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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-26824
TEGAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 68-0370244
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
2201 SOUTH MCDOWELL BLVD. 94955-6020
P.O. BOX 6020 (ZIP CODE)
PETALUMA, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (707) 763-5600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price of the Common Stock on June 4,
1999, as reported on the Nasdaq National Market was $24,179,206. As of June 4,
1999, 10,725,650 shares of the Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1999 Annual Meeting of
Stockholders to be held on September 21, 1999, will be filed with the Commission
within 120 days after the close of the Registrant's fiscal year and are
incorporated by reference in Part III.
Total Pages 45 Index to Exhibits appears on page 43
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 18
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 22
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 39
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 39
Item 13. Certain Relationships and Related Transactions.............. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 40
Signatures.............................................................. 42
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PART I
ITEM 1. BUSINESS
Information contained or incorporated by reference herein contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology or which constitute projected financial information. The
following contains cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements. See "-- Additional Risk Factors."
THE COMPANY
Tegal Corporation ("Tegal" or the "Company") designs, manufactures, markets
and services plasma etch systems used in the fabrication of integrated circuits
("ICs") and related devices in the thin film head, small flat panel and printer
head applications. Etching constitutes one of the principal IC and related
device production process steps and must be performed numerous times in the
production of such devices.
The Company was formed in December 1989 to acquire the operations of the
former Tegal Corporation, a division of Motorola, Inc. ("Motorola"). The
predecessor company was founded in 1972 and acquired by Motorola in 1978.
SEMICONDUCTOR INDUSTRY BACKGROUND
Growth of Semiconductor and Semiconductor Equipment Industries
The semiconductor industry has experienced significant growth over the last
20 years. This growth has resulted from the increasing demand for ICs from
traditional IC markets, such as personal computers, telecommunications, consumer
electronics, automotive electronics and office equipment, as well as the
recently developing markets, such as multimedia, wireless communications and
portable and network computing. As a result of this increased demand,
semiconductor device manufacturers have periodically expended significant
amounts of capital to build new semiconductor fabrication facilities ("fabs")
and to expand existing fabs. In spite of the continuing growth in demand for
semiconductors, the industry periodically experiences periods of excess supply
and excess capacity as additions to capacity are brought online in large
increments which exceed the short-term growth in demand for ICs. The industry
has experienced such excess supply and excess capacity since late 1995.
Growth in the semiconductor industry has been driven, in large part, by
advances in semiconductor performance at a decreasing cost per function.
Increasingly advanced semiconductor processing technologies allow semiconductor
manufacturers to produce ICs with smaller features, thereby increasing
processing speed and expanding device functionality and memory capacity. As ICs
have become more complex, however, both the number and price of state of the art
process tools required to manufacture ICs have increased significantly. As a
result, the cost of semiconductor manufacturing equipment is becoming an
increasingly large part of the total cost in producing advanced ICs. Today, the
average state of the art dynamic random access memory (DRAM) fab costs from $750
million to over $1.5 billion, with semiconductor manufacturing equipment costs
representing the majority of total fab costs.
Semiconductor Production Processes
To create an IC, semiconductor wafers are subjected to a large number of
complex process steps. The three primary steps in manufacturing ICs are (1)
deposition, in which a layer of insulating or conducting material is deposited
on the wafer surface, (2) photolithography, in which the circuit pattern is
projected onto a light sensitive material (the photoresist), and (3) etch, in
which the unmasked parts of the deposited material on the wafer are selectively
removed to form the IC circuit pattern.
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Each step of the manufacturing process for ICs requires specialized
manufacturing equipment. Today, plasma etch systems are used for the great
majority of etching processes. During a plasma etch process (also known as "dry
etch"), a semiconductor wafer is exposed to a plasma composed of a reactive gas,
such as chlorine, which etches away selected portions of the layer underlying
the patterned photoresist layer.
Segmentation of the Etch Market
The Company believes that the dry etch market is becoming increasingly
segmented. Certain dry etch technologies or processes are better suited for
etching different types of materials (films) and, as a result, the dry etch
market may be segmented according to the type of film being etched. In addition,
as ICs become increasingly complex, certain etch steps required to manufacture a
state of the art IC demand leading edge (or "critical") etch performance. For
example, to produce a 64-megabit DRAM device, semiconductor manufacturers are
required to etch certain device features at dimensions as small as 0.25 micron.
Nonetheless, even in the most advanced ICs, a significant number of production
steps can be performed with a significantly less demanding (or "non-critical")
etch performance. As a result, the Company believes the etch market has also
begun to segment according to the required level of etch performance -- critical
or non-critical.
Segmentation of the Etch Market by Film
The dry etch market is generally segmented into the following market
segments, defined according to the class of film being etched: polysilicon,
oxide (dielectric) and metal. According to VLSI Research Inc., the oxide,
polysilicon, and metal segments of the dry etch market represented approximately
50%, 25% and 25%, respectively, of the total sales of dry etch systems in 1998.
New films are continually being developed in each of these three market
segments.
Today, the semiconductor industry is faced with the need to develop and
adopt an unprecedented number of new films as conventional materials are running
out of the physical properties needed to support continuing shrinks in die size
and to provide improved performance. Certain of these films present unique etch
production problems. For example, the use of certain new films, such as
platinum, currently being used in the development of high-density DRAM devices,
and Lead Zirconium Titanate (PZT), currently being used in the development of
non-volatile, ferroelectric random access memory (FRAM) devices, is presenting
new challenges to semiconductor manufacturers. While these new films contribute
to improved IC performance and reduced die size, their unique properties make
them particularly difficult to etch and, therefore, require more advanced etch
process technologies. Similarly, corrosion of metal etched wafers within 48 to
72 hours after completion of the etch process has been a chronic problem for
semiconductor manufacturers, regardless of the line geometries involved. The
reaction byproducts of a chlorine based metal etch process tend to redeposit on
the wafer and corrode when exposed to water in the atmosphere. Removal of these
contaminants from the wafer is essential to prevent this corrosion.
Segmentation of the Etch Market into Critical and Non-Critical Production Steps
Over time, the disparity in relative prices for etch systems capable of
etching at non-critical versus critical dimensions has grown significantly. The
Company believes that in 1993, the cost of an eight inch wafer-capable system
ranged from approximately $500,000 to $700,000. Given the relatively modest
price differential among etchers, manufacturers of ICs and similar devices
tended to purchase one system, (the one they believed provided the most
technologically advanced solution for their particular etch requirements), to
perform all their etching. In contrast, the cost today of an eight inch capable
etch system ranges from approximately $500,000, for reliable, non-critical
etchers, to more than $2.5 million, for advanced, state of the art critical
etchers. Consequently, the Company believes it is no longer cost effective to
use state of the art etchers to perform both critical and non-critical etching.
When critical etching is required in the production process, the Company
believes that the leading purchasing factor for a semiconductor manufacturer
will continue to be, ultimately, the product's etch performance. When
non-critical etching is required in the production process, the Company believes
the leading purchasing factor for a semiconductor manufacturer will be the
overall product cost, with particular emphasis on the system's sale price. In
either case, however, the semiconductor manufacturer is driven to make a
value-oriented purchasing decision which minimizes the
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overall etch system costs, while meeting the required etch process performance.
The Company believes that a well-implemented "mix and match" purchasing
philosophy could allow a semiconductor manufacturer to realize significant etch
system savings.
BUSINESS STRATEGY
Tegal believes it currently has one of the largest installed bases of etch
equipment in the industry and that over the years it has earned a reputation as
a supplier of reliable, value-oriented etch systems. The Company's systems are
sold throughout the world to both domestic and international customers. In
fiscal 1999, approximately 72% of the Company's revenues resulted from
international sales. To support its systems sales, the Company maintains local
service and support in every major geographic market in which it has an
installed base, backed up by a spares logistics system designed to provide
delivery within 24 hours anywhere in the world.
The Company's objective is to build on its technical knowledge, experience
and reputation in the etch industry, as well as its established sales, marketing
and customer service infrastructure, to be a leading supplier of etch systems
for both the critical and non-critical segments of the etch market. To meet this
objective, the Company is implementing a business strategy incorporating the
following elements:
- Use the performance capabilities of the Company's 6500 series systems to
generate incremental sales from the IC and related device markets for
critical etch of specific applications and films where Tegal's products
provide unique performance capabilities; and
- Increase sales of its non-critical etch systems by focusing sales and
marketing on specialty applications that are addressed by the Company's
900 series non-critical etchers such as thin film heads, small flat
panels, printer heads, and the conversion from wet to dry etch
technologies.
PRODUCTS
Critical Etch Products
The Company offers several models of its 6500 series critical etch products
configured to address film types and applications desired by the customer. Tegal
introduced the 6500 series tool in 1994 and since that time has expanded the
product line to address new applications. Etch applications addressed by the
6500 series system include; 1) new high K dielectrics and associated materials
used in capacitors at sub-0.5 micron for FRAMs and high-density DRAM devices, 2)
shallow trench isolation used to isolate transistors driven by increased packing
densities used in memory devices employing design rules at or below 0.25 micron,
3) sub-0.5 micron multi-layer metal films composed of
aluminum/copper/silicon/titanium alloys, 4) sub-0.5 micron polysilicon and 5)
leading edge thin film head materials. All 6500 series models offer one and
two-chamber configurations. 6500 series systems typically range in price between
$1.8 million and $3.0 million.
The Company's 6500 series systems have been engineered to provide process
flexibility and competitive throughput for wafers and substrates up to eight
inches in diameter, while minimizing cost and space requirements. A dual chamber
platform design allows for either parallel or integrated etch processes. The
Company seeks to maximize the 6500 series systems' average throughput by
incorporating a process chamber technology and system architecture designed to
minimize processing down-time required for cleaning and maintenance. Each 6500
series system has a central wafer handling system with full cassette vacuum
loadlocks, noncontact optical wafer alignment and a vacuum transport system.
Individual process module servicing is possible without shutting down the system
or other chambers. Contamination control features in the 6500 series systems
include pick and place wafer handling with no moving parts above the wafer,
four-level vacuum isolation from the atmosphere to the etch chamber, and
individual high-throughput, turbo-pumped vacuum systems for the cassettes, wafer
handling platform and each process module. These and other features of the 6500
series are designed to enable a semiconductor manufacturer to reduce wafer
particle contamination to a level which the Company believes exceeds industry
standards and to improve etch results and process flexibility.
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In addition, the Company's 6500 series systems incorporate a software
system which has been designed and tested to minimize the risk of the system
operator "crashing" the system or interrupting wafer fabrication and to be easy
to use. This software system incorporates a software architecture designed to
operate in multiple interface modes, including operator, maintenance engineer,
process engineer and diagnostic modes. Features include icon-based touch screen
menus for ease of use. In addition, the software provides a quick-response
interface which allows the semiconductor manufacturer access to all necessary
system information for factory automation. The system includes data archiving
and remote, real time diagnostics.
Non-Critical Etch Products
The Company first introduced its 900 series etch system in 1984 as a
critical etch tool of that era. Over the years, the Company has repositioned the
900 series system as a non-critical etch system capable of performing the
less-demanding etch steps required in the production of an IC and related
devices. In 1994, the Company introduced an eight inch wafer capable 900 series
system (capable of etching five inch to eight inch wafers) that was a scaled-up
version of its three inch to six inch wafer capable non-critical etch system.
The 900 series non-critical etch systems are aimed at pad, zero layer,
non-selective nitride, backside, planarization and small flat panel display
applications and thin film etch applications used in the manufacture of
read-write heads for the disk drive industry. The Company's 900 series systems
typically sell for a price of $350,000 to $600,000.
The 900 series systems incorporate a single diode process chamber on a
non-loadlocked modular platform for reliability and ease of maintenance, which
the Company believes results in higher average throughput and lower operating
costs. Continued improvements in both reliability and performance have enabled
the Company to offer the 900 series systems as a solution for non-critical
applications involving line widths of 0.8 micron and greater.
CUSTOMERS
The Company sells its systems to semiconductor and related electronic
device component manufacturers throughout the world. Major customers over the
last three fiscal years have included the following:
ABB Semiconductor AG Matsushita Seiko Epson
Bosch Micrel Semiconductor SGS-Thomson Microelectronics
Fuji Film Motorola Siemens
Hewlett-Packard NEC Sony
Hyundai Northern Telecom Toshiba
International Rectifier -- Oki Winbond
Hex Fet America Read Rite
LG Semiconductor Samsung
Of these 21 customers, 10 ordered one or more systems from the Company in
fiscal 1999. The composition of the Company's top five customers has changed
from year to year, but net system sales to the Company's top five customers in
each of fiscal 1999, 1998 and 1997 accounted for 66.4%, 61.2% and 46.7%,
respectively, of the Company's total net system sales. Matsushita, Seiko Epson,
Fuji Film and Oki represented 17.9%, 14.8%, 14.7% and 11.8%, respectively, of
the Company's net system sales in fiscal 1999. Motorola, Samsung, Read Rite and
Hyundai represented 18.2%, 12.2%, 11.2% and 10.3%, respectively, of the
Company's net system sales in fiscal 1998. Winbond, Hyundai and Motorola
represented 16.8%, 13.6% and 10.2%, respectively, of the Company's net system
sales in fiscal 1997. Other than the above customers, no single customer
represented more than 10% of the Company's net system sales in fiscal 1999, 1998
or 1997. Although the composition of the group comprising the Company's largest
customers may vary from year to year, the loss of a significant customer or any
reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the semiconductor and related
device manufacturing industry, may have a material adverse effect on the
Company.
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BACKLOG
The Company schedules production of its systems based upon order backlog
and customer commitments. The Company includes in its backlog only orders for
which written authorizations have been accepted and shipment dates within the
next 12 months have been assigned. As of March 31, 1999 and 1998 the Company's
order backlog was approximately $2.8 million and $3.4 million, respectively.
Systems orders are subject to cancellation by the customer, but with substantial
penalties other than in the case of orders for evaluation systems or for systems
which have not yet incurred production costs. Orders may be subject to
rescheduling with limited or no penalty. Some orders are received for systems to
be shipped in the same quarter as the order is received. As a result, the
Company's backlog at any particular date is not necessarily indicative of actual
sales for any succeeding period.
MARKETING, SALES AND SERVICE
The Company sells its systems worldwide through a network of 16 direct
sales representatives and 12 independent sales representatives in 17 sales
offices located throughout the world. In the United States, the Company markets
its systems through direct sales personnel located in its Petaluma, California
headquarters, two regional sales offices and through two independent sales
representatives. In addition, the Company provides field service and
applications engineers out of three regional locations and its Petaluma
headquarters in order to ensure dedicated technical and field process support
throughout the United States on short notice.
The Company maintains sales, service, and process support capabilities in
Japan, Taiwan, Germany, Italy and the United Kingdom and service/support
operations in Austria and China. In addition to its international direct sales
and support organizations, the Company markets its systems through independent
sales representatives in China, Israel, Korea and Singapore and selected markets
in the United States and Japan.
International sales, which consist of export sales from the United States
either directly to the end user or to one of the Company's foreign subsidiaries,
accounted for approximately 72%, 61% and 61% of total revenue for fiscal 1999,
1998 and 1997, respectively. The Company generally sells its systems on 30-to-60
day credit terms to its domestic and European customers. Customers in Pacific
Rim countries, other than Japan, are generally required to deliver a letter of
credit payable in U.S. dollars upon system shipment. Sales to other
international customers, including Japan, are either billed in local currency or
U.S. dollars. The Company anticipates that international sales will continue to
account for a significant portion of revenue in the foreseeable future.
International sales are subject to certain risks, including the imposition of
government controls, fluctuations in the U.S. dollar (which could increase the
sales price in local currencies of the Company's systems in foreign markets),
changes in export license and other regulatory requirements, tariffs and other
market barriers, political and economic instability, potential hostilities,
restrictions on the export or import of technology, difficulties in accounts
receivable collection, difficulties in managing distributors or representatives,
difficulties in staffing and managing international operations and potentially
adverse tax consequences. There can be no assurance that any of these factors
will not have a material adverse effect on the Company.
The Company generally warrants its new systems for 12 months and its
refurbished systems for six months from shipment. Installation is included in
the price of the system. The Company's field process engineers provide customers
with call-out repair and maintenance services for a fee. Customers may also
enter into repair and maintenance service contracts covering the Company's
systems. The Company trains customers' service engineers to perform routine
service for a fee and provides telephone consultation services generally free of
charge.
