharge such
duties and responsibilities, and enjoy such authorities, as are customary for
such position. The Employee will devote his full time and attention to the
affairs of the Company and will not enter the employ of or serve as a
consultant to, or in any way perform any services, with or without
compensation, for any other person, business or organization, where such
contact would be inconsistent with, or prevent Employee from carrying out, his
duties under this Agreement.
3. COMPENSATION AND EXPENSES.
(a) Salary. During the Term, the Company will pay the Employee
an annual salary of $165,000 (one hundred sixty-five thousand dollars) (the
"Base Salary"); provided that Employee's Base Salary may be reduced to the
extent that the Employee elects to defer any portion thereof under the terms of
any deferred compensation or savings plan maintained by the Company. During the
Term, Employee shall be entitled to annual merit increases of his Base Salary
in accordance with Company policy. Employee's Base Salary may also be reduced,
during the Term, consistent with reductions made to the salaries of other
executive Officers of the Company. The Company will pay the Employee his Base
Salary in equal installments no less frequently than monthly.
(b) Incentive Payment. Employee shall be eligible for an annual
incentive bonus payment in accordance with any incentive bonus program then in
effect.
1
<PAGE> 2
(c) Expenses. The Company will reimburse the Employee for all
reasonable travel, entertainment and miscellaneous expenses incurred in
connection with the performance of his duties under this Agreement, provided
that the Employee properly accounts for such expenses in accordance with the
Company's practices.
(d) Home Office. The Company recognizes that Employee's health
may not permit him to work at the Company's corporate offices. In order to
facilitate Employee's continued productive employment, Company shall provide
Employee with computer, facsimile, and other equipment that Employee may
reasonably require in order to perform his duties from home. All equipment made
available to Employee pursuant to this paragraph shall be returned to Company
by Employee upon any termination of Employee's employment.
4. BENEFITS. The Employee will be entitled during the term of this
Agreement to participate in any vacation, stock option, pension, insurance or
other benefit plan that is maintained by the Company for executive-level
employees.
5. TERMINATION.
(a) Termination by the Company Without Cause. The company may
terminate the Employee's employment under this Agreement without cause at any
time by giving no less than 30 days written notice to the Employee. However, in
the event that the company desires to terminate Employee's employment without
cause, the company agrees that it will permit Employee to apply for disability.
The Company further agrees that it will take no action to oppose or undermine
Employee's claim for disability insurance benefits. Upon any termination by
Company without cause, the Company shall pay Employee's salary and benefits
through the date of termination of his employment and any severance pay to
which the Employee may be entitled under the Company's policies.
(b) Termination by the Company for Cause. The Company may
immediately terminate the Employee's employee at any time for cause by giving
written notice to the Employee. Upon any such termination for cause, the
Employee shall have no right to compensation or benefits, except as required by
law, for any period subsequent to the date of termination. For purposes of this
Section 5(b), "cause" shall mean: the Employee wilfully engages in an act or
omission which is in bad faith and to the detriment of the Company, engages in
misconduct or willful malfeasance, or engages in any act of dishonesty,
disclosure of Company confidential information not required by the duties of
Employee, commercial bribery, criminal act or perpetration of fraud.
(c) Termination by Death or Disability. In the event that
Employee dies or becomes completely disabled from performing his duties during
the Term of this Agreement, the Company shall be relieved of all obligations
under this Agreement, except for payment of salary and the provision of
benefits through the date of Employee's death or until Employee goes out on
full-time disability, whichever is earlier.
2
<PAGE> 3
(d) Termination by Employee. The Employee may terminate his/her
employment under this Agreement at any time by giving written notice to the
Company. Such termination will become effective upon the date specified in such
notice, provided that such date is at least 14 days after the date of delivery
of the notice. Upon any such termination, the Company shall be relieved of all
of its obligations under this Agreement, except for payment of salary and the
provisions of benefits through the effective date of termination.
6. ARBITRATION.
The Company and Employee agree that any controversy or claim
(contract, tort or statutory) under federal, state or local law between company
and Employee arising out of Employee's employment with the Company including,
without limitation, the construction or application of any of the terms,
provisions or conditions of this Agreement, shall, on written request of either
party served upon the other, be submitted to final and binding arbitration.
Such arbitration shall be conducted according to the Model Employment
Arbitration Procedures of the American Arbitration Association, except as
otherwise provided herein. The arbitration shall be conducted before the
American Arbitration Association or such other arbitration service as the
parties may, by mutual agreement, select. The arbitrator shall be appointed by
agreement of the parties hereto or, if no agreement can be reached, by the
American Arbitration Association pursuant to its rules.
Judgment on the award the arbitrator renders may be entered in any
court having jurisdiction over the parties. The arbitration shall be conducted
in Portland, Oregon or such other jurisdiction as the Company's headquarters
may be located. Costs, including attorney's fees, may be sought by the
prevailing party and awarded by the Arbitrator. This paragraph shall survive
the expiration or termination of this Agreement. If any part of this paragraph
is found to be void as a matter of law or public policy, the remainder of the
paragraph will continue to be in full force and effect.
7. MISCELLANEOUS.
(a) Assignment. The rights and obligations of the parties under
this Agreement shall inure to the benefit of and be binding upon their
respective successors and assigns. The Employee agrees that the Company may
assign its rights and obligations under this Agreement to any
successor-in-interest. The Employee may assign his/her rights and obligations
hereunder only with the express written consent of the Company, except that the
rights under this Agreement shall inure to the benefit of the Employee's heirs
or assigns in the event of his/her death. Except as expressly provided in this
paragraph, no party may assign its/his/her rights and obligations hereunder; and
any attempt to do so will be void.
(b) Severability. If any provision of this Agreement otherwise
is deemed to be invalid or unenforceable or is prohibited by the laws of the
state or jurisdiction where it is to be performed, this Agreement shall be
considered divisible as to such provision, and such provision shall be
inoperative in such state or jurisdiction and shall not be part of the
consideration moving from any of the parties to any other. The remaining
provisions of this
3
<PAGE> 4
Agreement shall be valid and binding and of like effect as though such
provision were not included.
(c) Notice. Notices given pursuant to the provisions of this
Agreement shall be delivered personally or sent by certified mail, postage
pre-paid, or by overnight courier, or by telex, telecopier or telegraph,
charges prepaid, to the Company's then-current business address or, in the
event the notice is to Employee, the address that Employee has represented to
Company as current.
(d) Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with laws of the State of California,
without giving effect to the conflict of laws rules thereof.
(e) Waiver; Amendment. The waiver by any party to this
Agreement of a breach of any provision hereof by any other party shall not be
construed as a waiver of any subsequent breach. No provision of this Agreement
may be terminated, amended, supplemented, waived or modified other than by an
instrument in writing, signed by the party against whom the enforcement of the
termination, amendment, supplement, waiver or modification is sought.
(f) Entire Agreement. This Agreement represents the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersedes any previous agreement or understanding.
(g) Execution in Counterparts. This Agreement may be executed
in counterparts with the same force and effectiveness as though executed as a
single document.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the day and year first above written.
TEGAL CORPORATION
By: ROBERT V. HERY STEVE DEORNELLAS
------------------------------ -----------------------------
Robert V. Hery Steve DeOrnellas
Title: Chairman, CEO and President
4
<PAGE> 1
TEGAL CORPORATION
LOAN AND SECURITY AGREEMENT
DATED AS OF AUGUST 15, 1997
<PAGE> 2
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement ("Agreement") is made and entered into
as of August 15, 1997, by and among Imperial Bank ("Imperial") as Collateral
Agent and a Bank, and Sanwa Bank California ("Sanwa"). Imperial and Sanwa are
referred to individually herein as a "Bank" and collectively as the "Banks") and
Tegal Corporation ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Banks, and Banks
desire to extend credit to Borrower. This Agreement sets forth the terms on
which Banks will advance credit to Borrower, and Borrower will repay the amounts
owing to Banks.
AGREEMENT
The parties agree as follows:
SECTION 1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following terms shall
have the following definitions:
"ACCOUNTS" means all presently existing and hereafter arising accounts,
contract rights, and all other forms of obligations owing to Borrower arising
out of the sale or lease of goods (including, without limitation, the licensing
of software and other technology) or the rendering of services by Borrower,
whether or not earned by performance, and any and all credit insurance,
guaranties, and other security therefor, as well as all merchandise returned to
or reclaimed by Borrower and Borrower's Books relating to any of the foregoing.
"ACQUISITION" means any transaction, or series of transactions, by
which Borrower or any of its Subsidiaries directly or indirectly acquires all
or substantially all of any ongoing business, whether through the purchase of
stock or assets for cash, a cash merger, or consolidation.
"ADVANCE" or "ADVANCES" means an advance or advances under the
Committed Revolving Line.
"AFFILIATE" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, and Person that controls or is
under common control with such Person, and each of such Person's senior
executive officers, directors, and partners.
"BANK EXPENSES" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, amendment, and enforcement of the
Loan Documents; and each Bank's reasonable attorneys' fees and expenses
incurred in enforcing or defending the Loan Documents, whether or not suit is
brought.
"BORROWER'S BOOKS" means all of Borrower's books and records including
ledgers; records concerning Borrower's assets or liabilities, the Collateral,
business operations or financial condition; and all computer programs, or tape
files, and the equipment containing such information.
"BUSINESS DAY" means any day that is not a Saturday, Sunday, or other
day on which banks in the State of California are authorized or required to
close.
"CLOSING DATE" means the date of this Agreement.
"CODE" means the California Uniform Commercial Code.
1.
<PAGE> 3
"COLLATERAL" means the property described on EXHIBIT A attached hereto.
"COLLATERAL AGENT" means Imperial or such entity as may succeed to such
position.
"COMMITTED REVOLVING LINE" means Twenty Million Dollars ($20,000,000).
"CONTINGENT OBLIGATION" means, as applied to any Person, any direct or
indirect liability , contingent or otherwise, of that Person with respect to
(i) any indebtedness, lease, dividend, letter of creditor other obligation of
another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by
that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person, and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate
cap agreement, interest rate collar agreement, or other agreement or
arrangement designated to protect a Person against fluctuation in interest
rates, currency exchange rates or commodity prices; provided, however, that the
term "Contingent Obligation" shall not include endorsements for collection or
deposit in the ordinary course of business. The amount of any Contingent
Obligation shall be deemed to be an amount equal to the stated or determined
amount of the primary obligation in respect of which such Contingent Obligation
is made or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by such Person in good faith;
provided, however, that such amount shall not in any event exceed the maximum
amount of the obligations under the guarantee or other support arrangement.
"CURRENT LIABILITIES" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included a current liabilities on the
consolidated balance sheet of the Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding
Advances made under this Agreement, but including all other Indebtedness that
is payable upon demand or within one year from the date of determination
thereof unless such Indebtedness is renewable or extendable at the option of
Borrower or any Subsidiary to a date more than one year from the date of
determination, but excluding Subordinated Debt.
"DAILY BALANCE," means the amount of the Obligation owed at the end of
a given day.
"EQUIPMENT" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended, and the regulation thereunder.
"EVENT OF DEFAULT" has the meaning set forth in Section 8.
"FEDERAL FUNDS RATE" means, for any period, the rate set forth in the
weekly statistical release designated as H.15(519) or any successor
publication, published by the Federal Reserve Board (including any such
successor, "H.15(519)") for such day opposite the caption "Federal Funds
(Effective)". If on any relevant day such rate is not yet published in
H.15(519), the rate for such day will be the rate set forth in the daily
statistical release designated as the Composite 3:30 p.m. Quotations for U.S.
Government Securities, or any successor publication published by the Federal
Reserve Bank of New York (including any such successor, the "Composite" 3:30
p.m. Quotation") for such day under the caption "Federal Funds Effective Rate."
"FEDERAL RESERVE BOARD" means the Board of Governors of the Federal
Reserve System and any successor thereto.
"GAAP" means generally accepted accounting principles as in effect from
time to time.
2.
<PAGE> 4
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services (other than trade payables not
past due incurred in the ordinary course of business), including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against any
person or entity under any provision of the United States Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency law, including assignments
for the benefit of creditors, formal or informal moratoria, compositions,
extension generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"Inventory" means all present and future inventory in which Borrower or
its Subsidiaries has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any account or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investing" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" Means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or notes
executed by Borrower, the Disclosure Letter and any other agreement entered into
between Borrower and Banks in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper, and Borrower's books relating
to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts or obligations owed to either Banks by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from Borrower to others that either Bank
may have obtained by assignment or otherwise.
"Payment Date" means the fifteenth (15th) calendar day of each month.
"Percentage Share" means, as to each Bank, the percentage calculated in
accordance with SECTION 12.6 hereof.
"Periodic Payments" means all installments or similar recurring payments
that Borrower may now or hereafter become obligated to pay to either Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and such Bank.
3.
<PAGE> 5
"PERMITTED INDEBTEDNESS" means:
(a) Indebtedness of Borrower in favor of Banks arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in the
Schedule;
(c) Indebtedness in Japan under the note discount facility as
disclosed in the Schedule;
(d) Subordinated Debt;
(e) Letters of credit;
(f) Indebtedness incurred in connection with mortgage financing and
purchase money security interests as defined in Section 9-107 of the UCC;
(g) Guaranties of Indebtedness or other obligations permitted
hereunder;
(h) Obligations related to stock options, provided that such stock
options have been approved by the Borrower's Board of Directors;
(i) Extensions, renewals or refinancings of Indebtedness permitted
under this Loan Agreement, other than clause (d) above; and
(j) Other Indebtedness in the aggregate amount not exceeding Three
Million Dollars ($3,000,000).