The sales cycles for the Company's systems vary depending upon whether the
system is an initial design-in, reorder or used equipment. Initial design-in
sales cycles are typically 12 to 18 months, particularly for 6500 series
systems. In contrast, reorder sales cycles are typically four to six months, and
used system sales cycles are generally one to three months. The initial
design-in sales cycle begins with the generation of a sales lead, which is
followed by qualification of the lead, an analysis of the customer's particular
applications needs and problems, one or more presentations to the customer
(frequently including extensive participation by the Company's senior
management), two to three wafer sample demonstrations, followed by customer
testing of
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the results and extensive negotiations regarding the equipment's process and
reliability specifications. Initial design-in sales cycles are monitored by
senior management for correct strategy approach and prioritization. The Company
may, in some instances, need to provide the customer with an evaluation critical
etch system for three to six months prior to the receipt of a firm purchase
order.
RESEARCH AND DEVELOPMENT
The market for semiconductor capital equipment is characterized by rapid
technological change. The Company believes that continued and timely development
of new systems and enhancements to existing systems is necessary for it to
maintain its competitive position. Accordingly, the Company devotes a
significant portion of its personnel and financial resources to research and
development programs and seeks to maintain close relationships with its
customers in order to be responsive to their system needs.
The Company's research and development encompasses the following areas:
plasma technology, process characterization and development, material sciences
applicable to the etch environment, system design and architecture,
electro-mechanical design and software engineering. Management emphasizes
advanced plasma and reactor chamber modeling capabilities in order to accelerate
bringing advanced chamber designs to market. The Company employs
multi-discipline teams to facilitate short engineering cycle times and rapid
product development.
As of March 31, 1999, the Company had 56 full-time employees dedicated to
equipment design engineering, process support and research and development.
Research and development expenses for fiscal 1999, 1998 and 1997 were $9.6
million, $11.0 million and $10.5 million, respectively, and represented 33.0%,
26.6% and 18.3% of total revenue, respectively. Such expenditures were used for
the development of new systems and processes, continued enhancement and
customization of existing systems, etching customer samples in the Company's
demonstration labs and providing process engineering support at customer sites.
MANUFACTURING
The Company's etch systems are produced at its headquarters in Petaluma,
California. The Company's manufacturing activities consist of assembling and
testing components and sub-assemblies which are then integrated into finished
systems. The Company has structured its production facility to be driven either
by orders or by forecasts and has adopted a modular system architecture to
increase assembly efficiency and design flexibility. The Company has also
implemented "just-in-time" manufacturing techniques in its assembly processes.
Through the use of such techniques, non-critical system manufacturing cycle
times take approximately 14 days and cycle times for its critical etch products
take two to three months.
The Company procures certain components and sub-assemblies included in its
systems from a limited group of suppliers, and occasionally from a single source
supplier. In particular, the Company is dependent upon MECS Corporation
("MECS"), a robotic equipment supplier, as the sole source for the robotic arm
used in all of its 6500 series systems. The Company currently has no existing
supply contract with MECS, and the Company currently purchases all robotic
assemblies from MECS on a purchase order basis. Disruption or termination of
certain of these sources, including its robotic sub-assembly source, could have
an adverse effect on the Company's operations. While the Company believes that
alternative sources could be obtained and qualified to supply these components
or sub-assemblies, a prolonged inability to obtain such components or
sub-assemblies, receipt of defective components or sub-assemblies, as well as
difficulties or delays in shifting to alternative sources, could have a material
adverse effect on the Company's operating results and could damage customer
relationships.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of governmental regulations related to
the use, storage, handling, discharge or disposal of toxic, volatile or
otherwise hazardous chemicals used in the manufacturing process. The Company
believes that it is currently in compliance in all material respects with these
regulations and that it has obtained all necessary environmental permits to
conduct its business, which permits generally relate to the discharge of
hazardous wastes. Nevertheless, the failure to comply with present or future
regulations could
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result in fines being imposed on the Company, suspension of production,
alteration of the Company's manufacturing processes, or cessation of operations.
Such regulations could require the Company to acquire expensive remediation
equipment or to incur other expenses to comply with environmental regulations.
Any failure by the Company to control the use, disposal or storage of, or
adequately restrict the discharge of, hazardous substances could subject the
Company to future liabilities.
COMPETITION
The semiconductor capital equipment industry is highly competitive. The
Company believes that the principal competitive factor in the critical segment
of the etch industry is technical performance of the system, followed closely by
the existence of customer relationships, the overall system price, the ability
to provide service and technical support on a global basis and other related
cost factors. The Company believes that the principal competitive factor in the
non-critical segment of the etch industry is system price, followed closely by
the technical performance of the system, the existence of established customer
relationships, the ability to provide service and technical support on a global
basis and other related cost factors.
The Company believes that to be competitive, it will require significant
financial resources in order to offer a broad range of systems, to maintain
customer service and support centers worldwide and to invest in research and
development. Many of the Company's existing and potential competitors,
including, among others, Applied Materials, Inc., Lam Research Corporation,
Hitachi Ltd. and Tokyo Electron Limited, have substantially greater financial
resources, more extensive engineering, manufacturing, marketing and customer
service and support capabilities, larger installed bases of current generation
etch and other production equipment and broader process equipment offerings as
well as greater name recognition than the Company. The Company expects its
competitors to continue to improve the design and performance of their current
systems and processes and to introduce new systems and processes with improved
price and performance characteristics. No assurance can be given that the
Company will be able to compete successfully in the United States or worldwide.
INTELLECTUAL PROPERTY
The Company holds an exclusive license to 26 United States patents,
including its dual frequency tri-electrode control system, and 28 corresponding
foreign patents covering various aspects of its systems. The Company holds a
patent for its etch-rinse-strip-rinse process sequence directly, which process
has been designed to address the post-etch corrosion problems faced by
semiconductor manufacturers. The Company has also applied for 13 additional
United States patents and 33 additional foreign patents. The Company believes
that the duration of such patents generally exceed the life cycles of the
technologies disclosed and claimed therein. The Company believes that although
the patents it has exclusively licensed or holds directly will be of value, they
will not determine the Company's success, which depends principally upon its
engineering, marketing, service and manufacturing skills. However, in the
absence of patent protection, the Company may be vulnerable to competitors who
attempt to imitate the Company's systems or processes and manufacturing
techniques and processes. In addition, other companies and inventors may receive
patents that contain claims applicable to the Company's systems and processes.
The sale of the Company's systems covered by such patents could require licenses
that may not be available on acceptable terms, if at all. The Company also
relies on trade secrets and other proprietary technology that it seeks to
protect, in part, through confidentiality agreements with employees, vendors,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by others.
The original version of the system software for the Company's 6500 series
systems was jointly developed by the Company and Realtime Performance, Inc., a
third party software vendor. Tegal holds a perpetual, non-exclusive, nonroyalty
bearing license to use and enhance this software. The enhanced version of the
software currently used on the Company's 6500 series systems has undergone
multiple releases of the original software, and such enhancements were developed
exclusively by the Company. Neither the software vendor nor any other party has
any right to use the Company's current release of the system software.
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Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, there can be no
assurance that the Company will be able to protect its technology adequately or
that competitors will not be able to develop similar technology independently.
There can be no assurance that any patent applications that the Company may file
will be issued or that foreign intellectual property laws will protect the
Company's intellectual property rights. There can be no assurance that any
patent licensed by or issued to the Company will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide competitive
advantages to the Company. Furthermore, there can be no assurance that others
will not independently develop similar systems, duplicate the Company's systems
or design around the patents licensed by or issued to the Company.
On March 17, 1998, the Company filed a suit in the United States District
Court in the Eastern District of Virginia against Tokyo Electron Limited and
several of its U.S. subsidiaries (collectively, "TEL") alleging that TEL's
current generation of etch equipment infringes certain of the Company's patents.
On January 21, 1999 the Court issued an order interpreting the patents-in-suit
in the manner urged by the Company and rejecting the interpretation arguments
made by TEL. The Company is seeking, among other things, injunctive relief
barring TEL from importing or selling such products. The case was tried to the
Court on May 26-29, 1999 and is now under submission. The Court has indicated
that it expects to issue a decision by September 1, 1999. No assurance can be
given as to the outcome of such legal proceedings or as to the effect of any
such outcome on the Company's results of operation or financial condition.
On June 10, 1996, Lucent Technologies Inc. ("Lucent") filed a claim with
the United States District Court for the Northern District of California
alleging patent infringement by Austria Mikro Systeme International AG and AMS
Austria Mikro Systeme International, Inc. ("AMS") for the sale of integrated
circuits manufactured with the Company's dry plasma etch systems. In March 1995,
the Company executed an agreement with AMS, containing an indemnification
provision covering certain uses of select equipment sold to AMS. Lucent and AMS
have settled the U.S. claim and AMS is now seeking indemnification from the
Company through an arbitration proceeding with respect to the U.S. claim. The
Company has been informed that Lucent filed a claim for patent infringement in
Germany against AMS for the worldwide sale of integrated circuits manufactured
with the Company's dry plasma etch systems. Lucent and AMS have settled that
matter with respect to worldwide sales and AMS has also requested
indemnification for that matter. The Company believes that the claims made by
AMS are without merit and that the ultimate outcome of any defense of such
indemnification claims is unlikely to have a material adverse effect on the
Company's results of operations or financial condition. With respect to the
above matters, proposals have been made by the parties to an ICC arbitration
panel. The proposals must now be examined and finalized by the International
Court of Arbitration. A resolution is expected in July of this year. No
assurance can be given, however, as to the outcome of such legal proceedings or
as to the effect of any such outcome on the Company's results of operations or
financial condition.
As is typical in the semiconductor industry, the Company has received
notices from time to time from third parties alleging infringement claims. In
July 1991, the Company was advised by General Signal Corporation ("GSC") that
the Company may need a license under certain U.S. patents owned by GSC relating
to "cluster tool" equipment. The Company's 6500 series systems are generally
configured with multiple process chambers and, therefore, may be deemed "cluster
tool" equipment. A number of companies which were contacted by GSC with regard
to licensing these patents formed an ad-hoc committee to investigate the
validity of the GSC patents. As a result of such investigation, in November 1992
the committee members, including the Company, jointly notified GSC that they
believe the subject patents are invalid and that, accordingly, no license is
necessary. In the fall of 1994, GSC filed suit against Applied Materials, a non-
member of the ad-hoc investigative committee, alleging infringement of such
patents. The Company believes that GSC's dispute with Applied Materials has
subsequently been settled. To date, GSC has taken no action against the Company
in connection with the licensing of these patents. There can be no assurance
that GSC will not take any such action in the future or, if any such action is
taken, as to the outcome of such action.
Although there are currently no other pending claims or lawsuits by or
against the Company regarding possible infringement claims, there can be no
assurance that infringement claims by other third parties, or claims for
indemnification resulting from infringement claims, will not be asserted in the
future or that such
10
<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, 1999, the Company had a total of 208 employees consisting
of 191 full-time permanent employees and 17 temporary or contract personnel,
including 56 in engineering, research and development, 38 in manufacturing, 81
in marketing, sales and customer service and support and 33 in executive and
administrative positions. Many of the Company's employees are highly skilled,
and the Company's success will depend in part upon its ability to attract,
retain and develop such employees. Skilled employees, especially employees with
extensive technological backgrounds, are currently in great demand. There can be
no assurance that the Company will be able to attract or retain the skilled
employees which may be necessary to continue its research and development,
manufacturing or marketing programs. The loss of any such persons, as well as
the failure to recruit additional key personnel in a timely manner, could have a
material adverse effect on the Company.
None of the Company's employees are represented by a labor union or covered
by a collective bargaining agreement. The Company considers its employee
relations to be good.
ADDITIONAL RISK FACTORS
Dependence on Recently Introduced Systems for Critical Etch Markets
The Company's 6500 series systems, its generation of critical etch systems,
have been designed for sub-0.35 micron critical etch applications in emerging
films, polysilicon and metal which the Company believes to be the leading edge
of critical etch applications. The Company's 6500 series systems which have been
installed are currently being used primarily for research and development
activities or low volume production. For the 6500 series systems to achieve
market acceptance, the Company's customers must utilize these systems for volume
production. Achieving market acceptance of the Company's 6500 series systems is
very important to the Company's future financial results.
Because new product development commitments must be made well in advance of
sales, new product decisions must anticipate both the future requirements for
etch processes needed by semiconductor manufacturers and the equipment required
to address such applications. There can be no assurance that the market for
critical etch emerging film, polysilicon or metal etch systems will develop as
quickly or to the degree the Company expects. There can be no assurance whether
or when the 6500 series systems will achieve market acceptance. In addition, the
selling cycles of these new systems are typically lengthy.
In connection with the development and production of the 6500 series, the
Company has increased its operating expenses and is likely to invest in
increased inventory levels in the future. The failure to complete the commercial
introduction of this generation of systems in a timely manner could result in,
among other things, an increase in operating expenses and inventory obsolescence
without corresponding sales, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
If the 6500 series does not achieve significant sales or volume production
due to a lack of customer acceptance, inability to correct technical,
manufacturing or other difficulties which may develop with this
11
<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.
Fluctuations in Quarterly Operating Results
The Company's revenue and operating results have fluctuated and are likely
to continue to fluctuate significantly from quarter to quarter, and there can be
no assurance as to future profitability.
The Company's 900 series etch systems typically sell for prices ranging
between $350,000 and $600,000, while prices of the Company's 6500 series
critical etch systems typically range between $1.8 million and $3.0 million. To
the extent the Company is successful in selling its 6500 series systems, the
sale of a small number of these systems will probably account for a substantial
portion of revenue in future quarters, and a transaction for a single system
could have a substantial impact on revenue and gross margin for a given quarter.
The Company's backlog at the beginning of each quarter does not normally
include all systems sales needed to achieve planned revenue for the quarter.
Consequently, the Company depends on obtaining orders for shipment within a
particular quarter to achieve its revenue objectives for that period. Because
the Company builds a portion of its systems according to forecast, the absence
of significant backlog for an extended period of time could hinder the Company's
ability to plan expense, production and inventory levels, which could materially
adversely affect its operating results. Furthermore, a substantial portion of
the Company's net revenue has historically been realized near the end of the
quarter. Accordingly, the failure to receive anticipated orders or delays in
shipments near the end of a quarter, due, for example, to unanticipated customer
delays, cancellations or manufacturing difficulties, may cause quarterly net
revenue to fall significantly short of the Company's objectives, which could
materially adversely affect the Company's operating results.
The timing of new systems and technology announcements and releases by the
Company and others may also contribute to fluctuations in quarterly operating
results, including cases in which new systems or technology offerings cause
customers to defer ordering systems from the Company's existing product lines.
The Company's revenue and operating results may also fluctuate due to the timing
and mix of systems sold, the volume of service provided and spare parts
delivered in a particular quarter and changes in pricing by the Company, its
competitors or suppliers. The impact of these and other factors on the Company's
revenue and operating results in any future periods are, and will continue to
be, difficult for the Company to forecast.
The need for continued investment in research and development, for capital
equipment requirements and for extensive ongoing customer service and support
capability worldwide result in significant fixed costs which will be difficult
to reduce in the event that the Company does not meet its sales objectives. The
Company's expense levels are based, in part, on expectations of future revenue.
If revenue in a particular quarter does not meet expectations, fixed operating
expenses will adversely affect results of operations. A variety of factors
influence the level of revenue in a particular quarter. Those factors include
the timing and mix of systems
12
<PAGE> 13
sales, the introduction or announcement of new systems by the Company or the
Company's competitors, management decisions to commence or discontinue product
lines, the Company's ability to design, introduce and manufacture new systems on
a timely basis, the timing of research and development expenditures and expenses
attendant to the further development of marketing, process support and service
capabilities, specific economic conditions in the semiconductor industry or
major global semiconductor markets, general economic conditions and exchange
rate fluctuations. The impact of these and other factors on the Company's
revenue and operating results in any future periods are, and will continue to
be, difficult for the Company to forecast.
Cyclicality of the Semiconductor Industry
The Company's business depends upon the capital expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and systems utilizing integrated circuits.
The semiconductor industry is highly cyclical and historically has experienced
periodic downturns, which often have had a material adverse effect on the
semiconductor industry's demand for semiconductor capital equipment, including
etch systems manufactured by the Company. The semiconductor industry is
currently experiencing such a slowdown. The current and prior semiconductor
industry downturns have adversely affected the Company's revenue, gross margins
and results of operations. In addition, the need for continued investment in
research and development, substantial capital equipment requirements, and
extensive ongoing customer service and support requirements worldwide will
continue to limit the Company's ability to reduce expenses in response to any
such downturn or slowdown. The Company's revenue, gross margin and results of
operations may continue to be materially adversely affected by the current
slowdown or by future downturns or slowdowns in the rate of capital investment
in the semiconductor industry. Moreover, although the semiconductor industry may
experience growth that causes significant growth in the semiconductor capital
equipment industry, there can be no assurance that such growth can be sustained
or that the Company will be positioned to benefit from such growth.
Domestic and International Economic Conditions
The Company's business is subject to general economic conditions, both in
the United States and abroad. A significant decline in economic conditions in
any significant geographic area could have a material adverse effect on the
Company. For example, there is currently an economic crisis in Asia, which has
led to weak demand for the Company's products in certain Asian
economies -- notably Korea. Furthermore, current price cutting by U.S. personal
computer manufacturers are putting pressure on semiconductor manufacturers to
contain spending on capital equipment. The Company anticipates that such
economic events may continue to adversely affect the Company's results of
operations, and a further decline of economic conditions could, in the future,
affect demand for the Company's products, which could have a material adverse
effect on the Company's business, financial condition and operating results.
Rapid Technological Change; Importance of Timely Product Introduction
The semiconductor manufacturing industry is subject to rapid technological
change and new system introductions and enhancements. The Company believes that
its future success depends on its ability to continue to enhance its existing
systems and their process capabilities, and to develop and manufacture in a
timely manner new systems with improved process capabilities. The industry also
is subject to fundamental changes in equipment requirements, such as the prior
shift from six inch wafer equipment to eight inch wafer equipment and the
anticipated shift from eight inch wafer equipment to twelve inch wafer
equipment.
The Company must manage system transitions successfully, as introductions
of new systems could adversely affect sales of existing systems, including its
6500 series. There can be no assurance that the Company will be successful in
the introduction and volume manufacture of new systems or that the Company will
be able to develop and introduce, in a timely manner, new systems or
enhancements to its existing systems and processes which satisfy customer needs
or achieve market acceptance. The failure of the Company to accomplish any of
the above would adversely affect the Company's business, financial condition and
results of operations. In addition, the Company may incur substantial
unanticipated costs to ensure product functionality and reliability early in its
products' life cycles. If new products have quality or reliability problems, the
13
<PAGE> 14
Company could experience reduced orders, delays in collecting accounts
receivable, higher manufacturing costs, and additional service and warranty
expenses, any of which could have a material adverse effect on the Company's
business, financial condition and operating results.
Lengthy Sales Cycle
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to add new manufacturing capacity or to
expand existing manufacturing capacity, both of which typically involve a
significant capital commitment. The Company often experiences delays in
finalizing system sales following initial system qualification while the
customer evaluates and receives approvals for the purchase of the Company's
systems and completes a new or expanded facility. Due to these and other
factors, the Company's systems typically have a lengthy sales cycle (often 12 to
18 months in the case of critical etch systems) during which the Company may
expend substantial funds and management effort. Lengthy sales cycles subject the
Company to a number of significant risks, including inventory obsolescence and
fluctuations in operating results over which the Company has little or no
control.
Future Capital Needs
The development, manufacture and marketing of etch systems are highly
capital intensive. In order to be competitive, the Company must continue to make
significant expenditures for, among other things, capital equipment and the
manufacture of evaluation and demonstration unit inventory for its 6500 series
etch systems. The Company believes that its existing cash balances, anticipated
cash flow from operations and funds available under its existing lines of credit
will satisfy its financing requirements for the next twelve months. To the
extent that such financial resources are insufficient to fund the Company's
activities or existing credit lines are not renewed, additional funds will be
required. There can be no assurance that additional financing will be available
on reasonable terms or at all. To the extent that additional capital is raised
through the sale of additional equity or convertible debt securities, the
issuance of such securities could result in additional dilution to the Company's
stockholders.
Customer Concentration
Although the composition of the group comprising the Company's largest
customers may vary from year to year, the loss of a significant customer or any
reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the semiconductor manufacturing
industry, may have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's ability to increase
its sales in the future will depend, in part, upon its ability to obtain orders
from new customers as well as the financial condition and success of its
existing customers and the general economy, of which there can be no assurance.
Additional Risks Associated with International Sales and Operations
Sales of the Company's systems in certain countries are billed in local
currency, and the Company has two lines of credit denominated in Japanese Yen.
The Company generally attempts to offset a portion of its U.S. dollar
denominated balance sheet exposures subject to foreign exchange rate
remeasurement each period held by its foreign subsidiaries whose books are
denominated in currencies other than U.S. dollars by purchasing currency options
and forward currency contracts for future delivery. There can be no assurance
that the Company's future results of operations will not be adversely affected
by foreign currency fluctuations. In addition, the laws of certain countries in
which the Company's products are sold may not provide the Company's products and
intellectual property rights with the same degree of protection as the laws of
the United States.
Significant Stockholders; Anti-Takeover Effect
The Company's principal stockholders and the Company's executive officers
and directors beneficially owned approximately 41.0% of the Company's
outstanding shares of common stock as of March 31, 1999.
14
<PAGE> 15
Accordingly, these stockholders can be expected to have substantial influence
over the Company. Such a high level of ownership by such persons or entities may
have a significant effect in delaying, deferring or preventing a change in
control of the Company and may adversely affect the voting and other rights of
holders of common stock. In addition to the foregoing, the ability of the
Company's Board of Directors to issue preferred stock without further
stockholder approval or to exercise the anti-takeover provisions of its
Shareholder Rights Plan in the event of an unsolicited attempt to assume control
of the Company could have the effect of delaying, deferring or preventing a
change in control of the Company.
Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's operating
results, sales of the Company's common stock into the market place, failure to
meet or changes in analysts' expectations, natural disasters, outbreaks of
hostilities, general conditions in the semiconductor industry or the worldwide
economy, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in patents or other
intellectual property rights and developments in the Company's relationships
with its customers and suppliers could cause the price of the Company's common
stock to fluctuate, perhaps substantially. In addition, in recent years the
stock market in general, and the market for shares of small capitalization
stocks in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. In
addition, as of March 31, 1999, the holders of an aggregate of approximately 3.3
million shares of the Company's common stock issued and outstanding are entitled
to certain rights with respect to the registration of such shares for offer and
sale to the public under the Securities Act of 1933, as amended, pursuant to a
registration rights agreement between the Company and the holders. In addition
to other rights under the registration rights agreement, the holders may require
the Company, at any time and from time to time, to use its best efforts to
effect a registration statement on Form S-3, subject to various conditions.
There is no limit to the number of times that the holders may demand
registration on Form S-3 pursuant to the registration rights agreement. There
can be no assurance that the market price of the Company's common stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance.
Year 2000 Compliance
In the past, many information technology products were designed with two
digit year codes that did not recognize century and millennium fields. As a
result these hardware and software products may not function or may give
incorrect results when Year 2000 dates are used. The "Year 2000 Issue" is faced
by substantially every company which relies on computer systems. In order to
address this issue, such hardware and software products may need to be upgraded
or replaced in order to correctly process dates beginning in the Year 2000.
The Company has formed a team and named an executive sponsor to identify
remedies and test and develop contingency plans for the Year 2000 Issue. The
Company estimates that the tasks identified by this team will be completed by
October 1999. To date, the Company has evaluated its internal systems, its
products and the readiness of its key suppliers and other third parties to
determine their Year 2000 status.
The Company's Enterprise Resource Planning (ERP) system is provided by a
software vendor and contains some custom modifications to meet the Company's
business requirements. The vendor-provided software is Information Technology
Association of America certified Year 2000 compliant. The custom modifications
have been evaluated to identify the changes necessary to make them compliant.
The Company estimates that the required modifications will be completed by
October 1999. The Company's current product offerings have been tested and
determined to either be Year 2000 compliant or, where they are not compliant, an
upgrade program is available to address the problem.
The Company completed its Year 2000 risk assessment and its corrective
action and contingency plans in April 1999. The corrective action plan has
identified required modifications and upgrades to its business software and
hardware. The risk assessment has evaluated the readiness of its key suppliers
and other third parties and the effect their compliance readiness might have on
the Company. For key suppliers where
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<PAGE> 16
the risk of non-compliance has been assessed as high, backup or contingency
plans have been developed and documented and audits of those vendors for Year
2000 compliance are scheduled to be performed prior to October 1999. The Company
is not currently planning on assessing the compliance readiness of its
customers. The Company's customers are generally considerably larger than the
Company and are unlikely to complete any questionnaire which the Company might
furnish to its customers to assess Year 2000 compliance. The Company does not
anticipate that its ability to conduct its business operations with its
suppliers or customers is likely to be materially adversely impacted by Year
2000 issues since purchase and sales order transactions are generally
transmitted by mail, phone or facsimile between parties as opposed to through
some form of electronic data interchange.
The total expense of preparing the Company for Year 2000 compliance is
estimated at approximately $0.4 million, which is not material to the Company's
business operations or financial condition. Less than $0.1 million of expense
has been incurred through the date of this report. Nevertheless, satisfactorily
addressing the Year 2000 Issue is dependent on many factors, some of which are
not within the Company's control. Should the Company's internal systems, or the
internal systems of one or more of its significant vendors, customers, or other
third parties fail to achieve Year 2000 compliance, the Company's business,
financial condition and results of operations could be materially adversely
affected.
ITEM 2. PROPERTIES
The Company maintains its headquarters, encompassing its executive office,
manufacturing, engineering, research and development operations, in one leased
120,000 square foot facility in Petaluma, California. The Company currently
occupies 90,000 square feet of this building, with the remaining portion sublet
or being offered for sublet. The lease expires in March 2004. Other than certain
large pieces of capital equipment leased by the Company, the Company owns
substantially all of the machinery and equipment used in its facilities. The
Company believes that its existing facilities are adequate to meet its
requirements for several years.
The Company leases sales, service and process support space in Santa Clara,
California; Austin, Texas; Manassas, Virginia; Kent, England; Munich, Germany;
Kawasaki, Japan; Catania, Italy; Seoul, Korea and Hsin Chu City, Taiwan.
ITEM 3. LEGAL PROCEEDINGS
Except as provided in Item 1. Business -- Intellectual Property, there are
no material legal proceedings pending to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended March 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers and directors of the Company as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael L. Parodi........ 50 Chairman of the Board of Directors, President and
Chief Executive Officer
David Curtis............. 45 Vice President, Finance and Administration, Chief
Financial Officer, Secretary and Treasurer
Stephen P. DeOrnellas.... 44 Vice President, Technology and Corporate Development
and Chief Technical Officer
George B. Landreth....... 44 Vice President, Product Development
James D. McKibben........ 48 Vice President, Worldwide Sales and Marketing
Colin C. Tierney......... 52 Vice President, Worldwide Operations and Customer
Support
</TABLE>
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<PAGE> 17
Michael L. Parodi joined the Company as Director, President and Chief
Executive Officer in December 1997 and assumed the additional role of Chairman
of the Board in March 1999. From 1991 to 1996, Mr. Parodi was Chairman of the
Board, President and Chief Executive Officer of Semiconductor Systems, Inc.
("SSI"), a manufacturer of photolithography processing equipment sold to the
semiconductor and thin film head markets until SSI was merged with FSI
International ("FSI"). Mr. Parodi remained with FSI as Executive Vice President
and General Manager of SSI from the time of the merger to December 1997,
integrating SSI into FSI. In 1990, Mr. Parodi led the acquisition of SSI from
General Signal Corporation. Prior to 1990, Mr. Parodi held various senior
engineering and operations management positions with General Signal Corporation,
Signetics Corporation, Raytheon Company, Fairchild Semiconductor Corporation and
National Semiconductor Corporation. Mr. Parodi currently is a member of the
Semiconductor Equipment and Materials International and the U.S. Display
Consortium Boards of Directors.
David Curtis joined the Company in August 1991 as Vice President of Finance
and Administration and Chief Financial Officer and from May 1995 until June
1996, he assumed the additional role of Vice President of Operations. Prior to
joining the Company, Mr. Curtis served as Chief Financial Officer of AMOT
Controls Corporation from 1988 until 1991. Prior to 1991, he held consulting
positions with Pittiglio Rabin Todd and McGrath, an operations consulting firm
specializing in implementing planning and control processes in rapidly growing
technology companies and with Arthur Andersen & Co.'s systems consulting
division.
Stephen P. DeOrnellas joined the Company in July 1990 as Vice President of
Marketing and Technology, served as Vice President of Process Technology from
April 1995 until June 1996, at which time he was appointed Vice President,
Technology and Corporate Development and Chief Technical Officer. From 1989 to
1990 he was Vice President of Marketing for the Wafer Inspection Systems
Division of KLA Instruments Corporation ("KLA"). From 1981 to 1989 he held a
variety of product development and marketing management positions, including
Vice President Marketing from 1987 to 1989, Vice President of Process
Engineering from 1983 to 1987, and Senior Process Engineer from 1981 to 1983,
with Lam Research Corporation where he had responsibility for the development
and introduction of the Lam Autoetch and Rainbow product lines.
George B. Landreth joined the Company in November 1992 as Manager of
Mechanical Engineering where he was responsible for directing the development of
the Company's 6500 series critical etch systems platform. From June 1996 until
April 1997 he served as Director of Program Development, at which time he was
promoted to Vice President, Product Development. Prior to joining the Company,
Mr. Landreth held product development engineering management and design
engineering positions with KLA, Silicon Valley Group, Inc., Optoscan
Corporation, Eaton Corporation, Siltec Corporation and Peterbilt Motors.
James D. McKibben joined the Company in June 1996 as Vice President,
Worldwide Sales. In November 1998, he assumed the additional role of Vice
President, Marketing. Prior to joining the Company, from 1995 to 1996 and from
1988 to 1992, Mr. McKibben was Vice President, Marketing, Sales and Customer
Support for MRS Technology, Inc., a lithography equipment manufacturer for flat
panel displays. From 1993 to 1995, he served as Director of Marketing and Sales
for SSI. From 1992 to 1993, he was Regional Manager for Kulicke and Soffa
Industries, Inc., a maker of wire bonders and other back-end assembly equipment
for the IC industry. Prior to 1988, Mr. McKibben held several sales and service
management positions with Wild/ Lietz, Inc., GCA Corporation and J.T. Baker
Chemical Company.
Colin C. Tierney joined the Company in September 1998 as Vice President,
Worldwide Operations and Customer Support. From 1996 to 1998, he was Vice
President Operations with KLA where he led Operations through the merger with
Tencor and implemented new product introduction and demand flow technology
processes. From 1988 to 1996, Mr. Tierney served as Vice President, Operations
with Lam Research Corporation where he led worldwide operations and facilities
functions and directed projects to integrate several acquisitions. Prior to
1988, Mr. Tierney held senior operations positions with Scientific Microsystems,
Inc., Ultratech Stepper, Inc. and Diablo Systems Inc., a division of Xerox
Corporation.
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<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Since October 19, 1995, Tegal's common stock has been traded on the Nasdaq
National Market System under the symbol TGAL. The following table sets forth the
range of high and low sales prices for the Company's common stock for the prior
two fiscal years.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR 1998
First Quarter............................................... 8 3/4 5
Second Quarter.............................................. 10 1/4 6
Third Quarter............................................... 11 1/2 4
Fourth Quarter.............................................. 7 1/2 4
FISCAL YEAR 1999
First Quarter............................................... 7 3 11/16
Second Quarter.............................................. 4 5/8 1 15/16
Third Quarter............................................... 3 5/8 1 3/8
Fourth Quarter.............................................. 5 13/16 2 17/32
</TABLE>
The approximate number of record holders of the Company's common stock as
of March 31, 1999 was 138. Tegal has not paid any cash dividends since its
inception and does not anticipate paying cash dividends in the foreseeable
future. Further, the Company's domestic lines of credit restrict the declaration
and payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue.................................. $ 29,035 $41,472 $57,423 $62,046 $ 44,645
Gross profit............................. 8,161 17,095 25,901 28,577 20,583
Operating income (loss).................. (15,402) (6,673) 3,180 6,572 1,376
Income (loss) before income taxes........ (14,997) (5,545) 4,180 6,186 949
Net income (loss)........................ (15,132) (5,545) 3,140 5,566 828
Net income (loss) per share:(1)
Basic................................. (1.42) (0.54) 0.31 1.14 (0.05)
Diluted............................... (1.42) (0.54) 0.29 0.64 (0.05)
Shares used in per share computation:
Basic................................. 10,630 10,364 10,124 4,506 502
Diluted............................... 10,630 10,364 10,764 8,760 502
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $ 17,569 $25,660 $30,323 $23,283 $ 2,351
Working capital.......................... 27,298 39,574 45,392 41,726 11,432
Total assets............................. 39,652 55,146 63,524 64,672 33,744
Short-term notes payable to banks and
others................................ 223 285 252 243 8,164
Long-term obligations.................... 30 101 301 356 4,338
Redeemable preferred stock............... 0 0 0 0 21,695
Stockholders' equity (deficit)........... 30,816 44,804 50,542 47,626 (11,633)
</TABLE>
- ---------------
(1) See Note 1 of Tegal's Consolidated Financial Statements for an explanation
of the computation of earnings per share.