"PERMITTED INVESTMENT" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having one of the two highest ratings obtainable from
either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii)
any Investments permitted by Borrower's investment policy, as amended from time
to time, provided that such investment policy (and any amendment thereto) has
been approved in writing by Banks, which approval shall not be unreasonably
withheld, and (iv) certificates of deposit maturing no more than one (1) year
from the date of investment therein issued by either Bank; and
(c) Investments constituting Acquisitions permitted under Section
7.3 hereof.
"PERMITTED LIENS" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental charges
or levies, either not delinquent or being contested in good faith by appropriate
proceedings, provided the same have no priority over any of Collateral Agent's
or either Bank's security interests;
4.
<PAGE> 6
(c) Liens (i) upon or in any equipment acquired or held by Borrower
or any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition of
such equipment, or (ii) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred for the purchase or improvement of real property;
(e) Liens for taxes, assessments or governmental charges or claims
the payment of which is not at the time required hereunder;
(f) Statutory Liens of landlords and depository institutions and
Liens of carriers, warehousemen, mechanics, materialmen and other Liens imposed
by law incurred in the ordinary course of business for sums not delinquent for a
period of more than sixty (60) days or being contested in good faith, provided,
however, that Borrower shall have made such reserve or other provision therefor
as may be required by GAAP;
(g) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(h) Any attachment or judgment Lien, if the judgment it secures
shall, within sixty (60) days after the entry thereof, have been discharged or
execution thereof stayed pending appeal, or shall have been discharged within
sixty (60) days after the expiration of any such stay;
(i) Easements, rights-of-way, zoning and similar restrictions and
other encumbrances affecting real property which do not in any case materially
interfere with the ordinary conduct of the business of Borrower or any of its
Subsidiaries;
(j) Any interest or title of a lessor under any lease not prohibited
hereunder; and
(k) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (j) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"PERSON" means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"PRIME RATE" means either (i) the variable rate of interest, per annum,
most recently announced by Imperial, as its "prime rate," or (ii) the variable
rate of interest, per annum, most recently announced by Sanwa as its "reference
rate," whichever rate is higher, as applicable to the Advances made hereunder by
the Banks whether or not such announced rate is the lowest available from such
Bank.
"QUICK ASSETS" means, at any date as of which the amount thereof shall be
determined, the consolidated cash, cash-equivalents, accounts receivable and
investments of Borrower determined to be quick assets in accordance with GAAP.
"RESPONSIBLE OFFICER" means each of the Chief Executive Officer, the Chief
Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" means August 15, 1998.
5.
<PAGE> 7
"SCHEDULE" means the schedule of exceptions attached hereto.
"SUBORDINATED DEBT" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Banks on terms reasonably
acceptable to each Bank (and identified as being such by Borrower and each
Bank), where the subordinated lender has executed a subordination agreement (in
a form provided by the Banks) in favor of each of the Banks.
"SUBSIDIARY" means any corporation or partnership in which (i) any
general partnership interest or (ii) more than 50% of the stock of which by the
terms thereof ordinary voting power to elect the Board of Directors, managers
or trustees of the entity shall, at the time as of which any determination is
being made, be owned by Borrower, either directly of through an Affiliate.
"TANGIBLE NET WORTH" means at any date as of which the amount thereof
shall be determined, the consolidated total assets of Borrower and its
Subsidiaries minus, without duplication, (i) the sum of any amounts
attributable to (a) goodwill, (b) intangible items such as unamortized debt
discount and expense, parents, trade and service marks and names, copyrights
and research and development expenses except prepaid expenses, and (c) all
reserves not already deducted from assets, and (ii) Total Liabilities.
"TOTAL LIABILITIES" means at any date as of which the amount thereof
shall be determined, all obligations that should, in accordance with GAAP be
classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but specifically excluding
Subordinated Debt.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
SECTION 2. LOAN AND TERMS OF PAYMENT
2.1 ADVANCES. Subject to and upon the terms and conditions of this
Agreement, each Bank severally agrees to make its Percentage Share of each
Advance to Borrower in an aggregate amount not to exceed such Bank's Percentage
Share of the Committed Revolving Line. Subject to the terms and conditions of
this Agreement, amounts borrowed pursuant to this SECTION 2.1 may be repaid and
reborrowed at any time during the term of this Agreement.
Whenever Borrower desires an Advance, Borrower will notify each
Bank by facsimile transmission or telephone no later than 11:00 a.m. Pacific
time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of EXHIBIT B hereto. Each Bank is authorized to make
Advances under this Agreement, based upon instructions received from a
Responsible Officer. Each Bank shall be entitled to rely on any telephonic
notice given by a person who such Bank reasonably believes to be a Responsible
Officer, and Borrower shall indemnify and hold such Bank harmless for any
damages or loss suffered by such Bank as a result of such reliance. Such Bank
will credit the amount of Advances made under this SECTION 2.1 to Borrower's
deposit account held by Imperial or Collateral Agent not later than 3:00 p.m.
Pacific time on the Business Day such Advance is to be made. Borrower's
Obligations under the Committed Revolving Line shall be evidenced by this
Agreement and by a Promissory Note, executed in favor of each Bank, in the form
attached hereto as EXHIBIT D.
The Committed Revolving Line shall terminate on the Revolving
Maturity Date, at which time all Advances under this SECTION 2.1 and other
amounts due under this Agreement (except as otherwise expressly specified
herein) shall be immediately due and payable.
2.2 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in SECTION 2.2(b), any
Advances of each Bank shall bear interest, on the average Daily Balance, at a
rate equal to the Prime Rate.
6.
<PAGE> 8
(b) LATE PAYMENT RATE. All Obligations which have not been paid
when due shall bear interest at a rate equal to two (2) percentage points above
the interest rate applicable immediately prior to the date such payment was due.
(c) (i) PAYMENTS. Interest hereunder shall be due and payable
on the Payment Date of each month during the term hereof. Borrower hereby
authorizes Imperial or Collateral Agent to debit any accounts with Imperial or
Collateral Agent, including, without limitation, Account Number 00017057057 for
payments of principal and interest due on the Obligations and any other amounts
owing by Borrower to Banks. Imperial or Collateral Agent will promptly notify
Borrower of all debits which Imperial or Collateral Agent makes against
Borrower's accounts. Any such debits against Borrower's accounts in no way
shall be deemed a set-off. Any interest not paid when due shall be compounded
by becoming a part of the Obligations, and such interest shall thereafter
accrue interest at the rate then applicable hereunder.
(ii) DISTRIBUTION OF PAYMENTS. All amounts received by
Imperial or Collateral Agent shall be allocated and paid to Banks as necessary
to ensure a sharing of all amounts received by Imperial or Collateral Agent as
set forth in SECTION 12.6. Imperial or Collateral Agent shall immediately
distribute to each Bank, at such address as each Bank shall designate, such
Bank's interest in all repayments and prepayments of principal and all payments
of interest, loan fees, commitment fees and other fees, expenses and costs
received by Imperial or Collateral Agent on the same day and in the same type
of funds as payment was received. In the event Agent does not distribute such
payments on the same day received, such payment shall accrue interest at the
Federal Funds Rate, which shall be payable by Imperial or Collateral Agent.
Imperial or Collateral Agent shall indemnify and hold Borrower harmless from
any claim for overnight interest by any Lender under this SECTION 2.2(c)(ii).
(D) COMPUTATION. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.3 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, each Bank shall credit a wire transfer of funds, check, or other item
of payment to such deposit account held at such Bank or Obligation as Borrower
specifies. After the occurrence of an Event of Default, the receipt by a Bank
of any wire transfer of funds, check, or other item of payment shall be
immediately applied to conditionally reduce Obligations, but shall not be
considered a payment on account unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is
honored when presented for payment. Notwithstanding anything to the contrary
contained herein, any wire transfer or payment received by a Bank after 2:00
p.m. Pacific time shall be deemed to have been received by such Bank as of the
opening of business on the immediately following Business Day. Whenever any
payment to a Bank under the Loan Documents would otherwise be due (except by
reason of acceleration) on a date that is not a Business Day, such payment
shall instead be due on the next Business Day, and additional fees or interest,
as the case may be, shall accrue and be payable for the period of such
extension.
2.4 FEES. Borrower shall pay to Banks the following:
(a) FACILITY FEE. A Facility Fee equal to Twelve Thousand Five
Hundred Dollars ($12,500.00), which fee shall be payable to Imperial on the
Closing Date and shall be fully earned and non-refundable; and a Facility Fee
equal to Seven Thousand Five Hundred Dollars ($7,500.00), which fee shall be
payable to Sanwa on the Closing Date and shall be fully earned and
non-refundable;
(b) LOAN FEE. A Loan Fee equal to three-eighths of one percent
(0.375%) per annum of the average unused amount of the Committed Revolving Line
which fee shall be due quarterly, beginning September 30, 1997, payable in
arrears to each Bank based upon such Bank's Percentage Share of the Committed
Revolving Line.
7.
<PAGE> 9
(c) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's customary and
reasonable fees and out-of-pocket expenses for such Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time and, if an Event of Default
does not exists, at reasonable intervals by such Bank or its agents; and
(d) BANK EXPENSES. Upon the date hereof, all Bank Expenses incurred
through the Closing Date, including reasonable attorneys' fees and expenses,
and, within thirty (30) days of demand, other Bank Expenses as they become due
from time to time hereunder.
2.5 Additional Costs. In case any law, regulation, treaty or official
directive or the interpretation or application thereof by any court or any
governmental authority charged with the administration thereof, in any such
case enacted or made effective after the date hereof, or the compliance with any
guideline or request of any central bank or other governmental authority
(whether or not having the force of law) made effective after the date hereof:
(a) subjects either Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of such Bank imposed by the United States of
America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by any Bank; or
(c) imposed upon any Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to such Bank,
reduce the income receivable by such Bank or impose any expense upon such Bank
with respect to any Advances, such Bank shall notify Borrower thereof. Borrower
agrees to pay to such Bank the amount of such increase in cost, reduction in
income or additional expense as and when such cost, reduction or expense is
incurred or determined, upon presentation by such Bank of a statement of the
amount and setting forth such Bank's calculation thereof, all in reasonable
detail, which statement shall be deemed true and correct absent manifest error.
No Bank shall be entitled to any compensation pursuant to this Section 2.5 in
respect of any such event (i) for any period of time in excess of ninety (90)
days prior to such notice or (ii) for any period of time prior to such notice
if such Bank shall not have given such notice within ninety (90) days of the
date on which such event shall have been enacted, promulgated, adopted or
issued in definitive or final form unless such event is retroactive.
2.6 TERM. Except as otherwise set forth herein, this Agreement shall
become effective on the Closing Date and, subject to SECTION 13.7, shall
continue in full force and effect for a term ending on the Revolving Maturity
Date. Notwithstanding the foregoing, Banks shall have the right to terminate any
obligation to make Advances under this Agreement immediately and without notice
upon the occurrence and during the continuance of an Event of Default.
Notwithstanding termination (but subject to SECTION 13.7), Collateral Agent and
Banks shall retain their Lien on the Collateral which remain in effect for so
long as any Obligations are outstanding.
SECTION 3. CONDITIONS OF LOANS
3. CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of either
Bank to make the initial Advance is subject to the condition precedent that
such Bank shall have received, in form and substance satisfactory to such Bank,
the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
8.
<PAGE> 10
(c) a certificate of the Secretary of State of State of Delaware
and California with respect to Borrower's standing (and foreign qualification);
(d) financing statements (Forms UCC-1 and UCC-2);
(e) insurance certificate;
(f) payment of the fees and Bank Expenses then due (to the extent
invoiced) specified in SECTION 2.4 hereof; and
(g) such other documents, and completion of such other matters,
as Banks may reasonably request prior to the Closing Date.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of either Bank
to make each Advance, including the initial Advance, is further subject to the
following conditions;
(a) receipt by each Bank of the Payment/Advance Form as provided
in SECTION 2.1; and
(b) the representations and warranties contained in SECTION 5
shall be true and correct in all material respects on and as of the date of
such Payment/Advance Form and on the effective date of each Advance as though
made at and as of each such date, provided, however, that those representations
and warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date, and no Event of Default
shall have occurred and be continuing, or would result from such Advance, or
with the lapse of time or the giving of notice or both would constitute an
Event of Default. The making of each Advance shall be deemed to be a
representation and warranty by Borrower on the date of such Advance as to the
accuracy of the facts referred to in this SECTION 3.2(b).
SECTION 4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to
Collateral Agent on behalf of Banks a continuing security interest in all
presently existing and hereafter acquired or arising Collateral in order to
secure prompt repayment of any and all Obligations and in order to secure
prompt performance by Borrower of each of its covenants and duties under the
Loan Documents. Such security interest constitutes a valid, first priority
security interest in the presently existing Collateral, and will constitute a
valid, first priority security interest in Collateral a "hold" on any Deposit
Account pledged as Collateral to secure the Obligations.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall from
time to time execute and deliver to Collateral Agent, at the request of either
Bank, all Negotiable Collateral, all financing statements and other documents
that either Bank may reasonably request, in form satisfactory to such Bank, to
perfect and continue perfect Bank's security interest in the Collateral.