18
<PAGE> 19
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,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenue............................................. 100.0% 100.0% 100.0%
Cost of sales....................................... 71.9 58.8 54.9
----- ----- -----
Gross profit........................................ 28.1 41.2 45.1
Operating expenses:
Research and development.......................... 33.0 26.6 18.3
Sales and marketing............................... 18.0 14.7 10.8
General and administrative........................ 30.1 16.0 10.5
----- ----- -----
Total operating expenses.................. 81.1 57.3 39.6
----- ----- -----
Operating income (loss)............................. (53.0) (16.1) 5.5
Other income (expense), net......................... 1.4 2.7 1.7
----- ----- -----
Income (loss) before income taxes................... (51.6) (13.4) 7.2
Provision for income taxes.......................... (0.5) 0.0 1.7
----- ----- -----
Net income (loss).............................. (52.1)% (13.4)% 5.5%
===== ===== =====
</TABLE>
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Revenue
The Company's revenue is derived from sales of new and refurbished systems,
spare parts and non-warranty service. Revenue declined 30 percent in fiscal 1999
from fiscal 1998 (to $29.0 million from $41.5 million). Revenue declined 28
percent in fiscal 1998 from fiscal 1997 (to $41.5 million from $57.4 million).
The revenue decline in fiscal 1999 as compared to fiscal 1998 was principally
attributable to a decline in the number of 900 and 6500 series etch systems sold
as the semiconductor industry further curtailed its capital equipment
expenditures in the face of a continued industry slowdown. The Company's sales
of spare parts and service also declined in fiscal 1999 over fiscal 1998, which
the Company believes was principally due to its customers operating their Tegal
equipment at a lower level of utilization during the industry slowdown. The
Company believes that sales of its 6500 series systems were adversely affected
in fiscal 1999 by the Korean financial crisis which became apparent in the fall
of 1997 and began to adversely impact the Company's sales of 6500 series systems
in the fourth quarter of fiscal 1998 and continues through the date of this
report. The revenue decline in fiscal 1998 as compared to fiscal 1997 was
principally attributable to a decline in the number of 900 series etch systems
sold as the semiconductor industry curtailed its capital equipment expenditures
for capacity expansion in the face of an industry-wide over-supply of
manufacturing capacity. The Company's sales of spare parts also declined in
fiscal 1998 over fiscal 1997, which the Company believes was primarily caused by
customers depleting their supplies of spare parts during the industry slowdown.
Revenue derived from the sale of the Company's 6500 series critical etch systems
increased as a result of both increased unit sales and higher average selling
prices in fiscal 1998, partially offsetting the
19
<PAGE> 20
declines experienced in 900 series etch systems and spare parts sales.
International sales accounted for approximately 72, 61 and 69 percent of total
revenue in fiscal 1999, 1998 and 1997, respectively. The Company expects that
international sales will continue to account for a significant portion of its
revenue.
Gross Profit
The Company's gross profit as a percentage of revenue (gross margin)
declined to 28 percent in fiscal 1999 from 41 percent in fiscal 1998 and 45
percent in fiscal 1997. The gross margin decline in fiscal 1999 as compared to
fiscal 1998 was principally attributable to spreading substantially fixed
manufacturing overhead expenses over significantly fewer systems manufactured
and spare parts revenue. The gross margin decline in fiscal 1998 as compared to
fiscal 1997 was principally attributable to a decline in gross margins in the
service business as the Company invested in additional field service engineering
support for its major 6500 series systems customers that was above and beyond
contractually required installation and warranty support. The Company believes
that such investments are required to support customer's decisions to reorder
its 6500 series systems in the future.
The Company's gross profit as a percentage of revenue has been, and will
continue to be, affected by a variety of factors, including the mix and average
selling prices of systems sold and the costs to manufacture, service and support
new product introductions and enhancements. Gross margins for the Company's new
systems are typically lower than those of its more mature products due to the
inefficiencies associated with the start-up of manufacturing operations, smaller
vendor discounts due to lower order volumes and increased service installation
and warranty support. As a result of such factors and an anticipation that the
semiconductor equipment industry slowdown will continue for several more
quarters, the Company expects that its gross margin is likely to be below 35
percent for fiscal 2000.
Research and Development
Research and development expenses consist primarily of salaries, prototype
material and other costs associated with the Company's research and product
development efforts. In absolute dollars, research and development expenses
decreased to $9.6 million in fiscal 1999 from $11.0 million in fiscal 1998 and
$10.5 million in fiscal 1997. Research and development as a percentage of
revenue increased to 33 percent in fiscal 1999 from 27 percent in fiscal 1998
and 18 percent in fiscal 1997, as the Company continued to enhance and support
its new 6500 series systems in spite of the overall revenue decline in both
fiscal years. The absolute dollar decrease in fiscal 1999 expenses over fiscal
1998 expenses was attributable to reduced spending on salaries and related
expenses due to a reduction in headcount. The Company anticipates that fiscal
2000 research and development expenses in absolute dollars will continue at or
decline slightly from fiscal 1999 levels to permit the Company to support new
product applications at its new 6500 series customer installations and to
further enhance that product line.
Sales and Marketing
Sales and marketing expenses primarily consist of salaries, commissions,
trade show promotion and advertising expenses. In absolute dollars, sales and
marketing expenses declined to $5.2 million in fiscal 1999 from $6.1 million in
fiscal 1998 and $6.2 million in fiscal 1997. As a percentage of revenue, sales
and marketing expenses increased to 18 percent in fiscal 1999 from 15 percent in
fiscal 1998 and 11 percent in fiscal 1997. The absolute dollar declines in sales
and marketing expenses in fiscal 1999 versus fiscal 1998 and in fiscal 1998
versus fiscal 1997 were principally due to declines in systems sales volumes,
resulting in lower commission spending and to reduced spending on advertising.
The Company expects to reduce slightly its absolute dollar spending on sales and
marketing in fiscal 2000 through improved trade show and staffing efficiencies.
General and Administrative
General and administrative expenses consist of salaries, legal, accounting
and related administrative services and expenses associated with general
management, finance, information systems, human resources
20
<PAGE> 21
and investor relations activities. General and administrative expenses in
absolute dollars increased to $8.7 million in fiscal 1999 from $6.6 million in
fiscal 1998 and $6.0 million in fiscal 1997. As a percentage of revenues,
general and administrative expenses increased to 30 percent in fiscal 1999 from
16 percent in fiscal 1998 and 11 percent in fiscal 1997. The absolute dollar
increases in general and administrative expenses in fiscal 1999 over fiscal 1998
and in fiscal 1998 over fiscal 1997 were primarily attributable to the Company
incurring additional legal fees and expenses in connection with its patent
disputes with AMS and TEL. The Company anticipates that its general and
administrative expenses for fiscal 2000 will be somewhat lower than fiscal 1999
spending due primarily to anticipated reductions in legal costs associated with
its intellectual property after the first half of fiscal 2000.
Other Income (Expense), Net
Other income (expense), net, consists principally of interest income,
interest expense, and gains and losses on foreign exchange and the sale of fixed
assets. The Company recorded net non-operating income of $0.4 million, $1.1
million and $1.0 million in fiscal 1999, 1998 and 1997, respectively. In all
three years, net non-operating income was primarily attributable to interest
income on outstanding cash balances.
Provision for Income Taxes
The Company's effective tax rate was 0 percent, 0 percent and 25 percent in
fiscal 1999, 1998 and 1997, respectively. The effective tax rate for fiscal 1997
was materially lower than the statutory tax rate due to extensive operating loss
carryforwards generated in prior years. The Company incurred net losses before
taxes in fiscal 1999 and 1998 and therefore recorded no tax liability in fiscal
1998 and a $0.1 million tax liability in fiscal 1999 associated with its
operations in Japan.
Liquidity and Capital Resources
For fiscal 1999 and 1998, the Company financed its operations from
available cash balances. In fiscal 1997, the Company financed its operations
through cash generated from operations.
Net cash used in operations was $8.8 million in fiscal 1999, due
principally to a net loss of $13.2 million after adjusting for depreciation, a
decline in accrued expenses and accounts payable offset, in part, by a decline
in accounts receivable, inventories and other current assets. Net cash used in
operations was $2.9 million in fiscal 1998, due principally to a net loss of
$3.1 million after adjusting for depreciation, a decline in accrued expenses an
increase in inventories offset, in part, by a decline in accounts receivable.
Net cash provided by operations was $9.1 million in fiscal 1997, due principally
to net income of $5.5 million after adjusting for depreciation and a decrease in
accounts receivable and inventories offset, in part, by a decrease in accounts
payable. Included in net cash from operations were purchase credits for
preferred stock redemptions of $1.6 million in fiscal 1997. Such credits apply
to prior financing from Motorola which was fully repaid in fiscal 1997.
Net capital expenditures totaled $0.1 million, $1.3 million and $1.4
million in fiscal 1999, 1998 and 1997, respectively. Capital expenditures in all
three years were incurred principally for demonstration equipment, leasehold
improvements and to acquire design tools, analytical equipment and computers.
Net cash provided by financing activities totaled $0.2 million for fiscal
1999, due principally to proceeds from the exercise of employee stock options
and the Company's stock purchase plan offset, in part, by the repayment of
borrowings under equipment leases. Net cash provided by or used in financing
activities for fiscal 1998 and 1997 were immaterial.
As of March 31, 1999, the Company had approximately $17.6 million of cash
and cash equivalents. In addition to cash and cash equivalents, the Company's
other principal sources of liquidity consisted of unused portions of several
bank borrowing facilities. At March 31, 1999, the Company had an aggregate
borrowing capacity of $12.5 million available under a domestic line of credit
secured by substantially all of the Company's assets. The facility is available
until August 15, 1999. In addition to the foregoing facility, as of March 31,
1999, the Company's Japanese subsidiary had available two lines of credit
available for a total of
21
<PAGE> 22
390 million Yen (approximately $3.3 million at exchange rates prevailing on
March 31, 1999) unused portion of two Japanese bank lines of credit totaling 450
million Yen (approximately $3.8 million at exchange rates prevailing on March
31, 1999) secured by Japanese customer promissory notes held by such subsidiary
in advance of payment on customers' accounts receivable.
The Company believes that anticipated cash flow from operations, funds
available under its lines of credit and existing cash and cash equivalent
balances will be sufficient to meet the Company's cash requirements for the next
twelve months. See Item 1-- Business -- Additional Risk Factors -- Future
Capital Needs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk Disclosure
The Company is exposed to financial market risks, including changes in
foreign currency exchange ("FX") rates and interest rates. To mitigate the risks
associated with FX rates, the Company utilizes derivative financial instruments.
The Company does not use derivative financial instruments for speculative or
trading purposes.
The Company manufactures the majority of its products in the US; however,
it services customers worldwide and thus has a cost base that is diversified
over a number of European and Asian currencies as well as the US dollar (USD).
This diverse base of local currency costs serves to mitigate partially the
earnings effect of potential changes in value of the Company's local currency
denominated revenue. Additionally, the Company denominates its export sales in
US dollars, whenever possible.
The Company manages short-term exposures to changing FX rates with
financial market transactions, principally through the purchase of forward FX
contracts to offset the earnings and cash-flow impact of the nonfunctional
currency-denominated receivables. Forward FX contracts are denominated in the
same currency as the receivable being covered, and the term of the forward FX
contract matches the term of the underlying receivable. The receivables being
covered arise from trade transactions and other firm commitments affecting the
Company.
The Company does not hedge its foreign currency exposure in a manner that
would entirely eliminate the effects of changes in FX rates on its operations.
Accordingly, the Company's reported revenue and results of operations have been,
and may in the future, be affected by changes in the FX rates. The Company has
utilized a sensitivity analysis for the purpose of identifying its market risk,
in relation to underlying transactions that are sensitive to FX rates including
foreign currency forward exchange contracts and nonfunctional currency
denominated receivables. The net amount that is exposed to changes in foreign
currency rates was evaluated against a 10% change in the value of the foreign
currency versus the US dollar. Based on this analysis, the Company believes that
it is not materially sensitive to changes in foreign currency rates on its net
exposed FX position.
A 42 basis-point move in the weighted average interest rates (10% of
Tegal's weighted average interest rates in 1999) affecting Tegal's floating rate
financial instruments as of March 31, 1999, would have an immaterial effect on
Tegal's pretax results of operations over the next fiscal year.
All of the potential changes noted above are based on sensitivity analyses
performed on the Company's balances as of March 31, 1999.
22
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEGAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1999 1998
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17,569 $25,660
Accounts receivable, less allowance for returns and
doubtful accounts of $264 and $542..................... 4,831 7,482
Inventory................................................. 12,226 14,424
Prepaid expenses and other current assets................. 1,478 2,249
-------- -------
Total current assets.............................. 36,104 49,815
Property and equipment, net................................. 3,185 4,982
Other assets, net........................................... 363 349
-------- -------
$ 39,652 $55,146
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 223 $ 285
Accounts payable.......................................... 2,254 2,691
Accrued expenses and other current liabilities............ 6,329 7,265
-------- -------
Total current liabilities......................... 8,806 10,241
Long term portion of capital lease obligations.............. 30 101
-------- -------
Total liabilities................................. 8,836 10,342
-------- -------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock; $0.01 par value; 5,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock; $0.01 par value; 35,000,000 shares
authorized; 10,725,650 and 10,566,038 shares issued and
outstanding............................................ 107 106
Additional paid-in capital................................ 55,635 55,177
Accumulated other comprehensive income (loss)............. 156 (529)
Accumulated deficit....................................... (25,082) (9,950)
-------- -------
Total stockholders' equity........................ 30,816 44,804
-------- -------
$ 39,652 $55,146
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Revenue..................................................... $ 29,035 $41,472 $57,423
Cost of sales............................................... 20,874 24,377 31,522
-------- ------- -------
Gross profit........................................... 8,161 17,095 25,901
-------- ------- -------
Operating expenses:
Research and development.................................. 9,594 11,048 10,531
Sales and marketing....................................... 5,221 6,107 6,182
General and administrative................................ 8,748 6,613 6,008
-------- ------- -------
Total operating expenses.......................... 23,563 23,768 22,721
-------- ------- -------
Operating income (loss)................................ (15,402) (6,673) 3,180
Other income (expenses), net................................ 405 1,128 1,000
-------- ------- -------
Income (loss) before income taxes...................... (14,997) (5,545) 4,180
Provision for income taxes.................................. 135 -- 1,040
-------- ------- -------
Net income (loss)...................................... $(15,132) $(5,545) $ 3,140
======== ======= =======
Net income (loss) per share:
Basic.................................................. $ (1.42) $ (.54) $ .31
Diluted................................................ $ (1.42) $ (.54) $ .29
Shares used in per share computation:
Basic.................................................. 10,630 10,364 10,124
Diluted................................................ 10,630 10,364 10,764
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT EQUITY
---------- ------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1996..................... 10,064,404 $101 $54,455 $ 615 $ (7,545) $ 47,626
Common stock issued under
option and stock purchase
plans.................... 215,317 2 366 368
Net income (loss).......... 3,140
Cumulative translation
adjustment............... (592)
Total comprehensive income
(loss)................... 2,548
---------- ---- ------- ----- -------- --------
Balances of March 31,
1997..................... 10,279,721 103 54,821 23 (4,405) 50,542
Common stock issued under
option and stock purchase
plans.................... 286,317 356 359
Net income (loss).......... (5,545)
Cumulative translation
adjustment............... (552)
Total comprehensive income
(loss)................... (6,097)
---------- ---- ------- ----- -------- --------
Balances at March 31,
1998..................... 10,566,038 106 55,177 (529) (9,950) 44,804
Common stock issued under
option and stock purchase
plans.................... 159,612 1 458 459
Net income (loss).......... (15,132)
Cumulative translation
adjustment............... 685
Total comprehensive income
(loss)................... (14,447)
---------- ---- ------- ----- -------- --------
Balances at March 31,
1999..................... 10,725,650 $107 $55,635 $ 156 $(25,082) $ 30,816
========== ==== ======= ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(15,132) $(5,545) $ 3,140
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes................................ 239 -- (638)
Depreciation and amortization........................ 1,904 2,299 2,349
Purchase credit for preferred stock redemptions...... -- -- (1,587)
Allowance for doubtful accounts and sales return
allowances........................................ (277) (222) 311
Changes in operating assets and liabilities:
Accounts receivable............................... 2,929 5,062 3,559
Inventory......................................... 2,198 (1,952) 3,967
Prepaid expenses and other assets................. 756 (171) 435
Accounts payable and other current liabilities.... (1,459) (2,343) (2,467)
-------- ------- -------
Net cash provided by (used in) operating
activities...................................... (8,842) (2,872) 9,069
-------- ------- -------
Cash flows used in investing activities for the purchases of
property and equipment.................................... (106) (1,283) (1,427)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 459 359 368
Borrowings under (repayments of) notes payable............ (62) 33 9
Repayment of capital lease financing...................... (224) (348) (386)
-------- ------- -------
Net cash provided by (used in) financing
activities...................................... 173 44 (9)
-------- ------- -------
Effect of exchange rates on cash and cash equivalents....... 684 (552) (593)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (8,091) (4,663) 7,040
Cash and cash equivalents at beginning of year.............. 25,660 30,323 23,283
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 17,569 $25,660 $30,323
======== ======= =======
Supplemental disclosures of cash paid during the year:
Interest.................................................. $ 28 $ 68 $ 118
======== ======= =======
Income taxes.............................................. $ -- $ -- $ 1,727
======== ======= =======
Supplemental disclosure of noncash investing and financing
activities:
Transfer of demo lab equipment between inventory and fixed
assets................................................. $ (249) $ 682 $ 127
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Tegal Corporation (the "Company") designs, manufactures, markets, and
services plasma etch systems used in the fabrication of integrated circuits
("ICs") and related devices in the thin film head, small flat panel and printer
head applications. Etching constitutes one of the principal IC and related
device production process steps and must be performed numerous times in the
production of such devices.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. Intercompany transactions and balances are
eliminated in consolidation. Accounts denominated in foreign currencies are
translated using the foreign currencies as the functional currencies. Assets and
liabilities of foreign operations are translated to U.S. dollars at current
rates of exchange and revenues and expenses are translated using weighted
average rates. Gains and losses from foreign currency transactions are included
as a separate component of other income (expense).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could vary from those estimates, although such
differences are not expected to be material to the financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments having a maturity
of three months or less on the date of purchase to be cash equivalents.
At March 31, 1999 and 1998, all of the Company's investments are classified
as cash equivalents on the balance sheet. The investment portfolio at March 31,
1999 and 1998 is comprised of money market funds. At March 31, 1999 and 1998,
the fair value of the Company's investments approximated cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including
accounts receivable, approximates fair value, due to their relatively short
maturity. The Company has foreign subsidiaries which operate and sell the
Company's products in various global markets. As a result, the Company is
exposed to changes in foreign currency exchange rates. The Company utilizes
hedge instruments, primarily forward contracts to manage its exposure associated
with firm third-party transactions denominated in non-functional currencies. The
Company does not hold derivative financial instruments for speculative purposes.
Forward contracts are considered identifiable hedges and realized and unrealized
gains and losses are deferred until settlement of the underlying commitments.
They are recognized as other gains or losses when a hedged transaction is no
longer expected to occur. Deferred gains and losses were not significant at
March 31, 1999 or 1998. Foreign currency gains and losses included in other
income (expenses) were not significant for the years ended March 31, 1999, 1998
and 1997.
At March 31, 1999, the Company had forward exchange contracts maturing at
various dates throughout fiscal 2000 to exchange 178,338 Yen into $1,427 which
also represented the fair value of these instruments at March 31, 1999. The
counterparties to these contracts consist of U.S. financial institutions.
27
<PAGE> 28
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
The Company enters into foreign exchange options to partially hedge net
accounts receivable or payable U.S. dollar positions on the books of its
subsidiaries which are subject to periodic remeasurement. Foreign exchange
options permit, but do not require, the Company to exchange currencies at a
future date with another party at a contracted exchange rate. The expense of the
premiums paid for such options is amortized on a straight-line basis over the
term of the option (generally two to three months in duration) as a foreign
currency expense. Gains on the options that offset any losses on the underlying
balance sheet exposures are recognized as a foreign exchange gain over the term
of the options. To date, foreign currency gains on foreign exchange options have
been immaterial, and the only expenses incurred have been the premium cost of
the options. At March 31, 1999, the Company had no foreign exchange options
outstanding.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of temporary cash investments and
accounts receivable. Substantially all of the Company's temporary investments
are invested in money market funds. The Company's accounts receivable are
derived primarily from sales to customers located in the U.S., Europe, and the
Far East. The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company maintains reserves for potential
credit losses. Write-offs during the periods presented have been insignificant.
As of March 31, 1999, one customer accounted for approximately 35% of the
accounts receivable balance. As of March 31, 1998, two customers accounted for
approximately 24% and 16% of the accounts receivable balance.
INVENTORY
Inventory is stated at the lower of cost or market, with cost being
determined under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets,
ranging from three to seven years. Leasehold improvements are stated at cost and
are amortized using the straight-line method over the shorter of the estimated
useful life of the improvements or the lease term.
REVENUE RECOGNITION
Product revenue is recognized generally upon shipment, except in Japan
where revenue is generally recognized upon delivery. A provision for
installation costs and estimated future warranty costs is recorded at the time
revenue is recognized. Service revenue is recognized on a monthly basis as
billed, unless services are paid for in advance according to service contracts,
in which case revenue is deferred and recognized over the service period using
the straight-line method.
EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standard No. 128
("SFAS 128"), Earnings Per Share ("EPS"), the Company reports both basic and
diluted EPS on the income statement. Basic EPS is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS is computed using the weighted
average number of common shares outstanding plus any potentially dilutive
securities, except when antidilutive. In computing diluted EPS, the average
stock price for the period is used in determining the number of shares assumed
to be repurchased from proceeds received upon the exercise of stock options.
28
<PAGE> 29
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. The Company's policy is
to grant options with an exercise price equal to the closing market price of the
Company's stock on the grant date. Accordingly, no compensation cost for stock
option grants has been recognized in the Company's statements of operations. The
Company provides additional pro forma disclosures as required under Statement of
Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation" (see Note 7).
COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". Comprehensive income is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
The primary difference between net income and comprehensive income for Tegal, is
due to foreign currency translation adjustments. Comprehensive income is shown
in the statement of stockholders' equity.
SEGMENT REPORTING
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting Segments of a Business Enterprise." SFAS
131 establishes standards for disclosures about products and services,
geographic areas and major customers (see Note 9).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value. In addition,
corresponding derivative gains and losses should be either reported in the
statement of operations or stockholders equity, depending on the type of hedging
relationship that exists with respect to such derivatives. Adopting the
provisions of SFAS 133, which will be effective in fiscal 2001, is not expected
to have a material effect on the Company's consolidated financial statements.
NOTE 2. BALANCE SHEET AND INCOME STATEMENT DETAIL
Inventory consisted of:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Raw materials............................................ $ 2,554 $ 2,050
Work in process.......................................... 1,590 2,053
Finished goods and spares................................ 8,082 10,321
------- -------
$12,226 $14,424
======= =======
</TABLE>
29
<PAGE> 30
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
Property and equipment consisted of:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1999 1998
------- ------
<S> <C> <C> <C>
Machinery and equipment.......................... $ 8,081 $7,990
Demo lab equipment............................... 3,050 3,216
Leasehold improvements........................... 2,976 2,818
------- ------
14,107 14,024
Less accumulated depreciation and amortization... (10,922) (9,042)
------- ------
$ 3,185 $4,982
======= ======
</TABLE>
Machinery and equipment at March 31, 1999 and 1998 includes approximately
$607 and $1,388, respectively, of assets under leases that have been
capitalized. Accumulated amortization for such equipment approximated $523 and
$1,045, respectively.
A summary of accrued expenses and other current liabilities follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1999 1998
------- ------
<S> <C> <C> <C>
Accrued compensation costs....................... $ 1,340 $1,591
Income taxes payable............................. 615 996
Product warranty................................. 1,855 2,256
Other............................................ 2,449 2,422
------- ------
$ 6,259 $7,265
======= ======
</TABLE>
Other income (expenses), net, consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1999 1998 1997
----- ------ ------
<S> <C> <C> <C>
Interest income................................... $ 951 $1,329 $1,250
Interest expense.................................. (28) (68) (118)
Foreign currency exchange gain (loss), net........ (549) (138) (186)
Other............................................. 31 5 54
----- ------ ------
$ 405 $1,128 $1,000
</TABLE>
NOTE 3. EARNINGS PER SHARE
A reconciliation of the numerators and the denominators of the basic and
diluted per share computation is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ---------------------------- ---------------------------
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>
Basic EPS:
Net income available to common
stockholders..................... $(15,132) 10,630 $(1.42) $(5,545) 10,364 $(0.54) $3,140 10,124 $0.31
====== ====== =====
Effects of dilutive securities:
Stock Options...................... -- -- -- -- -- 640
Diluted EPS:
-------- ------ ------- ------ ------ ------
Net income (loss).................. $(15,132) 10,630 $(1.42) $(5,545) 10,364 $(0.54) $3,140 10,764 $0.29
-------- ------ ------ ------- ------ ------ ------ ------ -----
------ ------ -----
</TABLE>
30
<PAGE> 31
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
Options to purchase 2,441,000 and 2,036,000 shares of common stock were
outstanding at March 31, 1999 and 1998, respectively, but were not included in
the computation of diluted EPS as the Company was in a loss situation and to do
so would have been antidilutive. Options to purchase 53,000 shares of common
stock were outstanding at March 31, 1997, but were not included in the
computation of diluted EPS as their average exercise price was higher than the
average market price of the stock.
NOTE 4. NOTES PAYABLE TO BANKS AND OTHERS
The Company has a line of credit totaling $12,500 with one U.S. bank. The
line bears interest at prime (8.25 percent as of March 31, 1999), is secured by
a blanket security in all of the Company's assets, and is available until August
15, 1999. No amount was outstanding on this line of credit at March 31, 1999 and
1998. The line of credit restricts the declaration and payment of cash dividends
and includes, among other terms and conditions, requirements that the Company
maintain certain financial ratios and covenants. The Company was in compliance
with such covenants as of March 31, 1999 and 1998.
The Company's Japanese subsidiary has two lines of credit available for
300,000 Yen and 150,000 Yen (approximately $2,524 and $1,262, respectively, at
exchange rates prevailing as of March 31, 1999), bearing interest at 0.25
percent and 0.5 percent, in excess of Japanese prime (1.375 percent as of March
31, 1999). The lines of credit are available until June 30, 2000 and November
30, 1999, and are secured by Japanese customer promissory notes provided in
advance of payment. Outstanding balances on these lines in U.S. dollars as of
March 31, 1999 and 1998, were $223 and $285, respectively.
NOTE 5. INCOME TAXES
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Domestic...................................... $(14,563) $(6,760) $3,400
Foreign....................................... (434) 1,215 780
-------- ------- ------
$(14,997) $(5,545) $4,180
======== ======= ======
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Current:
U.S. federal................................ $ (257) $ (939) $1,143
State and local............................. -- -- 432
Foreign..................................... 153 -- 103
-------- ------- ------
(104) (939) 1,678
-------- ------- ------
Deferred:
U.S. federal................................ 239 939 (589)
State and local............................. -- -- (49)
-------- ------- ------
239 939 (638)
-------- ------- ------
Total............................... $ 135 $ -- $1,040
======== ======= ======
</TABLE>
31
<PAGE> 32
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
The income tax provision differs from the amount computed by applying the
statutory U.S. federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Income tax provision at U.S. statutory rate.... $(5,099) $(1,885) $1,424
State taxes net of federal benefit............. (874) (323) 254
Utilization of foreign losses.................. -- (633) --
Reversal of deferred tax assets previously
reserved..................................... -- -- (178)
Utilization of net operating losses............ 638 1,621 --
Increase (reduction) in valuation allowance.... 5,419 1,161 (460)
Other.......................................... 51 59 --
------- ------- ------
Income tax expense........................... $ 135 $ -- $1,040
======= ======= ======
</TABLE>
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Revenue recognized for tax and deferred for book........ $ 344 $ 378
Non-deductible accruals and reserves.................... 2,435 2,702
Foreign net operating loss carryforward................. 458 968
Domestic net operating loss carryforward................ 5,212 --
Credits................................................. 2,101 1,550
Uniform cap adjustment.................................. 139 130
Other................................................... 193 (26)
-------- -------
Total.............................................. 10,882 5,702
Valuation allowance..................................... (10,882) (5,463)
======== =======
Net deferred tax asset........................ $ -- $ 239
======== =======
</TABLE>
The Company has recorded net deferred tax assets of approximately $0 and
$239 at March 31, 1999 and 1998, respectively. Management's evaluation of the
recoverability of the March 31, 1998 deferred tax was based upon the Company's
ability to carry back temporary differences for future tax deductions against
previously taxed income.
At March 31, 1999, the Company had federal operating loss carryforwards of
approximately $13,150, which begin to expire in the year ending March 31, 2020.
32
<PAGE> 33
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company has several noncancelable operating leases and capital leases,
primarily for general office, production, and warehouse facilities, that expire
over the next five years. Future minimum lease payments under these leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
--------------------
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2000...................................................... $ 75 $1,941
2001...................................................... 30 1,713
2002...................................................... 2 38
2003...................................................... -- 13
2004...................................................... -- --
---- ------
Total minimum lease payments.............................. 107 $3,705
======
Less amount representing interest......................... (7)
----
$100
====
</TABLE>
The above schedule of minimum payments excludes minimum annual sublease
rentals payable to the Company totaling $300 through January 31, 2001, under
operating subleases. In addition, most leases provide for the Company to pay
real estate taxes and other maintenance expenses. Rent expense for operating
leases was $2,069, $1,949, and $2,406 during the years ended March 31, 1999,
1998, and 1997, respectively.
NOTE 7. EMPLOYEE BENEFIT PLANS
EQUITY INCENTIVE PLAN
Pursuant to the Amended and Restated Equity Incentive Plan ("Equity
Incentive Plan"), options and stock purchase rights to purchase 3,500,000 shares
of common stock may be granted to management and consultants. The exercise price
of options and the purchase price of stock purchase rights generally is the fair
value of the Company's common stock on the date of grant. At the date of
issuance of the stock options, all options are exercisable; however the Company
has the right to repurchase any stock acquired pursuant to the exercise of stock
options upon termination of employment or consulting agreement at the original
exercise price for up to four years from the date the options were granted, with
the repurchase rights ratably expiring over that period of time. Incentive stock
options are exercisable for up to 10 years from the grant date of the option.
Nonqualified stock options are exercisable for up to 15 years from the grant
date of the option. As of March 31, 1999, 120,280 shares were available for
issuance under the Equity Incentive Plan.
1990 STOCK OPTION PLAN
Pursuant to the terms of the Company's 1990 Stock Option Plan ("Option
Plan"), options and stock purchase rights to purchase 550,000 shares of common
stock may be granted to employees of the Company or its affiliates. Incentive
stock options are exercisable for a period of up to 10 years from the date of
grant of the option and nonqualified stock options are exercisable for a period
of up to 10 years and 2 days from the date of grant of the option. At the date
of issuance of the stock options, all options are exercisable; however, the
Company has the right to repurchase any stock acquired pursuant to the exercise
of stock options upon termination of employment at the original exercise price
for up to four years from the date the options were granted, with the repurchase
rights ratably expiring over that period of time. As of March 31, 1999, 70,281
shares were available for issuance under the Option Plan.
33
<PAGE> 34
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
1998 EQUITY PARTICIPATION PLAN
Pursuant to the terms of the Company's 1998 Equity Participation Plan
("Equity Plan"), which was authorized as a successor plan to the Company's
Equity Incentive Plan and Option Plan, 600,000 shares of common stock may be
granted upon the exercise of options and stock appreciation rights or upon the
vesting of restricted stock awards. The exercise price of options generally will
be the fair value of the Company's common stock on the date of grant. Options
are generally subject to vesting at the discretion of the Compensation Committee
of the Board of Directors (the "Committee"). At the discretion of the Committee,
vesting may be accelerated when the fair market value of the Company's stock
equals a certain price established by the Committee on the date of grant.