4.3 RIGHT TO INSPECT. Either Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, and, if an Event of
Default does not exist, at reasonable intervals, to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of,or
any other matter relating to, the Collateral.
9.
<PAGE> 11
SECTION 5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Subsidiary
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property required that it be so qualified except where the failure to be so
qualified would not reasonably be expected to have a Material Adverse Effect.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Certificate of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default would reasonably be expected to have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title to
the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 MERCHANTABLE INVENTORY. All Inventory (net of reserves) is in all
material respects of good and marketable quality, free from all material
defects.
5.5 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in SECTION 10 hereof.
5.6 Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court of administrative agency in which an adverse decision would
reasonably be expected to have a Material Adverse Effect or a material adverse
effect on Borrower's interest or Bank's security interest in the Collateral.
Borrower does not have knowledge of any such pending or threatened actions or
proceedings.
5.7 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Banks fairly present in all material
respects Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a change in the consolidated financial condition of Borrower since
the date of the most recent of such financial statements submitted to Banks,
which in the reasonable determination of Banks has a Material Adverse Effect.
For the quarters ending September 30, 1997, December 31, 1997, and March 31,
1998, the Banks shall determine whether there has been a Material Adverse Effect
in accordance with the terms of the disclosure letter provided by Borrower of
even date herewith the "DISCLOSURE LETTER").
5.8 SOLVENCY. Borrower is solvent and able to pay its debts (including
trade debts) as they mature.
5.9 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any applicable employee
benefit plans subject to ERISA. No events has occurred resulting from
Borrower's failure to comply with ERISA that is reasonably likely to result in
Borrower's incurring any liability that would reasonably be expected to have a
Material Adverse Effect. Borrower is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940. Borrower is not engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations G, T and
U of the Board of Governors of the Federal Reserve System). Borrower has
complied with all applicable
10.
<PAGE> 12
provisions of the Federal Fair Labor Standards Act to the extent failure to
comply would reasonably be expected to have a Material Adverse Effect. Borrower
has not violated any statutes, laws, ordinances or rules applicable to it,
violation of which would reasonably be expected to have a Material Adverse
Effect.
5.10 ENVIRONMENTAL CONDITION. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to
the best of Borrower's knowledge, by previous owners or operators, in the
disposal of, or to produce, store, handle, treat, release, or transport, any
hazardous waste or hazardous substance other than in accordance with applicable
law except where failure to act in accordance with applicable law would not
reasonably be expected to have a Material Adverse Effect as determined by the
Banks; to the best of Borrower's knowledge, none of Borrower's properties or
assets has ever been designated or identified in any manner pursuant to any
environmental protection statute as a hazardous waste or hazardous substance
disposal site, or a candidate for closure pursuant to any environmental
protection statute; no lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned by
Borrower or any Subsidiary which would reasonably be expected to have a
Material Adverse Effect as determined by the Banks; and neither Borrower nor
any Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment that would reasonably be
expected to have a Material Adverse Effect as determined by the Banks.
5.11 TAXES. Borrower and cash Subsidiary has filed or caused to be filed
all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.12 SUBSIDIARIES. Borrower does not own any stock, partnership interest
or other equity securities of any Person, except for Permitted Investments.
5.13 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted in
all material respects.
5.14 FULL DISCLOSURE. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Banks
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates
or statements not misleading.
Section 6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as any Bank may have any commitment to
make an Advance hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify would reasonably be expected to have a Material Adverse
Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain, to the extent consistent with prudent management of Borrower's
business, in force all licenses, approvals and agreements, the loss of which
would reasonably be expected to have a Material Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which would reasonably be expected to have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Banks' Lien on the
Collateral.
11.
<PAGE> 13
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to Banks: (a) as soon as available, but in any event within forty-five
(45) days after the end of each quarter, a company prepared consolidated and
consolidating balance sheer and income statement covering Borrower's
consolidated operations during such period, certified by an officer of Borrower
reasonably acceptable to Bank; (b) as soon as available, but consolidating
financial statements of Borrower prepared in accordance with GAAP, consistently
applied, together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank; (c)
within five (5) days of filing, copies of all statements, reports and notices
sent or made available generally by Borrower to its security holders or to any
holders or to any holders of Subordinated Debit and all reports on Form 10-K,
10-Q and 8-K filed with the Securities and Exchange Commission; (d) promptly
upon receipt of notice thereof, a report of any legal actions pending or
threatened against Borrower or any Subsidiary that would reasonably be expected
to result in damages or costs to Borrower or any Subsidiary of Two Hundred and
Fifty Thousand Dollars ($250,000) or more; and (e) upon the reasonable request
of either Bank, such budgets, sales projections, operating plans, consolidating
financial statements or other financial information as Bank may reasonably
request from time to time.
Borrower shall deliver to Banks with the quarterly financial
statements a Compliance Certificate signed by a Responsible Officer in
substantially the form of EXHIBIT C hereto.
Any Bank shall have a right from time to time hereafter to audit
Borrower's Accounts at Borrower's expense, provided that such audits will be
conducted no more often than every twelve (12) months unless an Event of Default
has occurred and is continuing.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory (net of
reserves) in good and marketable condition, free from all material defects.
Returns and allowances, if any, as between Borrower and its account debtors
shall be on the same basis and in accordance with the usual customary practices
of Borrower, as they exist at the time of the execution and delivery of this
Agreement. Borrower shall promptly notify Bank of all returns and recoveries and
of all disputes and claims, where the return, recovery, dispute or claim
involves more than Two Hundred and Fifty Thousand Dollars ($250,000).
6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Banks, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal taxes, and will, upon request, furnish each Bank with proof
satisfactory to such Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form,
with such companies, and in such amount as reasonably satisfactory to Banks. All
such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Banks, showing Banks as an additional
loss payees thereof and all liability insurance policies shall show the Banks as
additional insureds, and shall specify that the insurer must give
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at least twenty (20) days notice to Banks before canceling its policy for any
reason. Borrower shall deliver to Banks certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under nay such policy shall, at the option of Banks, be payable to
Banks to be applied on account of the Obligations.
6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain in principal
depository and operating accounts, other than cash management accounts, with
Imperial or Collateral Agent.
6.8 QUICK RATIO. Borrower shall maintain, as of the last day of each
calendar month, a ratio of Quick Assets to Current Liabilities of at least 1.25
to 1.00.
6.9 DEBT-NET WORTH RATIO. Borrower shall maintain, as of the last day of
each calendar month, a ratio of Total Liabilities to Tangible Net Worth of not
more than 0.75 to 1.00.
6.10 TANGIBLE NET WORTH. Borrower shall maintain, as of the last day of
each calendar month, a Tangible Net Worth of not less than Forty Million Dollars
($40,000,000).
6.11 MAXIMUM QUARTERLY LOSS. Beginning July 1, 1997, Borrower shall not
suffer a pre-tax loss in excess of Three Million Dollars ($3,000,000), measured
as of the end of each fiscal quarter for the two quarter period then ended. For
purposes of this calculation, the pre-tax loss shall exclude (i) non-recurring
income and expenses as determined by the Banks and (ii) research and
development costs in excess of Five Million Dollars ($5,000,000) for the two
quarter period then ended.
6.12 FURTHER ASSURANCES. At any time and from time to time Borrower shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Banks to effect the purposes of this Agreement.
SECTION 7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit hereunder shall
be available and until payment in full of the outstanding Obligations or for so
long as any Bank may have any commitment to make any Advances, Borrower will
not do any of the following without the prior written consent of Banks:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of
(collectively, a "TRANSFER"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than: (i) Transfers of Inventory
in the ordinary course of business; (ii) Transfer of non-exclusive licenses and
similar arrangements for the use of the property of Borrower or its
Subsidiaries; (iii) Transfers of worn-out or obsolete Equipment; or (iv)
Transfers in the aggregate amount not to exceed One Million Five Hundred
Thousand Dollars ($1,500,000) in any fiscal year.
7.2 CHANGE IN BUSINESS. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related
thereto (or incidental thereto), or suffer a material change in Borrower's
ownership or directors. Borrower will not, without thirty (30) days prior
written notification to Banks, relocate its chief executive office.
7.3 MERGERS OR ACQUISITIONS. Enter into any Acquisition, or permit any
of its Subsidiaries to enter into any Acquisition, having an aggregate cash
purchase price in excess of Twenty Million Dollars ($20,000,000) for any fiscal
year, provided, however, that the aggregate cash purchase price for such
Acquisitions shall be subject to SECTION 7.8 hereof. Borrower or its
Subsidiaries may enter into such Acquisitions at or under the Twenty Million
Dollar ($20,000,000) per fiscal year limitation, provided that no Event of
Default has occurred and is continuing or would result from such Acquisition.
Concurrently with any Acquisition, Borrower or its Subsidiaries shall execute
and deliver to Banks such documentation, in form and substance satisfactory to
Banks, as Banks may request to perfect their security interest in such assets.
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7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness or any Contingent Obligations, or permit any
Subsidiary so to do, other than Permitted Indebtedness.
7.5 ENCUMBRANCES. Create incur, assume or suffer to exist any Lien with
respect to any of its property, or assigns or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any cash dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock, provided, however, Borrower may (i) make such distributions or payments
subject to the terms of employee stock option plans which have been approved by
Borrower's Board of Directors, or (ii) repurchase capital stock in an amount
not to exceed Five Million dollars ($5,000,000) per fiscal year.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 LOANS. Make any loans or advances to any person or other entity other
than in the ordinary and normal course of its business as now conducted,
provided, however, that Borrower may make such loans or advances to its
Subsidiaries in an amount not to exceed Eleven Million Dollars ($11,000,000)
net of any loans or advances made by such Subsidiaries to Borrower.
7.9 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate or Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
7.10 SUBORDINATED DEBT. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Banks'
prior written consent.
7.11 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Banks may approve in writing,
Borrower shall keep the Inventory only at the locations set forth in SECTION 10
hereof and such other locations of which Borrower gives Banks prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Collateral Agent's security interest on behalf of and for the
benefit of Banks.
7.12 CAPITAL EXPENDITURES. Except as permitted under SECTION 7.3, make
capital expenditures in excess of Two Million Five Hundred Thousand Dollars
($2,500,000) per fiscal quarter.
7.13 COMPLIANCE. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose.
fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply
with the Federal Fair Labor Standards Act or violate any law or regulation,
which violation would reasonably be expected to have a Material Adverse Effect
or a material adverse effect on the Collateral or the priority of Collateral
Agent's Lien on the Collateral, or permit any of its Subsidiaries to do any of
the foregoing.
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SECTION 8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT.
(a) If Borrower fails to pay, when due, any principal; and
(b) If Borrower fails to pay, within five (5) days of the
invoice payment date, any of the Obligations, exclusive of principal.
8.2 COVENANT DEFAULT.
(a) If Borrower fails to perform any obligation under SECTIONS
6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the covenants contained in
Article 7 of this Agreement, or
(b) If Borrower fails or neglects to perform, keep, or observe
any other material term, provision, condition, covenant, or agreement contained
in this Agreement, in any of the Loan Documents, or in any other present or
future agreement between Borrower and any Bank and as to any default under such
other term, provision, condition, covenant or agreement that can be cured, has
failed to cure such default with in thirty (30) days after Borrower receives
notice thereof or any officer of Borrower becomes aware thereof;
8.3 MATERIAL ADVERSE CHANGE. If there is a change in Borrower's
business, assets, liabilities, financial condition, operations or affairs,
other than changes in the ordinary course of business, or if there is a
material impairment of the prospect of repayment of any portion of the
Obligations or a material impairment of the value or priority of Banks'
security interests in the Collateral, which in the reasonable determination of
Banks has, either individually or in the aggregate, a Material Adverse Effect.
8.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment, seizure, writ or distress warrant or levy
has not been removed, discharged or rescinded within thirty (30) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or encumbrance upon any material portion
of Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any material portion of borrower's assets by the United
States government, or any department, agency, or instrumentality thereof, or by
any state, county, municipal, or governmental agency, and the same is not paid
within thirty (30) days after Borrower receives notice thereof, provided that
none of the foregoing shall constitute an Event of Default where such action or
event is stayed or an adequate bond has been posted pending a good faith
contest by Borrower (provided that no Advances will be required to be made
during such cure period);
8.5 INSOLVENCY. If borrower is not Solvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is
commenced against Borrower and is not dismissed or stayed within forty-five
(45) days (provided that no Advances will be made prior to the dismissal of
such Insolvency Proceeding); "Solvent," meaning (a) the fair market value of
Borrower's assets will be in excess of the amount that will be required to be
paid on or in respect of the existing debts and other liabilities (including
contingent liabilities) of Borrower as they mature; (b) Borrower shall not have
unreasonably small capital to carry on its business as conducted or as proposed
to be conducted; (c) Borrower does not intend to or believe that it will incur
debts beyond its ability to pay such debts as they mature (taking into account
the timing and amounts of cash to be received by it and the amounts to be
payable on or in respect of its obligations); (d) Borrower does not intend to
hinder, delay or defraud either present or future creditors; and (e) Borrower
will have received fair consideration and reasonably
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equivalent value in exchange for incurring its Obligations under the Loan
Documents and Borrower will be a direct beneficiary of the full proceeds of the
credit made available by Banks pursuant to this Loan Agreement.