Incentive stock options will be exercisable for up to 10 years from the grant
date of the option. Non-qualified stock options will be exercisable for a
maximum term to be set by the Committee upon grant. As of March 31, 1999, all
600,000 shares were available for issuance under the Equity Plan.
DIRECTORS STOCK OPTION PLAN
Pursuant to the terms of the Amended Stock Option Plan for Outside
Directors ("Directors Plan"), up to 300,000 shares of common stock may be
granted to Directors. Under the Directors Plan, each Outside Director who was
elected or appointed to the Board on or after September 15, 1998, shall be
granted an option to purchase 20,000 shares of common stock and on each
secondary anniversary after the applicable election or appointment shall receive
an additional option to purchase 20,000 shares, provided that such outside
director continues to serve as an outside director on that date. 10,000 shares
each will vest on the first and second anniversaries of the option grant date,
contingent upon continued service as a director. Vesting may be accelerated, at
the discretion of the Board, when the fair market value of the Company's stock
equals a certain price set by the Board on the date of grant of the option. As
of March 31, 1999, 100,000 shares were available for issuance under the
Directors Plan.
The following table summarizes the Company's stock option activity for the
three plans described above and weighted average exercise price within each
transaction type for each of the years ended March 31, 1999, 1998, and 1997
(number of shares in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of year......................... 2,036 $5.46 1,413 $4.36 1,163 $4.90
Options canceled.................. (184) 6.23 (101) 6.07 (183) 9.52
Options granted................... 742 2.15 942 6.01 595 5.50
Options exercised................. (62) 1.31 (219) 0.47 (162) 0.33
----- ----- ----- ----- ----- -----
Options outstanding March 31...... 2,532 $4.53 2,036 $5.46 1,413 $4.36
===== ===== ===== ===== ===== =====
</TABLE>
At March 31, 1999, the repurchase right associated with 790,470 of the
options outstanding had elapsed.
34
<PAGE> 35
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
Significant option groups outstanding at March 31, 1999, and related
weighted average exercise price of options granted for which the Company no
longer has the right to repurchase and contractual life information are as
follows (number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS IN WHICH
UNDERLYING SHARES
NO LONGER SUBJECT
OUTSTANDING TO REPURCHASE RIGHTS
--------------- --------------------- REMAINING
EXERCISE PRICE RANGE SHARES PRICE SHARES PRICE LIFE (YEARS)
- -------------------- ------ ------ --------- --------- ------------
<S> <C> <C> <C> <C> <C>
$ .24 - $ .53 216 $ .48 115 $ .50 4.51
$1.50 - $3.38 692 2.19 4 1.50 13.91
$4.25 - $5.50 993 4.73 381 5.07 8.64
$6.13 - $6.25 119 6.20 52 6.20 10.35
$6.88 - $8.75 453 8.19 180 7.64 10.25
$12.00 59 12.00 59 12.00 7.05
</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 assumptions are included in the estimated grant date fair
value calculations for the Company's stock option awards and Employee Qualified
Stock Purchase Plan ("Employee Plan"):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected life (years):
Stock options........................................ 4.0 4.0 4.0
Employee plan........................................ 0.5 0.5 0.5
Risk-free interest rate................................ 5.20% 6.16% 6.07%
Volatility............................................. 75% 60% 60%
Dividend yield......................................... 0% 0% 0%
</TABLE>
The weighted average estimated grant date fair value, as defined by SFAS
123, for options granted during 1999, 1998 and 1997 was $1.27, $2.66 and $3.67
per option, respectively. The estimated fair value, as defined by SFAS 123,
attributable to options canceled and reissued during 1999, 1998 and 1997 were
$0, $0 and $1.53 per option, respectively.
STOCK PURCHASE PLAN
The Company has offered an Employee Plan under which rights are granted to
purchase shares of common stock at 85% of the lesser of the market value of such
shares at the beginning of a six month offering period or at the end of that six
month period. Under the Employee Plan, the Company is authorized to grant
options to purchase up to 250,000 shares of common stock. 97,541 common stock
shares were purchased in fiscal 1999 and 61,371 common shares were purchased in
1998. Shares available for future purchase under the Employee Plan were 37,455
at March 31, 1999.
35
<PAGE> 36
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
Compensation cost (included in pro forma net income and net income per
share amounts only) for the grant date fair value, as defined by SFAS 123, of
the purchase rights granted under the Employee Plan was calculated using the
Black-Scholes model. The weighted average estimated grant date fair value per
share, as defined by SFAS 123, for rights granted under the Employee Plan for
stock purchased under the Employee Plan during 1999, 1998 and 1997 were $1.48,
$1.47 and $3.69, respectively.
PRO FORMA NET INCOME AND NET INCOME PER SHARE
Had the Company recorded compensation costs based on the estimated grant
date fair value (as defined by SFAS 123) for awards granted under its stock
option plans and stock purchase plan, the Company's net income and earnings per
share would have been reduced to the pro forma amounts below for the years ended
March 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Pro forma net income (loss)................... $(16,895) $(6,674) $1,865
Pro forma net income (loss) per share:
Basic....................................... $ (1.59) $ (0.64) $ 0.18
Diluted..................................... $ (1.59) $ (0.64) $ 0.17
</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 1999, 1998 and 1997 is not necessarily representative of the pro forma
effect on net income in future years.
SAVINGS AND INVESTMENT PLAN
The Company has established a defined contribution plan that covers
substantially all U.S. employees who are regularly scheduled to work 20 or more
hours per week. Employee contributions of up to 4% of each covered employee's
compensation will be matched by the Company based upon a percentage to be
determined annually by the Board of Directors ("Board"). Employees may
contribute up to 15 percent of their compensation, not to exceed a prescribed
maximum amount. The Company made contributions to the plan of $27, $31 and $28
in the years ended March 31, 1999, 1998, and 1997, respectively.
NOTE 8. SHAREHOLDER RIGHTS PLAN
On June 11, 1996, the Board adopted a Preferred Shares Rights Agreement
("Agreement") and pursuant to the Agreement authorized and declared a dividend
of one preferred share purchase right ("Right") for each common share of the
Company's outstanding shares at the close of business on July 1, 1996. The
Rights are designed to protect and maximize the value of the outstanding equity
interests in the Company in the event of an unsolicited attempt by an acquirer
to take over the Company, in a manner or under terms not approved by the Board.
Each Right becomes exercisable to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock at an exercise price of $45.00
upon certain circumstances associated with an unsolicited takeover attempt and
expires on June 11, 2006. The Company may redeem the Rights at a price of $0.01
per Right.
36
<PAGE> 37
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 9. SEGMENT REPORTING
The Company operates in one segment comprising the design, manufacturing
and servicing of plasma etch systems used in the manufacturing of integrated
circuits and related devices.
The following is a summary of the Company's operations:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Sales to customers located in:
United States............................ $ 8,111 $16,045 $17,795
Asia..................................... 2,669 11,110 18,640
Europe................................... 6,657 8,667 10,061
Japan.................................... 11,598 5,650 10,927
------- ------- -------
Total external sales................ $29,035 $41,472 $57,423
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C> <C>
Identifiable assets at year-end:
United States............................... $38,986 $55,326
Europe...................................... 8,405 8,819
Japan....................................... 7,623 4,424
Consolidation eliminations.................. (15,362) (13,423)
------- -------
Total identifiable assets........... $39,652 $55,146
======= =======
</TABLE>
The Company's sales are primarily to domestic and international
semiconductor manufacturers. The top five customers accounted for approximately
41%, 41%, and 46% of the Company's total net sales for the years ended March 31,
1999, 1998, and 1997, respectively. No customer accounted for 10% or more of net
sales for the year ended March 31, 1999, one customer accounted for
approximately 16% of net sales for the year ended March 31, 1998, and two
customers accounted for 17% and 10%, respectively, of the Company's net sales
for the year ended March 31, 1997.
NOTE 10. RELATED PARTY TRANSACTIONS
Included in prepaids at March 31, 1999, was a note receivable for $230 from
an employee for an advance made by Tegal to the employee. This amount was repaid
in full on April 5, 1999. There were no such transactions in fiscal 1998.
37
<PAGE> 38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Tegal Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) and (2) on page 40 present fairly, in all material
respects, the financial position of Tegal Corporation and its subsidiaries at
March 31, 1999 and 1998 and the results of its operations and cash flows for
each of the three years in the period ended March 31, 1999 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
April 28, 1999
38
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") no later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement under the caption
"Election of Directors."
The information required by this Item relating to the Company's executive
officers is included under the caption "Executive Officers of the Registrant" in
Part I, Item 4, of this Form 10-K Report.
The information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the Company's
Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the captions "Principal Stockholders" and
"Ownership of Stock by Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Certain Transactions."
39
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements
The Company's Financial Statements and notes thereto appear on this Form
10-K according to the following Index of Consolidated Financial
Statements:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of March 31, 1999 and 1998... 23
Consolidated Statements of Operations for the years ended
March 31, 1999, 1998 and 1997............................. 24
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1999, 1998 and 1997................. 25
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997............................. 26
Notes to Consolidated Financial Statements.................. 27
Report of Independent Accountants........................... 38
</TABLE>
(2) Financial Statement Schedule
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ S-1
</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
- ------- -----------
<C> <S>
3.1 Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibits 3(i).1 and 3(i).2
included in Registrant's Registration Statement on Form S-1
(File No. 33-84702) declared effective by the Securities and
Exchange Commission on October 18, 1995)
3.2 By-laws of Registrant (incorporated by reference to Exhibit
3(ii) included in Registrant's Registration Statement on
Form S-1 (File No. 33-84702) declared effective by the
Securities and Exchange Commission on October 18, 1995)
*4.1 Form of Certificate For Common Stock
*4.2 Information and Registration Rights Agreement between the
Registrant and the investors listed on Schedule A thereto
dated December 19, 1989, as amended to date
*10.1 Amended and Restated Equity Incentive Plan
*10.2 1990 Stock Option Plan
*10.4 Employee Qualified Stock Purchase Plan
10.5 Amended and Restated Stock Option Plan for Outside Directors
(incorporated by reference to Appendix B to the Proxy
Statement for the Registrant's 1998 Annual Meeting of
Stockholders filed with the SEC on July 29, 1998 (Commission
File No. 0-26824))
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.10 Employment Agreement between the Registrant and Stephen P.
DeOrnellas dated December 16, 1997 (incorporated by
reference to Exhibit 10.10 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1998 filed
with the SEC on May 20, 1998 (Commission File No. 0-26824))
*10.11 Lease dated August 15, 1986, as amended, between the
Registrant and South McDowell Investments
*10.12 Technology License Agreement between the Registrant and
Motorola, Inc. dated December 19, 1989
10.14 Security and Loan Agreement between the Registrant and
Imperial Bank dated as of August 15, 1998
*10.15 Supplemental Source Code License Agreement with the
Registrant and Realtime Performance, Inc. dated as of
November 1, 1991
10.18 Employment Agreement between Registrant and Michael L.
Parodi dated as of December 17, 1997 (incorporated by
reference to Exhibit 10.18 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1998 filed
with the SEC on May 20, 1998 (Commission File No. 0-26824))
10.19 1998 Equity Participation Plan (incorporated by reference to
Appendix A to the Proxy Statement for the Registrant's 1998
Annual Meeting of Stockholders filed with the SEC on July
29, 1998 (Commission File No. 0-26824))
*21 List of Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
24.1 Power of Attorney (included on page 42 of this Report)
27.1 Financial Data Schedule
</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.
A current report on Form 8-K regarding an amendment to the Company's
stockholders' rights plan was filed with the SEC on January 15, 1999.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEGAL CORPORATION
By: /s/ MICHAEL L. PARODI
------------------------------------
Michael L. Parodi
Chairman, President & Chief
Executive Officer
Dated: June 25, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael L. Parodi and David Curtis,
jointly and severally, his attorneys-in-fact, each with the powers of
substitution, for him in any and all capacities, to sign any amendments to this
Report of Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ MICHAEL L. PARODI Chairman, President, June 25, 1999
- -------------------------------------- Chief Executive Officer and Director
Michael L. Parodi (Principal Executive Officer)
/s/ DAVID CURTIS Chief Financial Officer June 25, 1999
- -------------------------------------- (Principal Financial Officer)
David Curtis
/s/ KATHY PETRINI Corporate Controller June 25, 1999
- -------------------------------------- (Principal Accounting Officer)
Kathy Petrini
/s/ FRED NAZEM Director June 25, 1999
- --------------------------------------
Fred Nazem
/s/ JEFFREY KRAUSS Director June 25, 1999
- --------------------------------------
Jeffrey Krauss
/s/ THOMAS R. MIKA Director June 25, 1999
- --------------------------------------
Thomas R. Mika
/s/ EDWARD A. DOHRING Director June 25, 1999
- --------------------------------------
Edward A. Dohring
</TABLE>
42
<PAGE> 43
SCHEDULE II
TEGAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1998, 1999
(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, 1997:
Product warranty...................... $2,586 $4,406 $(118) $(4,623) $2,251
Doubtful accounts..................... 361 13 -- (54) 320
Sales returns and allowances.......... 83 532 (1) (211) 403
Cash discounts........................ 9 51 -- (19) 41
Year ended March 31, 1998:
Product warranty...................... 2,251 2,706 (31) (2,670) 2,256
Doubtful accounts..................... 320 154 -- (177) 297
Sales returns and allowances.......... 444 214 -- (420) 238
Cash discounts........................ 41 31 -- (65) 7
Year ended March 31, 1999:
Product warranty...................... 2,256 1,375 (57) (2,219) 1,355
Doubtful accounts..................... 297 35 -- (130) 202
Sales returns and allowances.......... 238 (25) -- (170) 43
Cash discounts........................ 7 49 -- (37) 19
</TABLE>
S-1
<PAGE> 44
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.14 Security and Loan Agreement between Registrant and Imperial
Bank dated as of August 15, 1998
23.1 Consent of Independent Accountants
24.1 Power of Attorney (included on page 42)
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10.14
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is made and
entered into as of August 15, 1998 ("AGREEMENT"), by and among IMPERIAL BANK
("IMPERIAL"), as Collateral Agent and a Bank, the BANKS, and TEGAL CORPORATION,
a Delaware corporation ("BORROWER"). This Agreement amends, restates and
supersedes in its entirety the Prior Loan Agreement (as hereinafter defined).
RECITALS
A. Borrower, Imperial and Sanwa Bank California ("SANWA") entered
into a certain Loan and Security Agreement dated as of August 15, 1997 (the
"PRIOR LOAN AGREEMENT"), pursuant to which Imperial and Sanwa agreed to extend
and make revolving loans available to Borrower thereunder.
B. Borrower and Imperial desire to amend and restate the Prior Loan
Agreement in its entirety to, among other things, remove Sanwa as a Bank
thereunder, reduce the amount of the Committed Revolving Line and to modify
certain covenants and reporting requirements of the Borrower, all as more fully
set forth herein. There are currently no Advances outstanding under the
Committed Revolving Line.
C. Imperial has agreed to continue to make and maintain the
Committed Revolving Line as described in this Agreement, but only upon the terms
and subject to the conditions hereinafter set forth and in reliance on the
representations and warranties set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants hereinafter set forth, and intending to be legally bound, the
parties hereby 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.
1.
<PAGE> 2
"AFFILIATE" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, any Person that controls or is
controlled by 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.
"BANK" or "BANKS" means Imperial and/or the banks, financial
institutions and other institutional lenders which have executed signature pages
to this Agreement and such other assignee as shall hereafter execute and deliver
an Assignment and Acceptance with respect to all or any portion of the Committed
Revolving Line and the Advances made and maintained pursuant to the Committed
Revolving Line, in each case pursuant to and in accordance with SECTION 13.4(B),
or otherwise become a party to this Agreement.
"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.
"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 Twelve Million Five Hundred Thousand
Dollars ($12,500,000.00).
"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 credit or 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.
2.
<PAGE> 3
"CURRENT LIABILITIES" means, as of any applicable date, all amounts that
should, in accordance with GAAP, be included as current liabilities on the
consolidated balance sheet of 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 Obligations 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 regulations 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.
"IP SECURITY AGREEMENT" means that certain Collateral Assignment, Patent
Mortgage and Security Agreement dated of even date herewith, entered into by and
between Borrower and Imperial.
"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,
3.
<PAGE> 4
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 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, and Borrower's Books relating
to any of the foregoing.
"INVESTMENT" 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, the Note or any
other note or notes executed by Borrower in favor of any Bank in connection with
this Agreement, the IP Security Agreement and any other agreement or document
delivered by Borrower or entered into between Borrower and Imperial or any other
Bank in connection with this Agreement, in each case as originally executed or
as the same may from time to time be modified, amended, supplemented or
restated.
"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.
"NOTE" means that certain Note dated of even date herewith in the
principal amount of Twelve Million Five Hundred Thousand Dollars
($12,500,000.00), made by Borrower and payable to the order of Imperial.
"OBLIGATIONS" means all debt, principal, interest, Bank Expenses and
other amounts or obligations owed to any Bank 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 any 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 13.6 hereof.
"PERIODIC PAYMENTS" means all installments or similar recurring payments
that Borrower may now or hereafter become obligated to pay to the Banks pursuant
to the terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrower and the Banks.
"PERMITTED INDEBTEDNESS" means:
4.
<PAGE> 5
(a) Indebtedness of Borrower in favor of the 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 Borrower's Board of Directors;
(i) Extensions, renewals or refinancings of Indebtedness
permitted under this Agreement, other than clause (d) above; and
(j) Other Indebtedness in the aggregate amount not exceeding
One Million Five Hundred Thousand Dollars ($1,500,000.00).
"PERMITTED INVESTMENTS" 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 the 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 any 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 any Bank's security interests;
5.
<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 the variable rate of interest, per annum, most
recently announced by Imperial, as its "prime rate," as applicable to the
Advances made hereunder by Imperial whether or not such announced rate is the
lowest rate available from Imperial.
"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.
6.
<PAGE> 7
"RESPONSIBLE OFFICER" means each of the Chief Executive Officer, the
Chief Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" means August 15, 1999.
"SCHEDULE" means the Schedule of Exceptions attached hereto as SCHEDULE
1.
"SUBORDINATED DEBT" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to the Banks on terms reasonably
acceptable to the Banks (and identified as being such by Borrower and the
Banks), where the subordinated lender has executed a subordination agreement (in
a form provided by the Banks) in favor 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 or through an Affiliate.
"TANGIBLE NET WORTH" means at any date as of which the amount thereof
shall be determined, (1) the consolidated total assets of Borrower and its
Subsidiaries minus, without duplication, the sum of any amounts attributable to
(i) goodwill, (ii) intangible items such as unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (iii) all reserves not already
deducted from assets, minus (2) 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.
"YEAR 2000 COMPLIANT" means, in regard to Borrower or any Person, that
all software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of Borrower or such
Person, will properly perform date sensitive functions before, during and after
the year 2000.
"YEAR 2000 PROBLEM" means the risk that any computer applications used
by Borrower and its Subsidiaries may be unable to recognize and properly perform
date-sensitive functions involving certain dates prior to and any date on or
after December 31, 1999.
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.
7.
<PAGE> 8
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 Loan Payment/Advance Telephone Request Form in
substantially the form of EXHIBIT B attached hereto ("ADVANCE FORM"). 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 the Note, in the form attached hereto as EXHIBIT C.
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.
(a) FOREIGN EXCHANGE USAGE AND SUBLIMIT. Subject to the
availability of the Committed Revolving Line and in reliance on the
representations and warranties of Borrower set forth herein, at any time and
from time to time from the date hereof through the Banking Day immediately prior
to the Revolving Maturity Date, Imperial shall arrange the purchase by Borrower
of foreign exchange futures contracts ("EXCHANGE CONTRACTS") as Borrower may
request, which request shall be made by delivering to Imperial a duly executed
exchange contract application on Imperial's standard form; provided, however,
that the maximum aggregate notional contract amount under all such Exchange
Contracts shall not at any time exceed $15,000,000.00 and provided, further,
that Imperial shall only advance up to ten percent (10.0%) of said maximum
aggregate notional contract amount under all such Exchange Contracts, the
amounts so advanced of which shall be deemed to constitute outstanding Advances
for the purpose of calculating availability under the Committed Revolving Line.
Unless Borrower shall have deposited with Imperial cash collateral in an amount
sufficient to cover all undrawn amounts under each such Exchange Contract and
Imperial shall have agreed in writing, no Exchange Contract shall have a due
date that is later than the Revolving Maturity Date. All Exchange Contracts
shall be in form and substance acceptable to Bank Imperial in its sole
discretion and shall be subject to the terms and conditions of Imperial's form
exchange contract application. Borrower will pay any standard issuance and other
fees that Imperial notifies Borrower will be charged for issuing and processing
Exchange Contracts for Borrower. After and during the continuance of an Event of
Default, Imperial may, in its sole and absolute discretion, terminate any or all
of the Exchange Contracts. Borrower agrees to indemnify and hold harmless
Imperial from and against all loss, costs and expense associated with any such
termination of any Exchange Contract.
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.
(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) (1) 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
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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 the 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 the Banks as
necessary to ensure a sharing of all amounts received by Imperial or Collateral
Agent as set forth in SECTION 13.6. 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 Collateral 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 Bank 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 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 such Bank after 2:00 p.m.
Pacific time shall be deemed to have been received by a 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 the Banks the following:
(a) CLOSING FEE. A Closing Fee equal to Twenty-Five Thousand
Dollars ($25,000.00), which fee shall be payable to Imperial on the Closing Date
and shall be fully earned and non-refundable;
(b) FACILITY FEE. A Facility Fee equal to one-half of one
percent (0.50%) per annum of the average unused amount of the Committed
Revolving Line, which fee shall be due quarterly, beginning with the quarter
ending December 31, 1998, and payable in arrears to each Bank based upon such
Bank's Percentage Share of the Committed Revolving Line. Notwithstanding the
foregoing,
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Borrower shall also pay to Imperial on September 30, 1998, a
pro-rated Facility Fee covering the period from August 15, 1998 through
September 30, 1998;
(c) FINANCIAL EXAMINATION AND APPRAISAL FEES. Each 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 the Collateral and financial
analysis and examination of Borrower performed from time to time and, if an
Event of Default does not exist, 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 any 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) imposes 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, the 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
the Banks shall retain their Lien on the Collateral which shall remain in effect
for so long as any Obligations are outstanding.
SECTION 3. CONDITIONS OF LOANS.
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3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of any
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;
(c) a certificate of the Secretary of State of Delaware and
California with respect to Borrower's standing (and foreign qualification) in
said states;
(d) financing statement amendments (Form 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 the Banks may reasonably request prior to the Closing Date.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of any Bank
to make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) receipt by each Bank of the 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 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 the 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 any Collateral acquired after the date
hereof. From and after an Event of Default, Borrower acknowledges that the Banks
may place 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 any
Bank, all Negotiable Collateral, all
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financing statements and other documents that any Bank may reasonably request,
in form satisfactory to such Bank, to perfect and continue perfected such Bank's
security interests in the Collateral.
4.3 RIGHT TO INSPECT. Any 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.
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 requires 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 conducted 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 or 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 any 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 the 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 the Banks,
which in the reasonable determination of the Banks has a Material Adverse
Effect. Notwithstanding the foregoing, if Borrower suffers any losses as
described in SECTIONS 6.11 and/or 6.12 hereof, but remains in compliance with
said financial covenants, the Banks
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agree that such losses will not, in and of themselves, be considered to
constitute as having a Material Adverse Effect on Borrower's financial
condition.
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 have met the
minimum funding requirements of ERISA with respect to any applicable employee
benefit plans subject to ERISA. No event 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 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 each 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 the Banks
contains any untrue statement of a material
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fact or omits to state a material fact necessary in order to make the statements
contained in such certificates or statements not misleading.
5.15 YEAR 2000 PROBLEM. Borrower and its Subsidiaries have reviewed
the areas within their operations and business which could be adversely affected
by, and have developed or are developing a program to address on a timely basis,
the Year 2000 Problem and have made related appropriate inquiry of material
suppliers and vendors, and based on such review and program, the Year 2000
Problem will not have a Material Adverse Effect upon its financial condition,
operations or business as now conducted.
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 any Bank's Lien on
the Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to the Banks: (a) as soon as available, but in any event within
forty-five (45) days after the end of each fiscal quarter, a company prepared
consolidated and consolidating balance sheet 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 in any
event within one hundred twenty (120) days after the end of Borrower's fiscal
year, audited consolidated and unaudited 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 of Subordinated
Debt 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 Fifty Thousand Dollars ($250,000.00) or more; and (e)
upon the reasonable request of any Bank, such budgets, sales projections,
operating plans, consolidating financial statements or other financial
information as such Bank may reasonably request from time to time.
Borrower shall deliver to the Banks with the quarterly financial
statements a Compliance Certificate signed by a Responsible Officer in
substantially the form of Exhibit D attached hereto.
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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 the Banks of all returns and
recoveries and of all disputes and claims, where the return, recovery, dispute
or claim involves more than Two Hundred Fifty Thousand Dollars ($250,000.00).
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 each Bank, 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 income 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 amounts as reasonably satisfactory to the
Banks. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to the Banks, showing the Banks as
additional loss payees thereof and all liability insurance policies shall show
the Banks as additional insureds, and shall specify that the insurer must give
at least twenty (20) days notice to the Banks before canceling its policy for
any reason. Borrower shall deliver to the Banks certified copies of such
policies of insurance and evidence of the payments of all premiums therefor. All
proceeds payable under any such policy shall, at the option of the Banks, be
payable to the Banks to be applied on account of the Obligations.
6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal
depository and operating accounts, other than cash management accounts, with
Imperial or Collateral Agent.
6.8 QUICK RATIO. Borrower shall maintain on a consolidated basis, as
of the last day of each fiscal quarter, a ratio of Quick Assets to Current
Liabilities of at least 1.75 to 1.00.
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6.9 DEBT-NET WORTH RATIO. Borrower shall maintain on a consolidated
basis, as of the last day of each fiscal quarter, 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 on a consolidated
basis, as of the last day of each fiscal quarter, a Tangible Net Worth of not
less than Twenty-Eight Million Dollars ($28,000,000.00).
6.11 MAXIMUM QUARTERLY LOSSES. Borrower shall not suffer a pre-tax
loss in excess of: (a) Six Million Five Hundred Thousand Dollars
($6,500,000.00), measured as of the end of each fiscal quarter for the two
quarter period ending September 30, 1998, (b) Seven Million One Hundred Thousand
Dollars ($7,100,000.00), measured as of the end of each fiscal quarter for the
two quarter period ending December 31, 1998, (c) Eight Million Two Hundred
Thousand Dollars ($8,200,000.00), measured as of the end of each fiscal quarter
for the two quarter period ending March 31, 1999 and (d) Six Million Eight
Hundred Thousand Dollars ($6,800,000.00), measured as of the end of each fiscal
quarter for the two quarter period ending June 30, 1999. For purposes of these
calculations, the pre-tax loss shall exclude (1) non-recurring income and
expenses as determined by the Banks and (2) research and development costs in
excess of Five Million Dollars ($5,000,000) for the two quarter period then
ended.
6.12 MAXIMUM ANNUAL LOSSES. Beginning with the fiscal year ending
March 31, 1999, Borrower shall not suffer a pre-tax loss in excess of Fifteen
Million Dollars ($15,000,000.00), measured as of the end of the fiscal year then
ended. For purposes of this calculation, the pre-tax loss shall exclude (a)
non-recurring income and expenses as determined by the Banks and (b) research
and development costs in excess of Ten Million Dollars ($10,000,000.00) for the
two quarter period then ended.
6.13 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 the 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 each Bank:
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) Transfers 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 ($1,500,000.00) 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 each Bank, relocate its chief executive office.
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<PAGE> 17
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 Ten Million Dollars ($10,000,000.00) 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 Ten Million Dollar
($10,000,000.00) 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 the Banks such documentation, in form and substance satisfactory
to the Banks, as the Banks may request to perfect their security interest in
such assets.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness or any Contingent Obligations, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign 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 ($5,000,000.00)
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 ($11,000,000.00)
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 of 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 the Banks' prior written consent.
7.11 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless the Banks have 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 the Banks may approve in
writing, Borrower shall keep the Inventory only at the locations set forth on
SCHEDULE 2 attached hereto and such other locations of which Borrower gives the
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 the Banks.
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7.12 CAPITAL EXPENDITURES. Except as permitted under SECTION 7.3,
make capital expenditures in excess of Two Million Five Hundred Thousand Dollars
($2,500,000.00) 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.
7.14 YEAR 2000 COMPLIANCE. Borrower shall perform all acts reasonably
necessary (a) to ensure that Borrower, its Subsidiaries and any business in
which Borrower holds a substantial interest, become Year 2000 Compliant in a
timely manner and (b) to the extent that a failure of any of Borrower's
customers, suppliers and vendors to become Year 2000 Compliant would have a
Material Adverse Effect on Borrower's business, to ensure that such customers,
suppliers and vendors become Year 2000 Compliant in a timely manner. Such acts
shall include, without limitation, performing a comprehensive review and
assessment of all of Borrower's systems and adopting a detailed plan, with an
itemized budget, for the remediation, monitoring and testing of such systems. If
requested by any Bank, Borrower shall within ten (10) business days deliver a
statement to such Bank summarizing the Year 2000 exposure, program or progress
of Borrower and its Subsidiaries or other evidence of Borrower's compliance with
the terms of this Section, certified by an officer of Borrower.
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 SECTION 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 within thirty (30) days after Borrower
receives notice thereof or any officer of Borrower becomes aware thereof.
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<PAGE> 19
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 the Banks' security interests in
the Collateral, which in the
reasonable determination of the 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). As used herein, "Solvent" shall mean that (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 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 the Banks pursuant to this 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 Fifty
Thousand Dollars ($250,000.00) 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
Twenty-Five Thousand Dollars ($125,000.00) 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).
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 any Bank to enter into this
Agreement or any other Loan Document.
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<PAGE> 20
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 Banks (the
"ENFORCING BANK"). Appointment of the Enforcing Bank shall be subject to the
approval of either (i) if 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 Committed Revolving Line, as the case may be, then both such
Banks 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, total more than sixty-six and
two-thirds percent (66.6%) of all such amounts outstanding or 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 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 SECTION 13 hereof, 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
possession 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 and
such Bank's determination appears to be prior or superior to its security
interest and 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;
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<PAGE> 21
(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 the 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 the
Banks; (b) endorse Borrower's name on any checks or other forms of payment or
security that may come into Collateral Agent's or any 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, verifications 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 the Banks as
Borrower's attorney in fact, and each and every one of Enforcing Bank's or the
Banks' 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 the 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 the Banks, and verify the amount of
such Account. Borrower shall collect all amounts owing to Borrower for the
Banks, receive in trust all payments as Enforcing Bank's or the Banks' trustee,
and immediately deliver such payments to Enforcing Bank or the 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 the 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 Revolving Line as the Banks reasonably deem
necessary to protect the
21.
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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 the Banks deem prudent. Any
amounts so paid or deposited by the 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 the Banks shall not constitute an agreement by any 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 SECTION 13, the Banks' rights
and remedies under this Agreement, the Loan Documents, and all other agreements
shall be cumulative. Subject to SECTION 13, the 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 Bank: Imperial Bank
2460 Sand Hill Road, Suite 102
Menlo Park, CA 94025
Attn: Steven D. Kattner
Fax: 650/ 233-3020
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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 the 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 THE 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 RECOGNIZES 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 WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
SECTION 12. JUDICIAL REFERENCE.
12.1 Other than (a) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (b) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Agreement or the other Loan Documents, which controversy,
dispute or claim is not settled in writing within thirty (30) days after the
"CLAIM DATE" (defined as the date on which a party subject to this Agreement
gives written notice to all other parties that a controversy, dispute or claim
exists), will be settled by a reference proceeding in California in accordance
with the provisions of Section 638 et seq. of the California Code of Civil
Procedure, or their successor section ("CCP"), which shall constitute the
exclusive remedy for the settlement of any controversy, dispute or claim
concerning this Agreement, including whether such controversy, dispute or claim
is subject to the reference proceeding and except as set forth above, the
parties waive their rights to initiate any legal proceedings against each other
in any court or jurisdiction other than the Superior Court in the County where
the real property, if any, is located or Santa Clara County, if none (the
"COURT"). The referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within forty-five (45)
days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his/her representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP Section 170.6. The referee shall (x) be requested to set the
matter for hearing within sixty (60) days after the date of selection of the
referee and (y) try any and all issues of law or fact and report a statement of
decision upon them, if possible, within ninety (90) days of the Claim Date. Any
decision rendered by the referee will be final, binding and conclusive and
judgement shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Agreement shall be
completed no later than fifteen (15) days before
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the first hearing date established by the referee. The referee may extend such
period in the event of a party's refusal to provide requested discovery for any
reason whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness. No
party shall be entitled to "priority" in conducting discovery. Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be resolved by
the parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided herein,
the Superior Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
12.2 Except as expressly set forth in this Agreement, the referee
shall determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
reference proceeding. All proceedings and hearings conducted before the referee,
except for trial, shall be conducted without a court reporter except that when
any party so requests, a court reporter will be used at any hearing conducted
before the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
12.3 The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the close
of the reference proceeding that shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
12.4 In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
SECTION 13. INTERCREDITOR PROVISIONS
13.1 OWNERSHIP OF ADVANCES. Notwithstanding any other terms of this
Agreement, each Bank shall be the holder and sole owner of the respective
Advances made by such Bank, and no Bank shall have any interest in the Advances
of any other Bank.