8.6 OTHER AGREEMENTS. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of Two Hundred and Fifty Thousand
Dollars ($250,000) or that would reasonably be expected to have a Material
Adverse Effect;
8.7 JUDGMENTS. If a judgment or judgments for the payment of money in an
amount, individually or in the aggregate, of at least One Hundred and Twenty
Five Thousand Dollars ($125,000) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of thirty (30) days (provided that
no Advances will be made prior to the satisfaction or stay of such judgment); or
8.8 MISREPRESENTATIONS. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set
forth herein or in any certificate delivered to any Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
SECTION 9. BANK'S RIGHTS AND REMEDIES Upon the occurrence and during the
continuance of an Event of Default, an enforcing Bank may be appointed by the
Banks to enforce the rights and remedies herein on behalf of itself and as
agent for the other Bank(s) (the "ENFORCING BANK"). Appointment of the
Enforcing Bank shall be subject to the approval of either (i) both Banks, as
long as there are only two Banks whose combined Pro Rata Share (and voting
interest with respect thereto) of all amounts outstanding under this Agreement,
or, in the event there are no amounts outstanding, the Committed Revolving
Line, total one hundred percent (100.0%) of all such amounts outstanding or the
Committee Revolving Line, as the case may be, or (ii) if there are more than
two Banks, any combination of Banks whose combined Pro Rata Share (and voting
interest with respect thereto) of all amounts outstanding under this Agreement,
or, in the event there are no amounts outstanding, the Committed Revolving
Line, as the case may be. Upon such appointment of the Enforcing Bank, the
Collateral Agent will transfer all of its rights under this Loan Agreement to
the Enforcing Bank.
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the continuance
of an Event of Default, the Enforcing Bank, or any Bank, if applicable, may,
subject to Article 12, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are
authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in SECTION
8.5 all Obligations shall become immediately due and payable without any action
by any Bank);
(b) Cease advancing money or extending credit to or for the benefit
of Borrower under this Agreement or under any other agreement between Borrower
and any Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Enforcing Bank or
such Bank reasonably considers advisable;
(d) Without notice to or demand upon Borrower, make such payments
and do such acts as Enforcing Bank or such Bank considers necessary or
reasonable to protect its security interest in the Collateral. Borrower agrees
to assemble the Collateral if Enforcing Bank or such Bank so requires, and to
make the Collateral available to Enforcing Bank or such Bank as Enforcing Bank
or such Bank may designate. Borrower authorizes Enforcing Bank or such Bank to
enter the premises where the Collateral is located, to take and maintain
possess of the Collateral, or any part of it, and to pay, purchase, contest, or
compromise any encumbrance, charge, or lien which in Enforcing Bank's or such
Bank's determination appears to be prior or superior to its security interests
and
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to pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned premises, Borrower hereby grants Enforcing Bank or such Bank a
license to enter into possession of such premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise any
of Enforcing Bank's or such Bank's rights or remedies provided herein, at law,
in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the Obligations
any and all (i) balances and deposits of Borrower held by such Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by such Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral. Enforcing Bank or such Bank is hereby granted a license or other
right, solely pursuant to the provisions of this SECTION 9.1, to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Enforcing Bank's or such Bank's exercise of its rights under
this SECTION 9.1, Borrower's rights under all licenses and all franchise
agreements shall inure to Enforcing Bank's or such Bank's benefit;
(g) Sell the Collateral at either a public or private sale, or
both,by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Enforcing Bank
or such Bank determines is commercially reasonable;
(h) Enforcing Bank or such Bank may credit bid and purchase at any
public sale; and
(i) Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during the
continuance of an Event of Default, Borrower hereby irrevocably appoints
Enforcing Bank or Banks (and any of their designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Collateral Agent's or Enforcing Bank's
security interest in the Accounts, on behalf of and for the benefit of Banks;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into any Collateral Agent's or Enforcing Bank's possession; (c)
sign Borrower's name on any invoice or bill of lading relating to any Account,
drafts against account debtors; schedules and assignments of Accounts,
verification of Accounts, and notices to account debtors;(d) make, settle, and
adjust all claims under and decisions with respect to Borrower's policies of
insurance; and (e) settle and adjust disputes and claims respecting the accounts
directly with account debtors, for amounts and upon terms which Enforcing Bank
or such Bank determines to be reasonable; provided Enforcing Bank or such Bank
may exercise such power of attorney to sign the name of Borrower on any of the
documents described in SECTION 4.2 regardless of whether an Event of Default has
occurred. The appointment of Enforcing Bank or Banks as Borrower's attorney in
fact, and each and every one of Enforcing Bank's or Bank's rights and powers,
being coupled with an interest, is irrevocable until all of the Obligations have
been fully repaid and performed and Banks' obligation to provide advances
hereunder is terminated.
9.3 ACCOUNTS COLLECTION. At any time from the date of this Agreement,
Enforcing Bank or Banks may notify any Person owing funds to Borrower of
Collateral Agent's or Enforcing Bank's security interest in such funds, on
behalf of and for the benefit of Banks, and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Enforcing Bank's or Bank's trustee, and immediately deliver such
payments to Enforcing Bank or Banks in their original form as received from the
account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Banks may do any or all of the following: (a)
make payment of the same or any part thereof; (b) set up such reserves under the
Committed
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Revolving Line as Banks reasonably deem necessary to protect Banks from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in SECTION 6.6 of this Agreement, and take any action with
respect to such policies as Banks deem prudent. Any amounts so paid or deposited
by Banks shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by such Bank to make similar payments in the future or a
waiver by such Bank of any Event of Default under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as each Bank complies with
prudent banking practices, such Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 REMEDIES CUMULATIVE. Subject to Article 12, Banks' rights and remedies
under this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Subject to Article 12, Banks shall have all other rights and
remedies not inconsistent herewith as provided under the Code, by law, or in
equity. No exercise by any Bank of one right or remedy shall be deemed an
election, and no waiver by any Bank of any Event of Default on Borrower's part
shall be deemed a continuing waiver. No delay by any Bank shall constitute a
waiver, election, or acquiescence by it. No waiver by any Bank shall be
effective unless made in a written document signed on behalf of such Bank and
then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by any Bank on which Borrower may in any way be liable.
SECTION 10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to each Bank, as the case may be, at its
addresses set forth below:
If to Borrower: Tegal Corporation
2201 South McDowell Boulevard
Petaluma, CA 94955
Attn: David Curtis
Fax: 707/763-0436
If to Banks: Imperial Bank
2460 Sand Hill Road, Suite 102
Menlo Park, CA 94025
Attn: Steve Kattner
Fax: 415/233-3020
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Sanwa Bank California
444 Market Street, 23rd Floor
San Francisco, CA 94111
Attn: Victoria Hankins
Fax: 415/597-5435
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. NOTICES TO ONE BANK SHALL NOT BE DEEMED NOTICE TO THE OTHER BANK.
SECTION 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Banks hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANKS EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS, EACH PARTY RECOGNIZED AND AGREES THAT
THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVERS ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
SECTION 12. INTERCREDITOR PROVISIONS
12.1 OWNERSHIP OF ADVANCES. Notwithstanding any other terms of this
Agreement, each Bank shall be the holder and the sole owner of the respective
Advances made by such Bank, and no Bank shall have any interest in the Advances
of any other Bank.
12.2 LIMITATION ON FURTHER LOANS. Except for daily cash transfers that
arise out of the ordinary course of Borrower's cash management operations,
neither Bank may make loans to or otherwise extend credit to Borrower without
the consent of the other Bank, which consent will not be unreasonably withheld.
Except as otherwise expressly provided herein, the provisions of this Agreement
apply only to Advances arising under this Agreement.
12.3 DISBURSEMENTS. All Advances shall be made pro rata by Banks. Each
Bank shall make the funds it is to lend under this Agreement available to
Borrower no later than 3:00 p.m. Pacific time on the date of disbursement by
payment to such account at Imperial, Collateral Agent or Enforcing Bank as
Borrower specific. No Bank is obligated to advance any funds in lieu of or for
the account of the other Bank if the latter Bank fails to make such Advance.
12.4 TRANSFER OF INTEREST IN ADVANCES.
(A) CONSENT. If an Event of Default does not exist, no Bank may sell
or otherwise transfer any of its interest in this Agreement without the prior
written consent of the other Bank and the Borrower, which consent shall not be
unreasonably withheld, provided that either Bank may grant to up to two (2)
other financial institutions (including any Affiliate of such Bank)
participations in all or any part of such Bank's obligations, rights and
benefits hereunder without obtaining the other Bank's consent. The grant of a
participation interest shall be on such terms as the Bank granting the
participation determines are appropriate, provided only that (1) the holder of
such a participation interest shall not have any of the rights of a Bank under
this Agreement except, if the participation agreement so provides, rights to
demand the payment of costs of the type described in SECTION 2.5,
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provided that the aggregate amount that the Borrower shall be required to pay
under SECTION 2.5 with respect to any ratable share of the Committed Revolving
Line or any Advance (including amounts paid to participants) shall not exceed
the amount that Borrower would have had to pay if no participation agreements
had been entered into, and (2) the consent of the holder of such a
participation interest shall not be required for amendments or waivers of
provisions of the Loan Agreement other than those which (i) increase the amount
of the Committed Revolving Line, (ii) extend the term of this Agreement, (iii)
decrease the rate of interest or the amount of any fee or any other amount
payable to such participant under this Agreement. Notwithstanding the grant of
participation, the Bank granting the participation shall remain solely
responsible for the performance of its obligations under this Agreement, and
Borrower shall continue to deal with such Bank in connection with this
Agreement. Each proposed transferee shall satisfy all of the requirements of
this SECTION 12.4 as a condition to any such transfer.
(b) ASSUMPTION OF OBLIGATIONS. Each assignee (other than a
participant) shall assume all obligations of the transferring Bank with respect
to the portion of the transferor's interest under this Agreement so assigned
pursuant to documentation substantially in the form of EXHIBIT E hereto. Upon
such assumption, Borrower shall be deemed to release and discharge the
transferor from the transferor's obligations to Borrower under this Agreement
with respect to the portion of the transferor's obligations assumed by the
transferee, and such transferee shall be deemed a Bank hereunder.
(c) LEGAL AUTHORITY AND FINANCIAL ABILITY. The transferee shall
provide to the remaining Bank(s) and the Borrower evidence satisfactory to the
remaining Bank(s) and the Borrower that the proposed transferee has the legal
authority and financial ability to assume and perform all obligations of the
transferring Bank under this Agreement and the Loan Documents.
(d) RECEIVE AND HOLD INTEREST. The transferee shall agree in writing
(in form satisfactory to the remaining Bank and Borrower) to receive and hold
the transferred interest subject to all of the provisions of this Agreement.
(e) CONFIDENTIALITY. Subject to SECTION 13.8 hereof, Borrower
authorizes each Bank to disclose to any prospective transferee and any actual
transferee any and all information designated by Borrower as confidential, in
such Bank's possession concerning Borrower and this Agreement, subject to such
prospective transferee or actual transferee agreeing to hold such information
confidential, in accordance with SECTION 13.8 hereof. Provided that such
prospective transferee or actual transferee has executed a confidentiality
agreement in favor of the Borrower agreeing to the provisions of SECTION 13.8
hereof, neither Bank shall be responsible if such prospective transferee or
actual transferee fails to hold such information confidentially.
(f) VOIDABILITY. Any sale or transfer of an interest in this
Agreement shall be voidable at the option of the remaining Bank or Borrower
unless the provisions of this SECTION 12.4 are satisfied.
12.5 INFORMATION. Each Bank shall use efforts that are reasonable under
the circumstances to deliver to the other Bank copies of reports and all other
documents received from Borrower or otherwise relating to this Agreement, and
to share all other material information relating to Borrower or to this
Agreement that such Bank receives. Neither Bank shall be responsible for the
accuracy, of any information shared pursuant to this SECTION 12.5, nor shall
either Bank be liable to the other for any damages incurred as a result of any
reliance on such shared information.
12.6 PROPORTIONATE INTERESTS. Except as otherwise provided in this
Agreement, the rights, interests, and obligations of each Bank under this
Agreement and the Loan Documents at any time shall be shared in the ratio
(expressed as a percentage) of (a) the maximum amount the Bank has committed to
advance as set forth on the signature page signed by the Bank to (b) the
Committed Revolving Line (the "PERCENTAGE SHARE"). Any reference in this
Agreement or the Loan Documents to an allocation between or sharing by the
Banks of any right, interest, or duty "ratably," "proportionally," "pro
rata" or in similar terms shall refer to this ratio.
20.
<PAGE> 22
12.7 ALLOCATION OF PAYMENTS. All amounts received by Banks for the account
of Borrower, whether by payment, set-off, counterclaim, or otherwise, shall be
allocated and paid to Banks as necessary to ensure a sharing of all amounts
received on account of the Advances as contemplated in SECTION 12.6. Each Bank
shall promptly remit to Collateral Agent or Enforcing Bank for disbursement to
the other Banks such sums (whether received by the Bank for the account of
Borrower or otherwise) as may be necessary to ensure a sharing of all amounts
received on account of the Advances as contemplated in SECTION 12.6. The Banks
likewise shall contribute in such proportions as are necessary to ensure a
sharing as contemplated in SECTION 12.6 if any amount received for the account
of Borrower is required to be returned as a voidable transfer or otherwise. All
amounts received with respect to any other obligations at the time when Borrower
is not in compliance with all of the material provisions of this Agreement and
the Loan Documents shall be applied to the Obligations hereunder unless the
Banks agree otherwise.
12.8 DETERMINATION OF A COURSE OF ACTION UPON DEFAULT. Each Bank will
promptly advise the other if it acquires knowledge that an Event of Default has
occurred or with the passage of time, will occur, or that Borrower is not likely
to be in compliance with any financial covenant as of any measurement date.
Banks shall use efforts that are reasonable under the circumstances to consult
with each other before taking any action to enforce this Agreement or the Loan
Documents or to collect or enforce the Obligations under the Loan Documents. In
connection therewith, the Enforcing Bank may engage such attorneys and other
agents as it may deem appropriate. The Enforcing Bank may deduct from the gross
proceeds of any action or other collective effort any reasonable costs and
expenses, including reasonable attorneys fees, incurred in connection with such
action or effort. The Enforcing Bank will not be liable to the other Bank for
any act or omission in the absence of the Enforcing Bank's gross negligence or
willful misconduct.
12.9 FORECLOSURE.
(a) CREDIT BID BY BANKS. The Enforcing Bank shall have the exclusive
right to enter a credit bid at any foreclosure sale or other sale of any of the
Collateral on behalf of both the Enforcing Bank and the other Bank. If the Banks
cannot agree on the amount of an opening credit bid, the Bank advocating the
lower bid shall prevail in the use of such lower bid as the opening credit bid.
If the Banks are the successful bidder at the sale, then (a) the amount to be
credited against the Credit shall be allocated between the Banks in proportion
to the balances of their respective Obligations under the Loan Documents; and
(b) the Banks shall take title to the Collateral so purchased together, each
holding an undivided interest in that Collateral in proportion to the amount
credited against its Obligations under the Loan Documents.
(b) CASH BID FOR ACCOUNT OF ONE BANK. Either Bank shall have the
right to enter a cash bid for such Bank's own account at any sale. If such bid
is the successful one, then (a) the proceeds of the sale shall be allocated and
paid to each Bank in proportion to the outstanding balance of its Obligations
under the Loan Documents, and (b) the Bank that entered the bid shall acquire
the Collateral so purchased for its own account, and the other Bank shall have
no further interest in that Collateral upon payment to such other Bank of its
proportionate share of the sale proceeds in cash.
(c) THIRD PARTY BID. If the successful bid is entered by a third
party, then the sale proceeds shall be shared by the Banks as provided in
SECTION 12.7.
12.10 OTHER OBLIGATIONS. A Bank shall not obtain any interest in any
property of the Borrower taken as security for any loan made or acquired by such
Bank outside of this Agreement, or in any property in the possession or control
of such Bank, unless such other property or the proceeds thereof is applied to
an Obligation arising under this Agreement or the Loan Documents, in which case
banks shall share proportionately in such property or proceeds.
12.11 INDEPENDENT REVIEW. Each Bank has reviewed this Agreement and the
Loan Documents, the financial statements of Borrower, and such other materials
as the Bank has deemed appropriate. Each Bank has made its decision to execute
this Agreement and the Loan Documents based upon its review and its independent
21.
<PAGE> 23
evaluation of Borrower's creditworthiness. No Bank has made any representation,
and no Bank shall rely on any alleged representation by any other Bank, as to
the form, substance, or enforceability of this Agreement or any of the Loan
Documents or the ability of any party thereto to pay any debt or perform any
obligation. Each Bank is a sophisticated commercial bank experienced in making
loans to companies similar to Borrower. Subject to SECTION 12.5, each Bank shall
make its own decision as how to perform its obligations hereunder. Each Bank has
the capacity to protect its own interests in connection with, and evaluate the
merits and risks of, the transactions contemplated by this Agreement. Each Bank
has had an opportunity to ask questions of the Borrower and its officers,
employees, accountants, and representatives concerning Borrower's business
operations, financial condition, assets, liabilities, and all other matters the
Bank deems appropriate in connection with the transactions contemplated by this
Agreement, and has based its decision to enter into those transactions on such
information.
12.12 DUE AUTHORIZATION. The execution, delivery, and performance of this
Agreement and the Loan Documents have been duly authorized by all requisite
corporate or other actions of each Bank. This Agreement and each Loan Document
to which each Bank is a party, is a valid and binding obligation of such Bank,
legally enforceable in accordance with its terms.
12.13 DESIGNATION OF COLLATERAL AGENT. To facilitate the administration of
this Agreement, Imperial shall act as "COLLATERAL AGENT" for itself and Sanwa.
Collateral Agent or Enforcing Bank shall have only such duties as are expressly
set forth in this Agreement, or as otherwise agreed in writing by the Banks.
Collateral Agent or Enforcing Bank shall be deemed to act on behalf of both
Banks whenever Collateral Agent or Enforcing Bank acts under this Agreement.
12.14 RESIGNATION. Collateral Agent may resign as Collateral Agent, upon
thirty (30) day's written notice to the other Banks and to Borrower and
appointment of a successor Collateral Agent. Upon receipt of notice of
resignation, the Banks shall appoint a successor Collateral Agent which, if an
Event of Default does not exist, shall be reasonably acceptable to Borrower. The
resigning Collateral Agent shall cooperate fully in delivering to the successor
Collateral Agent the Loan Documents and copies of all records relating to the
Advances and payments made hereunder that the successor Collateral Agent
reasonably requests.
12.15 NO REAL ESTATE COLLATERAL. Each Bank agrees with, and for the benefit
of, the other Bank (which agreement shall not be for the benefit of Borrower or
any of its Subsidiaries) that Borrower's Obligations to such Bank under this
Agreement and the other Loan Documents are not and shall not be secured by any
real property collateral now or hereafter acquired by such Bank.
12.16 LOAN COLLECTIONS. Subject to the provisions of this Agreement,
Collateral Agent or Enforcing bank shall have the right, and shall use
reasonable efforts, to collect all sums due under this Agreement. All sums
collected by any Bank shall be held in trust by that Bank as trustee for the
benefit of all Banks in accordance with this Agreement.
12.17 REPORTS. Collateral Agent or Enforcing Bank shall use reasonable
efforts to deliver to Banks notices from Borrower and reports concerning
Borrower that Collateral Agent receives pursuant to this Agreement. Collateral
Agent shall have no obligation to deliver any such notices or reports that
Borrower or a third party simultaneously has forwarded to Banks.
12.18 COLLATERAL AGENT'S AND ENFORCING BANK'S DUTY OF CARE. Collateral
Agent and Enforcing Bank shall act or refrain from acting in accordance with the
instructions of the Banks. In so doing, Collateral Agent and Enforcing Bank may
engage such attorneys and other agents to act on behalf of the Banks as
Collateral Agent or the Enforcing Bank may deem appropriate and shall make
reasonable efforts to keep Banks appraised of all material actions taken. Action
taken by Collateral Agent or Enforcing Bank pursuant to the instruction of Banks
shall not be deemed to be discretionary action. In any case where this
Agreement, the Loan Documents, or the Banks have not directed Collateral Agent
or Enforcing Bank to perform specific acts or omissions, Collateral Agent or
Enforcing Bank may take or omit such actions as Collateral Agent or Enforcing
Bank deems to be appropriate, and in the absence of gross negligence or willful
misconduct, Banks shall not later bring a claim against Collateral Agent or
22.
<PAGE> 24
Enforcing Bank if, in hindsight, they disagree with Collateral Agent's or
Enforcing Bank's acts or omissions. Collateral Agent and Enforcing Bank shall
not be liable to Banks for any act or omission in the absence of Collateral
Agent's or Enforcing Bank's, respectively, own gross negligence or willful
misconduct.
12.19 EXPENSES. Upon request, Banks shall promptly reimburse Collateral
Agent and Enforcing Bank for their ratable share of any reasonable fees, costs,
and expenses Collateral Agent or Enforcing Bank may incur in connection with
this Agreement. Upon request, Collateral Agent or Enforcing Bank shall provide
to Banks written evidence of such fees, costs, and expenses. If any Bank fails
to so reimburse Collateral Agent or Enforcing Bank, Collateral Agent or
Enforcing Bank may deduct the amount due from any amount to be remitted to such
Banks. If the funds due a non-reimbursing Bank are not sufficient to pay the
non-reimbursing Bank's share of Collateral Agent's or Enforcing Bank's fees,
costs, and expenses, the other Banks shall make up the unreimbursed amount in
accordance with the Bank's proportionate interests as set forth in SECTION 12.6.
12.20 COMMUNICATION. Collateral Agent and Enforcing Bank shall promptly
inform Banks if Collateral Agent or Enforcing Bank receives any communication
from Borrower calling for action on the part of Banks, or if Collateral Agent or
Enforcing Bank concludes that an Event of Default has occurred under this
Agreement.
12.21 LIMITED LIABILITY OF COLLATERAL AGENT AND ENFORCING BANK. Except as
provided in SECTION 12.18 in this Agreement, Collateral Agent and Enforcing Bank
shall not be liable or answerable to Banks for anything whatsoever in connection
with this Agreement or the Loan Documents, including responsibility in respect
to the execution, construction, or enforcement of this Agreement or the Loan
Documents, except to the extent of Collateral Agent's or Enforcing Bank's
Percentage Share of such liability. Collateral Agent and Enforcing Bank have no
duties or obligations to Banks other than as provided in this Agreement.
Collateral Agent and Enforcing Bank may rely on any opinion of counsel
(including counsel for Borrower) in relations to this Agreement and the Loan
Documents, and upon statements and communications received from Borrower, or
from any other person believed by Collateral Agent or Enforcing Bank to be
authentic. Collateral Agent and Enforcing Bank shall not be liable for any
action taken or omitted on such reliance.
12.22 INDEMNIFICATION OF COLLATERAL AGENT AND ENFORCING BANK. Each Bank
shall indemnify, defend, and hold Collateral Agent and Enforcing Bank harmless
(to the extent not reimbursed by Borrower), according to its pro rata interest,
from and against any and all liabilities, obligations, losses, damages,
penalties, claims, actions, judgments, suits, costs, expenses, and disbursements
of any kind or nature whatsoever (including attorneys fees) that may be imposed
on, incurred by, or asserted against Collateral Agent or Enforcing Bank in any
way relating to or arising out of this Agreement or the Loan Documents, except
that Collateral Agent and Enforcing Bank shall not be indemnified against its
own gross negligence or willful misconduct.
12.23 COLLATERAL AGENT AND ENFORCING BANK AS BANK. Collateral Agent and
Enforcing Bank shall have the same rights and powers under this agreement as any
other Bank and may exercise the same as though it were not Collateral Agent or
Enforcing Bank. The term "Banks" includes Collateral Agent in Collateral Agent's
individual capacity and Enforcing Bank in Enforcing Bank's individual capacity.
Subject to the provisions of SECTION 12.2, Collateral Agent or Enforcing Bank
and their Subsidiaries and Affiliates may accept deposits from, lend money to,
act as agent or trustee for other lenders to, and generally engage in any kind
of banking, trust, or other business with, Borrower or any Subsidiary or
Affiliates as if Collateral Agent were not Collateral Agent and as if Enforcing
Bank were not Enforcing Bank.
12.24 CREDIT DECISION. Each Bank shall make its own independent
investigations of the financial condition and affairs of Borrower and its own
appraisal of the credit-worthiness of Borrower in connection with its interest
this Agreement. Except as set forth in this Agreement, Agent has no duty to
provide any Bank with any information (other than information provided pursuant
to this Agreement), whether coming into Agent's possession before the Closing
Date or at any time thereafter.
23.
<PAGE> 25
12.25 NO AGENCY. EXCEPT AS SPECIFIED HEREIN, NEITHER BANK IS AN AGENT OF
THE OTHER. NEITHER BANK HAS ANY AUTHORITY TO ACT OR FAIL TO ACT FOR THE OTHER.
THE OBLIGATIONS OF EACH BANK HEREUNDER ARE SEVERAL. NO BANK SHALL BE LIABLE FOR
THE FAILURE OF ANY OTHER BANK TO PERFORM ITS OBLIGATIONS HEREUNDER.
12.26 NO RELIANCE. The provisions of this Article 12 (except for SECTIONS
12.3, 12.4, AND 12.14) are solely for the benefit of Banks in specifying their
rights and obligations with respect to each other, and not for the benefit of
Borrower or its assigns or successors.
SECTION 13. GENERAL PROVISIONS
13.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the respective successor and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without each Bank's prior written consent, which
consent may be granted or withheld in each Bank's sole discretion, provided
further, that assignment by each Bank is subject to SECTION 12.4 hereof.
13.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold harmless
Collateral Agent, Enforcing Bank and each Bank and it officers, employees, and
agents against: (a) all obligations, demands, claims, and liabilities claimed or
asserted by any other party in connection with the transactions contemplated by
this Agreement; and (b) all losses or Bank Expenses in any way suffered,
incurred, or paid by such Bank as a result of or in any way arising out of,
following, or consequential to transactions between such Bank and Borrower
whether under this Agreement, or in connection with any matter related hereto
(including without limitation reasonable attorneys fees and expenses), except
for losses caused by such Bank's gross negligence or willful misconduct.
13.3 TIME OF ESSENCE. Time is of the essence for the performance of all
obligations set forth in this Agreement.
13.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
13.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be amended
or terminated orally. All prior agreements, understanding, representations,
warranties, and negotiations between the parties hereto with respect to the
subject matter of this Agrement, if any, are merged into this Agreement and the
Loan Documents.
13.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
13.7 SURVIVAL. All covenants, representations and warranties made in this
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding. The obligations of Borrower to indemnify Banks with respect
to the expenses, damages, losses, costs and liabilities described in SECTION
13.2 shall survive until all applicable statute of limitations periods with
respect to actions that may be brought against Banks have run, provided that so
long as the obligations set forth in the first sentence of this SECTION 13.7
have been satisfied, and neither bank has a commitment to make any Advances or
to make any other loans to Borrower hereunder, Collateral Agent, Enforcing Bank
and Banks shall release all security interests granted hereunder and redeliver
all Collateral held by it in accordance with applicable law.
13.8 CONFIDENTIALITY. In handling any confidential information each Bank
shall exercise the same degree of care that it exercises with respect to its
own proprietary information of the same types to maintain the confidentiality
of any non-public information received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of such Bank in connection with their present
24.
<PAGE> 26
or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order and (iv) as may be required
in connection with the examination, audit or similar investigation of such
Bank. Confidential information hereunder shall not include information that
either: (a) is in the public domain or becomes part of the public domain after
disclosure to such Bank through no fault of such Bank; or (b) is disclosed to
such Bank by a third party, provided such Bank does not have actual knowledge
that such third party is prohibited from disclosing such information.
25.
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
TEGAL CORPORATION
By: [SIG]
---------------------------------------
Title: President & CEO
By: /s/ DAVID CURTIS
---------------------------------------
Title: Vice President & CFO
IMPERIAL BANK
By:
---------------------------------------
Title:
------------------------------------
Maximum Commitment Amount: $12,500,000 (62.5%)
SANWA BANK CALIFORNIA
By:
---------------------------------------
Title:
------------------------------------
Maximum Commitment Amount: $7,500,000 (37.5%)
26.
<PAGE> 28
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and financial products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing and any documents of title representing any of the above;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and
any and all credit insurance, guaranties, and other security therefor, as well
as all merchandise returned to or reclaimed by Borrower;
(e) All documents, cash, deposit accounts, securities, investment
property, letters of credit, certificates of deposit, instruments and chattel
paper now owned or hereafter acquired and Borrower's Books relating to the
foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter
acquired; all trade secret rights, including all rights to unpatented
inventions, know-how, operating manuals, license rights and agreements and
confidential information, now owned or hereafter acquired; all mask work or
similar rights available for the protection of semiconductor chips, now owned
or hereafter acquired; all claims for damages by way of any past, present and
future infringement of any of the foregoing; and
(g) All Borrower's Books relating to the foregoing and any and all
claims, rights and interests in any of the above and all substitutions for,
additions and accessions to and proceeds thereof.
1.
<PAGE> 29
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 11:00 A.M., P.S.T.
TO: DATE:
FAX#: TIME:
- --------------------------------------------------------------------------------
FROM:
CLIENT NAME(BORROWER)
REQUESTED BY:
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
PHONE NUMBER:
FROM ACCOUNT #_________________ TO ACCOUNT #
<TABLE>
<CAPTION>
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
<S> <C>
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
</TABLE>
OTHER INSTRUCTIONS:
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as
of the date of the telephone request for and Advance confirmed by this
Borrowing Certificate; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
- --------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
Phone #
- ------------------------------ -------------------
Authorized Requester
Phone #
- ------------------------------ -------------------
Received By (Bank)
------------------------------
Authorized Signature (Bank)
- --------------------------------------------------------------------------------
1.
<PAGE> 30
EXHIBIT C
COMPLIANCE CERTIFICATE
The consolidated financial statements dated as of ____________________ of TEGAL
CORPORATION ("Borrower") attached hereto and submitted to IMPERIAL BANK
("Imperial") and SANWA BANK CALIFORNIA ("Sanwa," collectively, the "Banks")
pursuant to that certain Loan and Security Agreement dated as of August 15,
1997 entered into between Borrower and Banks (the "Loan Agreement"), shows
compliance with all financial covenants (unless otherwise noted below) as
specified therein, as follows:
<TABLE>
<CAPTION>
QUARTERLY COVENANT: ACTUAL:
<S> <C>
a. Minimum Tangible Net Worth of:
$40,000,000 -----------------
b. Maximum Liabilities to Tangible Net Worth Ratio:
0.75 : 1.00 -----------------
c. Minimum Quick Ratio:
1.25 : 1.00 -----------------
d. Maximum Pre-Tax Losses not greater than:
$3,000, 000 (measured for the two quarter -----------------
period then ended, excluding (i) non-recurring
income and expenses, and (ii) R&D expense in
excess of $5,000,000 for the two quarter
period then ended
</TABLE>
Exceptions: (if none, so state):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The undersigned authorized officer of Borrower hereby certifies in such
capacity that Borrower is in complete compliance with the terms and conditions
of the Loan Agreement for the period ending ______ ______ ______, and as of the
date of this Compliance Certificate the representations and warranties stated
therein are true, accurate and complete as of the date hereof (except as to
those representations and warranties which specifically reference a particular
date and except as noted above).
The undersigned further certifies that s/he knows of no pending conditions
which may cause an Event of Default (as defined in the Loan Agreement) to exist
in the next thirty (30) days. The required support documents for this
certification are attached and prepared in accordance with generally
accepted accounting principles, consistently applied.
Date: TEGAL CORPORATION
---------------------
By:
--------------------------
Name:
--------------------------
Title:
--------------------------
1.
<PAGE> 31
EXHIBIT D
----------------------------------
NOTE
$ Petaluma, California
---------------------------------
On the Revolving Maturity Date, and as hereinafter provided, for value
received, the undersigned promises to pay to _________________________ ("Bank"),
a California banking corporation, or order, at its San Jose, California office,
the lesser of (i) the principal sum of $ _________________________ or (ii) such
sums up to such maximum as the Bank may now or hereafter advance to or for the
benefit of the undersigned in accordance with the terms of that certain Loan and
Security Agreement by and among the undersigned, Bank, and Sanwa Bank of
California of even date herewith, as amended from time to time (the "Loan
Agreement"), together with interest from date of disbursement on the unpaid
principal balance at the Prime Rate (as defined in the Loan Agreement), which
shall vary concurrently with any change in such Prime Rate. Interest shall be
computed at the above rate on the basis of the actual number of days during
which the principal balance is outstanding, divided by 360, which shall, for
interest computation purposes, be considered one year. All capitalized terms not
otherwise defined herein shall have the meanings given to such terms in the Loan
Agreement.
Interest shall be payable monthly in arrears beginning September 15, 1997,
and if not so paid shall become a part of the principal. All payments shall be
applied first to interest, and the remainder, if any, on principal. Advances not
to exceed any unpaid balance owing at any one time equal to the maximum amount
specified above, may be made at the option of Bank.
Should any Event of Default occur and be continuing, the entire balance of
principal and accrued interest then remaining unpaid may become immediately due
and payable in accordance with the terms of the Loan Agreement. Should an Event
of Default occur and be continuing under Section 8.1 of the Loan Agreement, all
principal and accrued interest then due and remaining unpaid shall thereafter
bear interest, until paid, at the increased rate of 2% per year in excess of the
rate provided for above, as it may vary from time to time.
If this note is not paid when due, Borrower promises to pay all costs and
expenses of collection and reasonable attorney fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Borrower shall be liable hereon
and consents to renewals, replacements and extensions of time for payment
hereof, before, at, or after maturity; consents to the acceptance, release or
substitution of security for this note; and waives demand and protest and the
right to assert any statute of limitations. The indebtedness evidenced hereby
shall be payable in lawful money of the Untied States. In any action brought
under or arising out of this note, Borrower, including successor(s) or
assign(s) hereby consents to the application of California law, to the
jurisdiction of any competent court within the State of California, and to
service of process by any means authorized by California law.
4.
<PAGE> 32
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. Subject to the terms of the Loan Agreement, the holder hereof shall at
all times have the right to proceed against any portion of the security for
this note in such order and in such manner as such holder may consider
appropriate, without waiving any rights with respect to any of the security.
Any delay or omission on the part of the holder hereof in exercising any right
hereunder, or under any deed of trust, security agreement or other agreement,
shall not operate as a waive of such right, or of any other right, under this
note or any deed of trust, security agreement or other agreement in connection
herewith.
TEGAL CORPORATION
By:___________________
Title: _______________
By:___________________
Title: _______________
2.
<PAGE> 33
EXHIBIT E
ASSIGNMENT AND ACCEPTANCE
ASSIGNMENT AND ACCEPTANCE dated __________, ____ between ________________
________________________ ("Assignor") and __________________________________
("Assignee").
PRELIMINARY STATEMENT
A. Reference is made to the Loan and Security Agreement dated as of
August 15, 1997 (as the same may from time to time hereafter be amended,
modified, supplemented or restated, the "Loan Agreement"), among Tegal
Corporation (the "Borrower"), Imperial Bank and Sanwa Bank (the "Banks"), and
Imperial Bank as the Collateral Agent for the Banks. Capitalized terms used but
not otherwise defined herein have the meanings given them in the Loan Agreement.
B. Assignor is a Bank under and as defined in the Loan Agreement and, as
such, presently has the following Commitment to Borrower:
Committed Revolving Line $_____________________
C. On the terms and conditions set forth below, Assignor desires to sell
and assign to Assignee, and Assignee desires to purchase and assume from
Assignor, a __________% interest (the "Revolving Line Assigned Percentage") in
and to all of Assignor's rights and obligations under the Committed Revolving
Line as of the effective Date (as defined below), representing a Commitment
under the Committed Revolving Line of _______________ Dollars $ _____________.
D. After giving effect to the assignments described in Section C above,
the respective Loans of Assignor and Assignee under the Loan Agreement will be:
Assignor
Committed Revolving Line $_____________________
Assignee
Committed Revolving Line $_____________________
NOW, THEREFORE, Assignor and Assignee hereby agree as follows:
1. Assignor hereby sells and assigns to Assignee, WITHOUT RECOURSE, and
Assignee hereby purchases and assumes from Assignor, the Revolving Line
Assigned Percentage of Assignor's rights and obligations under the Loan
Agreement as of the Effective Date.
1.
<PAGE> 34
2. ASSIGNOR:
(a) represents and warrants that as of the date hereof its principal
amount outstanding under the Committed Revolving Line (without giving effect to
assignments thereof which have not yet become effective) are as follows:
Committed Revolving Line $_____________________
(b) represents and warrants that it is the legal and beneficial
owner of the interest being assigned by it hereunder and that such interest is
free and clear of any adverse claim;
(c) makes no representations or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with the Loan Agreement or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the Loan
Agreement or any other Loan Document furnished pursuant thereto; and
(d) makes no representations or warranty and assumes no
responsibility with respect to the financial condition of the borrower or the
performance or observance by the Borrower or any of its obligations under the
Loan Agreement or any other Loan Document furnished pursuant thereto.
3. ASSIGNEE:
(a) confirms that it has received a copy of the Loan Agreement,
together with copies of such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter this
Assignment and Acceptance;
(b) agrees that it will, independently and without reliance upon the
Assignor or any other Bank and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking action under the Loan Agreement and any other Loan
Documents;
(c) represents and warrants that commercial loans of money made by
Assignee of the type contemplated by the Loan Agreement are exempt from the
"usury" restrictions of Section 1 of Article XV of the California Constitution;
and
(d) agrees that it will perform in accordance with their terms all
of the obligations which by the terms of the Loan Agreement and the other Loan
Documents are required to be performed by Bank hereunder.
4. Following the execution of this Assignment and Acceptance by Assignor
and Assignee, it will be delivered to the Banks for acceptance and recording by
the Banks and acceptance by the Borrower. The effective date for this
Assignment and Acceptance shall be ______________, ____ (the "Effective Date"),
subject to acceptance by the Banks and the Borrower.
2.
<PAGE> 35
5. Subject to and upon such acceptance and recording as the Effective
Date, (a) Assignee shall be a party to the Loan Agreement and shall be entitled
to the rights and benefits of the Loan Documents and, to the extent of the
percentage assigned in this Assignment and Acceptance, have the rights and
obligations of a Bank thereunder and (b) Assignor shall, to the extent of the
percentage assigned in this Assignment and Acceptance, relinquish its rights
and be released from its obligations under the Loan Agreement and the other
Loan Documents. Assignor shall retain all rights applicable to it under the
Loan Agreement relating to credits extended, acts or omissions made, or other
matters arising, prior to the Effective Date.
6. Upon such acceptance and recording, from and after the Effective
Date, Imperial or the Collateral Agent shall make all payments under the Loan
Agreement which are payable by Imperial or the Collateral Agent for the account
of the appropriate Bank to the appropriate Banks severally in proportion to
their respective percentages determined after giving effect to this assignment,
when payment is due. Assignor and Assignee shall make all appropriate
adjustments in payments under the Loan Agreement and the other Loan Documents
for periods prior to the Effective Date directly between themselves.
7. Assignee's address for the purpose of receiving notices under the
Loan Agreement is as set forth below Assignee's signature below.
3.
<PAGE> 36
8. This Assignment and Acceptance shall be governed by, and construed in
accordance with, the law of the State of California.
___________________________________________
By: _______________________________________
Printed Name: _____________________________
Title: ____________________________________
___________________________________________
By: _______________________________________
Printed Name: _____________________________
Title: ____________________________________
Address for notices:
___________________________________________
___________________________________________
___________________________________________
ACCEPTED this ____ day of
________________, ____
TEGAL CORPORATION
a Delaware corporation
By: _______________________________________
Printed Name: _____________________________
Title: ____________________________________
4.
<PAGE> 37
TEGAL CORPORATION
<TABLE>
SCHEDULE 1 -- INDEBTEDNESS EXISTING ON AUGUST 15, 1997
<S> <C>
Telogy 3,538.00
Phoenixcor 319,614.39
Xerox 63,436.96
Tokai Financing 132,057.28
Hewlett Packard 9,922.95
----------
Total 528,569.58
==========
</TABLE>
<TABLE>
SCHEDULE 3 -- INVESTMENTS EXISTING ON AUGUST 15, 1997
<S> <C>
Monarch Fund Balance
August 15, 1997 $ 27,312,590
============
</TABLE>
<PAGE> 38
Schedule 2
Indebtedness in Japan under Note Discount Facility on August 5, 1992
TEGAL CORPORATION
Japan line of credit August 15, 1997
<TABLE>
<CAPTION>
Credit amount Credit used Credit available
<S> <C> <C> <C>
Sumitomo bank 300,000,000 116,961,161 183,038,839
Sanwa bank 300,000,000 163,857,984 136,142,016
----------- ----------- -----------
600,000,000 280,819,145 319,180,855
=========== =========== ===========
U.S.D. U.S.D. U.S.D.
Sumitomo bank 2,528,445 985,766 1,542,679
Sanwa bank 2,528,445 1,381,020 1,147,425
----------- ----------- -----------
5,056,890 2,366,786 2,690,104
</TABLE>
note: additional note payable to vendor EDWARDS 1,648,500 yen equals EDWARDS
1,648,500 yen 13,894
2,380,680 tegal trial balance
=========
Page 1
<PAGE> 39
SCHEDULE 4
TEGAL CORPORATION
SCHEDULE OF LIENS
<TABLE>
<CAPTION>
# OF
DEBTOR SECURED PARTY STATEMENT DATE DESCRIPTION
- ------ ------------- --------- ---- -----------
<S> <C> <C> <C> <C>
Tegal Corporation Advanta Leasing Corp. 92164161 July 27, 1992 Security System
Tegal Corporation IBM Credit Corp. 93010582 January 19, 1993 Computer Equipment
Tegal Corporation IBM Credit Corp. 93025753 February 4, 1993 Computer Equipment
Tegal Corporation Imperial Bank 93060947 March 26, 1993 Tencor Thin Film Monitor
Tegal Corporation Telogy Inc. 93105519 May 25, 1993 Equipment as specified on
Financing Statement
Tegal Corporation Vendor Funding Co. Inc. 93106749 June 3, 1993 Computer Printer
Tegal Corporation First Trust Natl. Assoc. 94052673 March 25, 1994 Tencor Thin Film Monitor
as Trustee et al
Natl. Westminster BK USA
as Agent
Tegal Corporation Hewlett-Packard Co. 94099133 May 18, 1994 Computer Equipment
Tegal Corporation IBM Credit Corporation 9512460008 May 2, 1995 Computer Equipment
Tegal Corporation IBM Credit Corporation 9512460013 May 2, 1995 Computer Equipment
Tegal Corporation Master Lease Div. of Tokai 9515160413 May 26, 1995 Telephone Equipment
Financial Serv.
Tegal Corporation Phoenixcor, Inc. 9518060408 June 27, 1995 Electron Microscope
Tegal Corporation Phoenixcor, Inc. 9522960906 August 15, 1995 Long Scan Profiler
Tegal Corporation Phoenixcor, Inc. 9522960920 August 15, 1995 Film Surface Analysis System
Tegal Corporation Master Lease Div. of Tokai 9604460275 February 8, 1996 Telephone System
Financial Serv.
</TABLE>
<PAGE> 40
TEGAL CORPORATION
WORLDWIDE INVENTORY LOCATIONS
DOMESTIC
California
2201 S. McDowell Blvd.
Petaluma, CA 94955
1095 E. Duane Avenue
Suite 103
Sunnyvale, CA 94086
Arizona
1270 Broadway Road
Suite 214A
Tempe, AZ 85282
Texas
US Courier
8711 Burnett, Suite H95
Austin, TX 78757
FOREIGN - EUROPE FOREIGN - ASIA
Austria Japan
Herrgott Wiesgasse 99 Kanagawa Science Park
8020 Graz, Austria Building B, 1013
3-2-1, Sakado, Takatsu-ku
Kawasaki-shi
France Kanagawa Prefecture
Japan 251
ZA de L'Observatoire
4 Avenue des Trois Peuples Taiwan
78180 Montigny le Bretonneux 13F-1, No. 295, Sec. 2
Paris France Kuang Fu Road, Hsin-Chu
Taiwan, ROC 300
<PAGE> 41
Page Two
FOREIGN -- EUROPE (CONTINUED) FOREIGN -- ASIA (CONTINUED)
Germany Korea
Lise-Meitner - Str. 3 6F, Heung-Kuk B/O,6-7
85716 Unterschleissheim Sunae-Dong, Bundang-Ku
Germany Sungnam-City, Kyungki-Do
Korea
Italy
Contrada Vazzano
SS 121 Km 9,200
95040 Piano Tavola(CT)
Italy
Netherlands
Air Express Internatinal
Celsiusweg 66 5928 PR Venlo
5928 PR Venlo
The Netherlands
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS AGREEMENT between Tegal Corporation ("Tegal") and Michael L.
Parodi ("Parodi") is dated and entered into as of December 17, 1997. Tegal and
Parodi hereby agree as follows:
RECITALS
Parodi and Tegal have decided to enter into an employment agreement,
and have agreed upon the terms of such employment, which terms are set forth
herein.
AGREEMENT
1. Employment. As of the date hereof, Tegal will employ Parodi,
and Parodi will accept employment by Tegal, as its President and Chief
Executive Officer, with such duties and responsibilities consistent with such
offices. The Board of Directors of Tegal (the "Board") shall use its best
efforts to have Parodi as a director during the entire term of this Agreement.
2. Other Business. Parodi will devote his time, attention and
effort to Tegal's business on a substantially full-time basis. Notwithstanding
the foregoing, Parodi shall be entitled to serve on the Board of Directors of
other corporations, as Parodi may elect from time to time, so long as such
service is approved by the Board.
3. Term. This Agreement shall continue until the third anniversary
of the date hereof.
4. Salary. Parodi's base salary (the "Base Salary") shall be at an
annual rate of not less than $250,000.00 subject to discretionary increases in
accordance with Tegal's normal review procedures and policies. The Base Salary
shall be paid in substantially equal installments at the same intervals as
other officers of Tegal are paid.
<PAGE> 2
5. Annual Bonus and Vacation.
5.1 Bonus. In addition to his Base Salary, and subject to the
achievement of certain goals established in accordance with this Section 5,
Parodi shall be paid an annual bonus (the "Bonus") during the term of this
Agreement in an amount not less than 50% of the Base Salary. Each year the
Board shall approve objective, quantifiable and reasonably attainable annual
goals, which shall be reduced to writing and presented by Parodi to the Board
on or before the 60th day following the commencement of each fiscal year during
the term of this Agreement. The actual Bonus paid shall be evaluated using the
Board-approved Bonus plan methodology. The Bonus shall be paid in cash when
bonuses are generally paid to other senior executives of Tegal for the relevant
fiscal year. Parodi shall be entitled to a pro rata portion of the bonus at the
end of the fiscal year ending in 1997.
5.2 Vacation. Parodi shall be entitled to one and one-quarter
(1 1/4) days of paid vacation for each month during the term of this Agreement.
6. Stock Purchase. Upon signing of this Agreement by Parodi, the
Board will grant to Parodi, as soon as practical, non-qualified stock options
as follows:
(a) 260,000 shares with a four-year expiration of repurchase rights;
and
(b) 240,000 shares with rights of repurchase expiring immediately
upon Tegal's stock price reaching the following targets for 10 or more
consecutive trading days;
(a) 60,000 shares at $12 per share;
(b) 60,000 shares at $17 per share;
(c) 60,000 shares at $21 per share; or
(d) 60,000 shares at $25 per share.
-2-
<PAGE> 3
The stock price used will be the closing price at the end of the New
York Trading Day on NASDAQ.
Any stock purchased or stock options issued to Parodi shall be
substantially in the form, respectively, of the Amended and Restated Equity
Incentive Plan Nonqualified Stock Purchase Agreement and the Amended and
Restated Equity Incentive Plan Stock Option Agreement.
7. Living Accommodations, Commuting and Relocation Costs. In view
of the fact that Parodi's primary residence is not within the vicinity of the
headquarters of Tegal and in view of the uncertainty of his tenure, Tegal
shall, so long as its headquarters is more than 40 miles from Parodi's primary
residence, reimburse Parodi for (i) the costs of commuting from his current
residence to Tegal's headquarters, and (ii) the reasonable costs of securing
and maintaining living accommodations for the term of the Agreement. For the
purposes of Sections 7 and 8 hereof, Tegal's obligation to reimburse Parodi
shall include reimbursement for any tax liability Parodi may incur by reason of
such reimbursement. Accordingly, to the extent Parodi will incur tax liability
for all or any portion for any reimbursement, Tegal's obligation to reimburse
such expenses giving rise to a tax liability shall be "grossed-up" to cover the
tax liability according to the following formula:
X=Y/(1-Z)
X=Grossed-Up Reimbursement
Y=Reimbursable Expenses Giving Rise to Tax Liability
Z=Parodi's aggregate federal, state and local tax rate
8. Reimbursement of Expenses. Tegal shall reimburse Parodi for all
reasonable out-of-pocket expenditures incurred in establishing an office and
communications capabilities in Parodi's home and car, which expenditures
shall include but not be limited to routine office supplies, a facsimile
machine and a telephone and all expenses associated with
-3-
<PAGE> 4
a car telephone. Tegal shall further reimburse Parodi for all out-of-pocket
expenses incurred by Parodi in performing his obligations hereunder, including,
without limitation, telephone, fax, air freight and travel related expenses.
All reimbursable expenses shall be reimbursed in accordance with Tegal's
standard practices as in effect from time to time, upon delivery by Parodi of
an itemized statement, accompanied by appropriate receipts, describing the
reimbursable expenses incurred.
9. Benefits. During the term of this Agreement, Parodi will be
entitled to participate in all fringe benefit programs as shall be provided
from time to time to Tegal's employees or specifically to Parodi by action of
the Board (or any person or committee appointed by the Board to determine
fringe benefit programs and other emoluments).
10. Termination. Employment of Parodi pursuant to this Agreement may
be terminated as follows, in which event the compensation and all associated
benefits as set forth in this Agreement shall terminate except as provided in
Section 11 below:
10.1 With or without cause, Tegal may terminate the employment
of Parodi at any time during the term of employment upon 45 days' prior written
notice to Parodi.
10.2 Parodi may terminate his employment at any time upon 45
days' prior written notice to Tegal.
10.3 Employment shall terminate automatically upon death or
disability. For purposes of this Agreement, "disability" shall mean Parodi's
inability to perform in accordance herewith by reason of mental or physical
disorder or injury constituting "long-term disability" as defined under Tegal's
medical or disability insurance policy, as in effect from time to time.
-4-
<PAGE> 5
10.4 Neither party shall take any action to circumvent the intentions
of this Section 10 or of this Agreement.
11. Termination Payments.
11.1 Termination by Employer. If Tegal terminates Parodi's employment
prior to the end of the term of this Agreement without cause, Parodi shall
continue to receive his then effective Base Salary and benefits pursuant to
Section 9 hereof for twelve (12) months following the effective date of such
termination (the "Salary and Benefits Continuance").
11.2 Termination by Employee. In the case of a termination of
Parodi's employment by Parodi, except when he terminates his employment because
of good reason or a breach of this Agreement by Tegal, Parodi shall not be
entitled to a Salary and Benefits Continuance. If Parodi terminates his
employment because of good reason, as hereinafter defined, Parodi shall be
entitled to the Salary and Benefits Continuance. For purposes of this
Agreement, "good reason" shall mean (i) any material breach of this Agreement
by Tegal; (ii) the assignment to Parodi of any duties, or the substantial
reduction of Parodi's duties, either of which is inconsistent with Parodi's
position as President and Chief Executive Officer; or (iii) any change in
Parodi's reporting relationship which results in his not reporting directly to
the Board.
11.3 Continuance of Competition Restrictions. In the event that
Parodi's employment is terminated, but pursuant to Sections 11.1 or 11.2 he
remains entitled to Salary and Benefits Continuance, then during the period of
the Salary and Benefits Continuance his obligations under Section 14 hereof
shall continue to apply.
-5-
<PAGE> 6
12. Termination; Definitions; Special Provisions.
12.1 Cause. Wherever reference is made in this agreement to
Termination being with or without cause, "cause" means cause given by Parodi
to Tegal and is limited to the following:
(a) Repeated failure or refusal to carry out the
reasonable directions of the Board, which directions are consistent with
Parodi's duties as set forth herein;
(b) Conviction for violation of a state or federal
criminal law involving the commission of a felony; or
(c) Any material breach of this Agreement, if not
corrected as provided in Section 12.2 below.
12.2 Breach. Whenever a breach of this Agreement by either
party is relied upon as justification for any action taken by a party pursuant
to any provision of this Agreement, before such action is taken, the party
asserting the breach shall give the other party at least 90 days' prior written
notice of the existence and nature of the breach and the opportunity to
correct it during the 90-day period.
12.3 Payment Schedule. In the event Parodi is entitled to
Salary and Benefits Continuance, the payments of Base Salary shall be made to
Parodi in equal installments at the same intervals as other officers of Tegal
are being paid at the time that the employment was terminated.
12.4 Mitigation. Parodi shall not be required to mitigate
the amount of any payments provide for in Section 11 hereof by seeking other
employment or a consultancy with any other entity or otherwise, but Parodi
shall notify Tegal of any
-6-
<PAGE> 7
subsequent employment or consultancy engaged in by Parodi during the period
covered by any payments provided in Section 11 hereof and the amounts payable
pursuant thereto shall be reduced by the amount of any salary or fees so paid or
payable with respect to such period. Parodi's entitlement to any Salary and
Benefits Continuance shall cease upon any violation by Parodi of either Section
13 or 14 below.
12.5 Obligation to Successor Entity. In the event that Tegal merges into
another entity and is the disappearing corporation, or Tegal sells all or
substantially all of its assets, Tegal may assign its rights and obligations
under this Agreement to its successor or successors (the "Successor"). In the
event of any such assignment, Tegal shall cause the Successor to assume the
obligations of Tegal hereunder, by a written agreement addressed to Parodi,
concurrently with any assignment with the same effect as if the Successor were
"Tegal" hereunder. Upon the occurrence of any such assignment, Parodi agrees
that, if the Successor requests him to remain as President and Chief Executive
Officer with similar responsibilities and compensation as provided by Tegal at
the time of such assignment, he will continue such responsibilities for a period
of 12 months following the assignment of this Agreement. For purposes of this
Section, compensation shall include the Base Salary, the Bonus, all benefits
pursuant to Section 9 hereto, and all expense reimbursements. Notwithstanding
the foregoing, in the event Successor significantly decreases Parodi's
compensation or significantly alters responsibilities as in effect during the
immediately preceding 12 months, Parodi may resign his employment and, for
purposes of the Salary and Benefits Continuance, Parodi shall be deemed to have
terminated his employment because of good reason. However, in the event that the
Successor terminates
-7-
<PAGE> 8
Parodi's employment within six months of the change in control of Tegal, Parodi
shall be entitled to the Salary and Benefits Continuances as set forth in
Section 11.
13. Proprietary Information. All Proprietary Information, as hereinafter
defined, shall be the sole property of Tegal and its assigns, and Tegal and its
assigns shall be the sole owner of all patents, copyrights and other rights
(collectively referred to herein as "Rights") pertaining to the Proprietary
Information. Parodi hereby assigns to Tegal any Rights he may have or acquire in
the Proprietary Information or any Rights pertaining to the Proprietary
Information. Parodi further agrees, as to all Proprietary Information, to
reasonably assist Tegal or any person designated by it (at Tegal's expense) to
obtain and, from time to time, to enforce Rights relating to said Proprietary
Information in any and all countries. Parodi will execute documents for use in
applying for, obtaining and enforcing such Rights on such Proprietary
Information as reasonably required, together with any assignments thereof to
Tegal or persons designated by it. Parodi's obligation to reasonably assist
Tegal or any person designated by Tegal in obtaining and enforcing Rights
relating to the Proprietary Information shall continue beyond the cessation of
his employment, but Tegal shall compensate Parodi at a reasonable rate after the
cessation of Parodi's employment for time actually spent by him upon Tegal's
request for such assistance. At all times, both during Parodi's employment by
Tegal and after its cessation, whether the cessation is voluntary or
involuntary, for any reason or no reason, or by death or disability (the
"Cessation of Employment"), Parodi will keep in strictest confidence and trust
all Proprietary Information and will not disclose, use or induce or assist in
the use or disclosure of any Proprietary Information or Rights pertaining to
Proprietary Information, or anything related thereto, without the prior express
written consent of Tegal, except any may be necessary in
-8-
<PAGE> 9
the ordinary course of performing his duties as an employee of Tegal. For
purposes of this Agreement, "Proprietary Information" shall mean any and all
proprietary or confidential information or trade secrets in which Tegal has a
proprietary interest, including Tegal's anticipated research and development
accomplishments resulting from tasks assigned to Parodi by Tegal or resulting
from the use by Parodi of equipment, supplies or facilities owned, leased or
contracted for by Tegal, including, without limitation, trade secrets,
processes, formulas, data, patents, know-how, discoveries, developments,
designs, inventions, techniques, plans, strategies, customer and supplier lists
and information which may be useful or have actual or potential economic value
to Tegal. Notwithstanding the foregoing, Proprietary Information shall not
include (i) any information known to Parodi prior to the commencement of
employment with Tegal and not obtained or derived directly or indirectly from
Tegal or, if so obtained, not subject to confidential obligations; (ii) any
information which is or becomes public or available to the general public or
generally known in the industry otherwise than through any breach of
confidentiality by Parodi, or (iii) any information obtained subsequent to the
commencement of employment with Tegal from a third party who is lawfully in
possession of such information and which is not subject to any confidential or
non-use obligations of such third party owed to Tegal or any other third party.
PARODI UNDERSTANDS THAT TEGAL IS HEREBY ADVISING HIM THAT ANY PROVISION IN
THIS AGREEMENT REQUIRING HIM TO ASSIGN HIS RIGHTS IN ANY INVENTION DOES NOT
APPLY TO AN INVENTION WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION
2870 OF THE CALIFORNIA LABOR CODE. THAT SECTION PROVIDES THAT THE
-9-
<PAGE> 10
REQUIREMENT TO ASSIGN INVENTIONS "SHALL NOT APPLY TO ANY INVENTION FOR WHICH NO
EQUIPMENT, SUPPLIES, FACILITY, OR TRADE SECRET INFORMATION OF THE EMPLOYER WAS
USED AND WHICH WAS DEVELOPED ENTIRELY ON THE EMPLOYEE'S OWN TIME AND (A) WHICH
DOES NOT RELATE (1) TO THE BUSINESS OF THE EMPLOYER OR (2) TO THE EMPLOYER'S
ACTUAL OR DEMONSTRABLY ANTICIPATED RESEARCH OF DEVELOPMENT, OR (B) WHICH DOES
NOT RESULT FROM ANY WORK PERFORMED BY THE EMPLOYEE FOR THE EMPLOYER." BY
SIGNING THIS AGREEMENT, Parodi ACKNOWLEDGES THAT THIS PARAGRAPH SHALL
CONSTITUTE WRITTEN NOTICE OF THOSE PROVISIONS OF SECTION 2870.
14. Competition. During the term of this Agreement and except as
otherwise set forth herein, Parodi will not directly, as an officer, director,
stockholder, partner, associate, owner, employee or consultant engage in any
activity in direct competition with Tegal in any geographical areas in which
Tegal or any of its affiliates are now so engaged. Parodi shall report to the
Board any purchase of stock of a Tegal competitor at such time as Parodi
becomes aware of such purchase. During his employment by Tegal and for a period
of two years after or cessation of employment, Parodi will not, either directly
or indirectly, either alone or in concert with others, solicit or entice any
employee of or consultant of Tegal to leave Tegal or to entice such employee to
work for anyone in direct competition with Tegal. Parodi will not solicit,
entice or in any way divert any customer or supplier to do business with any
business entity in competition with Tegal. During his employment by Tegal,
Parodi agrees not to plan or otherwise take any preliminary steps,
-10-
<PAGE> 11
either alone or in concert with others, to set up or engage in any business
enterprises that would be in direct competition with Tegal.
15. Return of Work-Related Materials. In the event of a Cessation of
Employment, Parodi will deliver to Tegal all documents, data and other
materials of any nature pertaining to his work with Tegal, and will not take
with him any of the foregoing or any reproduction of any of the foregoing.
16. Disclosure. Except when not required by California Labor Code
Section 2870, Parodi will promptly disclose to Tegal all discoveries,
developments, designs, improvements, inventions, formulas, software programs,
processes, techniques, know-how, negative know-how and data, whether or not
patentable or registrable under patent, copyright or similar statutes or
reduced to practice, made or conceived or reduced to practice or learned by him,
either alone or jointly with others, during his period of employment by Tegal,
that are related to or useful in the business or future business of Tegal, or
result from tasks assigned him by Tegal or result from the use of property used
by Tegal.
17. General Provisions.
17.1 Governing Law. This Agreement shall be construed under and
according to the internal laws, and not the laws of conflict, of the State of
California.
17.2 Severability. In the event that any provision of this
agreement shall be determined by any court of competent jurisdiction to be
unenforceable or otherwise invalid as written, the same shall be enforced and
validated to the extent permitted by law. All provisions of this Agreement are
severable, and the unenforceability or invalidity of any single provision
hereof shall not affect the remaining provisions.
-11-
<PAGE> 12
17.3 Employment. Nothing in this Agreement shall obligate Tegal to
continue to retain Parodi as an employee. Parodi understands that this means
that Tegal has and will continue to have the absolute and unconditional right
to terminate his employment for any reason or no reason, with or without cause
or prior notice.
17.4 Entire Agreement. This Agreement contains the sole and entire
agreement and understanding between Tegal and Parodi with respect to the
subject matter hereof, and supersedes and replaces any prior agreement to the
extent any such agreement is inconsistent herewith. This Agreement can be
amended, modified, released or changed in whole or in part only by a written
agreement executed by Tegal and Parodi.
17.5 Arbitration. Any controversy or claim arising out of or
relating to this Agreement, or the breach hereof, shall be settled by final and
binding arbitration. Except as hereinafter set forth, any such arbitration
shall be conducted in accordance with the then existing rules (the "Rules") of
the American Arbitration Association ("AAA") and judgment upon the award
rendered by the arbitrators may be entered in any court having jurisdiction
thereof; provided, however, that the law applicable to any controversy shall be
the law of California, regardless of its or any jurisdiction's choice of law
principle. In any such arbitration, the award or decision shall be rendered by
a majority of the members of a Board of Arbitration consisting of three (3)
members, one of whom shall be appointed by each party and the third of whom
shall be the chairman of the panel and be appointed by mutual agreement of said
two party-appointed arbitrators. In the event of failure of said two
arbitrators to agree, within sixty (60) days after the commencement of the
arbitration proceeding, upon the appointment of the third arbitrator, the third
arbitrator shall be appointed by the AAA in accordance with the Rules. In the
event that either party shall fail
-12-
<PAGE> 13
to appoint an arbitrator within thirty (30) days after the commencement of the
arbitration proceeding, the arbitration shall be conducted by the single
arbitrator selected.
17.6 Notice. All notices and other communications required or
permitted under this Agreement shall be in writing, served personally on or
mailed by certified or registered United States mail to, the party to be
charged with receipt thereof. Notices and other communications served by mail
shall be deemed duly given three days after deposit of such notice in the
United States Post Office as certified or registered mail with postage
prepaid-and duly addressed to the applicable party at the address set forth
below or at such other address as the applicable party may designate by written
notice from time to time:
PARODI: Michael L. Parodi
91 Grand Via
Alamo, CA 94507
TEGAL: TEGAL CORPORATION
2201 S. McDowell Boulevard
Petaluma, CA 94953
ATTENTION: Robert V. Hery
Chairman of the Board
17.7 Waiver. No waiver of any of the provisions hereof shall be
valid unless in writing, signed by the party against whom such claim or waiver
is sought to be enforced, nor shall failure to enforce any right hereunder
constitute a continuing waiver of the same or a waiver of any other right
hereunder.
17.8 Amendment. No modification of any of the provisions hereof
shall be binding upon either Parodi or Tegal unless in writing, signed by the
party against whom such modification is sought to be enforced.
-13-
<PAGE> 14
17.9 Non-Disclosure. Parodi agrees that, during the term of his
employment by Tegal and following termination of such employment, he will not
disclose (except as required by Parodi's duties to Tegal) any of Tegal's secret
or confidential information, whether patentable or not, of which he becomes
informed during his employment.
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement on the date set forth above.
TEGAL CORPORATION
BY: /s/ ROBERT V. HERY
----------------------------
Robert V. Hery,
Chairman of the
Board of Directors
/s/ MICHAEL L. PARODI
-------------------------------
MICHAEL L. PARODI
-14-
<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 24, 1998 appearing on page 40 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 10K.
/s/ Price Waterhouse LLP
San Jose, California
May 18, 1998
<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
(Nos.: 333-462, 333-12473 and 333-52265) on Forms S-3 and S-8 of Tegal
Corporation of our reports dated April 23, 1996, relating to the consolidated
statements of operations, stockholders' equity (deficit) and cash flows of
Tegal Corporation and Subsidiaries for the year ended March 31, 1996, and the
related schedule, which reports appear in the March 31, 1998, annual report on
Form 10-K of Tegal Corporation.
/s/ KPMG Peat Marwick LLP
Mountain View, California
May 18, 1998
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