13.2 LIMITATION ON FURTHER LOANS. Except for daily cash transfers
that arise out of the ordinary course of Borrower's cash management operations,
no Bank may make loans to or otherwise extend credit to Borrower without the
consent of the other Banks, 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.
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13.3 DISBURSEMENTS. All Advances shall be made pro rata by the 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 specifies. 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.
13.4 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 Banks and Borrower, which consent shall not
be unreasonably withheld, provided that any 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 consent of the other Banks. 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, provided that
the aggregate amount that 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 this 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, (iv) reduce the principal amount payable to such participant under
this Agreement, or (v) extend the date fixed for the payment of principal or
interest 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 13.4 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 an Assignment and Acceptance substantially in the form of EXHIBIT E
hereto ("ASSIGNMENT AND ACCEPTANCE"). 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 Banks and Borrower evidence satisfactory to the
remaining Banks and 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 Banks and Borrower) to receive
and hold the transferred interest subject to all of the provisions of this
Agreement.
(e) CONFIDENTIALITY. Subject to SECTION 14.8 hereof,
Borrower authorizes each Bank to disclose to any prospective transferee and any
actual transferee any and all information designated by
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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 14.8 hereof.
Provided that such prospective transferee or actual transferee has executed a
confidentiality agreement in favor of Borrower agreeing to the provisions of
SECTION 14.8 hereof, no 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 Banks or Borrower
unless the provisions of this SECTION 13.4 are satisfied.
13.5 INFORMATION. Each Bank shall use efforts that are reasonable
under the circumstances to deliver to the other Banks 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. No Bank shall be responsible for the
accuracy, of any information shared pursuant to this SECTION 13.5, nor shall any
Bank be liable to any other Bank for any damages incurred as a result of any
reliance on such shared information.
13.6 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 such Bank has committed to
advance as set forth on the signature page to this Agreement (or any amendment
thereto) signed by such 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.
13.7 ALLOCATION OF PAYMENTS. All amounts received by The Banks for
the account of Borrower, whether by payment, set-off, counterclaim, or
otherwise, shall be allocated and paid to The Banks as necessary to ensure a
sharing of all amounts received on account of the Advances as contemplated in
SECTION 13.6. Each Bank shall promptly remit to Collateral Agent or Enforcing
Bank for disbursement to the other Banks such sums (whether received by such
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 13.6. The Banks likewise shall contribute in such proportions as are
necessary to ensure a sharing as contemplated in SECTION 13.6 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.
13.8 DETERMINATION OF A COURSE OF ACTION UPON DEFAULT. Each Bank will
promptly advise the other Banks 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. The Banks shall use efforts that are reasonable under the
circumstances to consult with the other Banks 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 Banks for any act or omission in the
absence of the Enforcing Bank's gross negligence or willful misconduct.
26.
<PAGE> 27
13.9 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 Banks.
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 Committed Revolving Line 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. Any Bank shall have
the right to enter a cash bid for such Bank's own account at any sale. If such a
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
Banks shall have no further interest in that Collateral upon payment to such
other Banks of their 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 13.7.
13.10 OTHER OBLIGATIONS. A Bank shall not obtain any interest in any
property of 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
the Banks shall share proportionately in such property or proceeds.
13.11 INDEPENDENT REVIEW. Each Bank has reviewed this Agreement and
the Loan Documents, the financial statements of Borrower, and such other
materials as such 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 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 13.5, each
Bank shall make its own decision as to 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 Borrower and its
officers, employees, accountants, and representatives concerning Borrower's
business operations, financial condition, assets, liabilities, and all other
matters such 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.
13.12 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.
27.
<PAGE> 28
13.13 DESIGNATION OF COLLATERAL AGENT. To facilitate the
administration of this Agreement, Imperial shall act as Collateral Agent for
itself and the other Banks. 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 all Banks whenever Collateral Agent or Enforcing Bank acts
under this Agreement.
13.14 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.
13.15 NO REAL ESTATE COLLATERAL. Each Bank agrees with, and for the
benefit of, the other Banks (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.
13.16 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.
13.17 REPORTS. Collateral Agent or Enforcing Bank shall use reasonable
efforts to deliver to the 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 the Banks.
13.18 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 the Banks appraised of all material actions taken.
Action taken by Collateral Agent or Enforcing Bank pursuant to the instruction
of the 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, the Banks shall not later bring a claim against Collateral Agent or
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 the Banks for any act or omission in the absence of Collateral
Agent's or Enforcing Bank's, respectively, own gross negligence or willful
misconduct.
13.19 EXPENSES. Upon request, the 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 and Enforcing
Bank shall provide to the 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 Bank. If the funds due a non-reimbursing
28.
<PAGE> 29
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 Banks' proportionate
interests as set forth in SECTION 13.6.
13.20 COMMUNICATION. Collateral Agent and Enforcing Bank shall
promptly inform the Banks if Collateral Agent or Enforcing Bank receives any
communication from Borrower calling for action on the part of the Banks, or if
Collateral Agent or Enforcing Bank concludes that an Event of Default has
occurred under this Agreement.
13.21 LIMITED LIABILITY OF COLLATERAL AGENT AND ENFORCING BANK. Except
as provided in SECTION 13.18 in this Agreement, Collateral Agent and Enforcing
Bank shall not be liable or answerable to the 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 the 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 relation 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.
13.22 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.
13.23 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 13.2, 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.
13.24 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
under this Agreement. Except as set forth in this Agreement, Collateral Agent
has no duty to provide any Bank with any information (other than information
provided pursuit to this Agreement), whether coming into Collateral Agent's
possession before the Closing Date or at any time thereafter.
13.25 NO AGENCY. EXCEPT AS SPECIFIED HEREIN, NO BANK IS AN AGENT OF
ANY OTHER BANK. NO BANK HAS ANY AUTHORITY TO ACT OR FAIL TO ACT FOR ANY OTHER
BANK. THE OBLIGATIONS OF EACH BANK HEREUNDER ARE SEVERAL. NO BANK SHALL
29.
<PAGE> 30
BE LIABLE FOR THE FAILURE OF ANY OTHER BANK TO PERFORM ITS OBLIGATIONS
HEREUNDER.
13.26 NO RELIANCE. The provisions of this SECTION 13 (except for
SECTIONS 13.3, 13.4, and 13.14) are solely for the benefit of the 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 14. GENERAL PROVISIONS.
14.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors 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 13.4 hereof.
14.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless Collateral Agent, Enforcing Bank and each Bank and their respective
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.
14.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
14.4 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.
14.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
14.6 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.
14.7 NOVATION. This Agreement is not intended to be, and shall not be
construed to create, a novation or accord and satisfaction, and, except as
otherwise provided herein, the Prior Loan Agreement is amended and restated in
full by the terms of this Agreement and all obligations outstanding under the
Prior Loan Agreement are governed by the terms of this Agreement.
14.8 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 the
Banks with respect to the expenses, damages, losses, costs and liabilities
described in SECTION 14.2 shall survive until all applicable statute of
limitations periods with respect to
30.
<PAGE> 31
actions that may be brought against the Banks have run, provided that so long as
the obligations set forth in the first sentence of this SECTION 14.8 have been
satisfied, and no Bank has a commitment to make any Advances or to make any
other loans to Borrower hereunder, Collateral Agent, Enforcing Bank and the
Banks shall release all security interests granted hereunder and redeliver all
Collateral held by it in accordance with applicable law.
14.9 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 or
prospective business relations with Borrower, (ii) to prospective transferees or
purchasers of any interest in the Advances, 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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
TEGAL CORPORATION,
a Delaware corporation
By: ___________________________________________
Michael Parodi
President and Chief Executive Officer
By: ___________________________________________
David Curtis
Vice President, Secretary, Treasurer and
Chief Financial Officer
IMPERIAL BANK
By: ___________________________________________
Steven D. Kattner
Vice President and Team Leader
Maximum Commitment Amount: $12,500,000 (100%)
31.
<PAGE> 32
SCHEDULE 1
SCHEDULE OF EXCEPTIONS
ADDITIONAL PERMITTED INDEBTEDNESS: None.
ADDITIONAL PERMITTED INVESTMENTS: None.
ADDITIONAL PERMITTED LIENS: None.
SECTION 5.5 OTHER NAMES: None.
SECTION 5.7 LITIGATION: There are no material legal proceedings pending against
Borrower. However, 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 Borrower's dry plasma etch systems. On
March 7, 1995, Borrower 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 Borrower through an
arbitration proceeding with respect to the U.S. claim. Borrower has been
informed that Lucent recently filed a claim for patent infringement in Germany
against AMS for the sale of integrated circuits manufactured with Borrower's dry
plasma etch systems. AMS has requested indemnification for the German matter.
Borrower believes that the claims made by AMS are without merit and that the
ultimate outcome of any defense of any required indemnification obligation to
AMS is unlikely to have a Material Adverse Effect on Borrower's results of
operations or financial condition. No assurance can be given, however, as to the
outcome of such legal proceedings or as to the effect of any such outcome on
Borrower's results of operations or financial condition.
On March 17, 1998, Borrower 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 Borrower's patents.
Borrower 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 Borrower.
32.
<PAGE> 33
SCHEDULE 2
LOCATION OF INVENTORY
See Attached.
SCHEDULE 2
<PAGE> 34
EXHIBIT A
DESCRIPTION OF COLLATERAL
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 finished 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.
EXHIBIT A
<PAGE> 35
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 11:00 A.M., P.S.T.
TO: ___________________________________ DATE: _______________________________
EXHIBIT B
<PAGE> 36
FAX#: _________________________________ TIME: _______________________________
FROM: __________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY: __________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: __________________________________________________
PHONE NUMBER: __________________________________________________________
FROM ACCOUNT # __________ TO ACCOUNT # ________________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $_______________________________
PRINCIPAL PAYMENT (ONLY) $_______________________________
INTEREST PAYMENT (ONLY) $_______________________________
PRINCIPAL AND INTEREST (PAYMENT) $_______________________________
OTHER INSTRUCTIONS: ____________________________________________________
All representations and warranties of Borrower stated in the Amended and
Restated Loan and Security Agreement dated as of August 15, 1998 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)
EXHIBIT B
<PAGE> 37
EXHIBIT C
FORM OF NOTE
$12,500,000.00 August 15, 1998
Petaluma, California
On the Revolving Maturity Date, and as hereinafter provided, for value
received, the undersigned promises to pay to IMPERIAL BANK, a California banking
corporation ("BANK"), or order, at its Santa Clara Valley Regional office in San
Jose, California, the lesser of (i) the principal sum of $12,500,000.00 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
Amended and Restated Loan and Security Agreement dated of even date herewith, by
and among the undersigned and Bank, as the same may be amended from time to time
(the "LOAN AGREEMENT"), together with interest from the date of disbursement on
the unpaid principal balance at a rate of interest equal to the Prime Rate (as
defined in the Loan Agreement), which shall vary concurrently with any change in
the Prime Rate. Interest shall be computed at the above rate on the basis of the
actual number of days during which the principal balance of this Note ("NOTE")
is outstanding, divided by 360, which shall, for interest computation purposes,
be considered one (1) 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 on September 15,
1998, and continuing on the fifteenth (15th) day of each month thereafter, 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 an 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 two percent
(2.0%) per year in excess of the Prime Rate, 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 attorneys' 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 United 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.
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
EXHIBIT C
Page 1 of 2
<PAGE> 38
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 waiver 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,
a Delaware corporation
By:___________________________________________
Printed Name:_________________________________
Title:________________________________________
By:___________________________________________
Printed Name:_________________________________
Title:________________________________________
EXHIBIT C
Page 2 of 2
<PAGE> 39
EXHIBIT D
COMPLIANCE CERTIFICATE
The consolidated financial statements dated as of __________________________ of
TEGAL CORPORATION, a Delaware corporation ("BORROWER") attached hereto and
submitted to IMPERIAL BANK ("Imperial") pursuant to that certain Amended and
Restated Loan and Security Agreement dated as of August 15, 1998 (the
"Agreement"), entered into between Borrower, Banks and Imperial, shows
compliance with all financial covenants (unless otherwise noted below) as
specified therein, as follows:
QUARTERLY COVENANT:
<TABLE>
<S> <C> <C>
ACTUAL:
a. Minimum Quick Ratio:
1.75 : 1.00 ____________________
b. Maximum Liabilities to Tangible Net Worth Ratio:
0.75 : 1.00 ____________________
c. Minimum Tangible Net Worth of:
$28,000,000.00 ____________________
d. Maximum Quarterly Losses not greater than:
$6,500,000.00 (2Q period ending 9/30/98) ____________________
$7,100,000.00 (2Q period ending 12/31/98) ____________________
$8,200,000.00 (2Q period ending 3/31/99) ____________________
$6,800,000.00 (2Q period ending 6/30/99) ____________________
e. Maximum Annual Losses not greater than:
$15,000,000.00 ____________________
</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
Agreement for the period ending _____________________, and as of the date of
this Compliance Certificate the representations and
EXHIBIT D
<PAGE> 40
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 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
a Delaware corporation
By:___________________________________________
Printed Name:_________________________________
Title:________________________________________
By:___________________________________________
Printed Name:_________________________________
Title:________________________________________
EXHIBIT D
<PAGE> 41
EXHIBIT E
FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT
ASSIGNMENT AND ACCEPTANCE dated ___________, ____ between
______________________ ("Assignor") and _____________________ ("Assignee").
PRELIMINARY STATEMENT
A. Reference is made to the Amended and Restated Loan and Security
Agreement dated as of August 15, 1998 (as the same may from time to time
hereafter be amended, modified, supplemented or restated, the "Loan Agreement"),
among TEGAL CORPORATION, a Delaware corporation (the "Borrower"), IMPERIAL BANK
("Imperial"), 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.
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:
EXHIBIT E
Page 1 of 3
<PAGE> 42
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 of 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.
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
EXHIBIT E
Page 2 of 3
<PAGE> 43
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.
8. This Assignment and Acceptance shall be governed by, and
construed in accordance with, the law of the State of California.
ASSIGNOR
______________________________________________
By:___________________________________________
Printed Name:_________________________________
Title:________________________________________
ASSIGNEE
______________________________________________
By:___________________________________________
Printed Name:_________________________________
Title:________________________________________
Address for notices:
______________________________________________
______________________________________________
______________________________________________
ACCEPTED this ____ day of
_________________, ____
TEGAL CORPORATION,
a Delaware corporation
By:_________________________________________
Printed Name:_______________________________
Title:______________________________________
By:_________________________________________
Printed Name:_______________________________
Title:______________________________________
EXHIBIT E
Page 3 of 3
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 333-66781, 333-12473 and 333-462) of our report
dated April 28, 1999 appearing on page 38 of Tegal Corporation's Annual Report
on Form 10-K for the year ended March 31, 1999.
PricewaterhouseCoopers LLP
San Jose, California
June 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 17,569
<SECURITIES> 0
<RECEIVABLES> 5,095
<ALLOWANCES> 264
<INVENTORY> 12,226
<CURRENT-ASSETS> 36,104
<PP&E> 14,107
<DEPRECIATION> 10,922
<TOTAL-ASSETS> 39,652
<CURRENT-LIABILITIES> 8,806
<BONDS> 0
0
0
<COMMON> 107
<OTHER-SE> 30,709
<TOTAL-LIABILITY-AND-EQUITY> 39,652
<SALES> 29,035
<TOTAL-REVENUES> 29,035
<CGS> 20,874
<TOTAL-COSTS> 20,874
<OTHER-EXPENSES> 9,594
<LOSS-PROVISION> 35
<INTEREST-EXPENSE> 28
<INCOME-PRETAX> (14,997)
<INCOME-TAX> 135
<INCOME-CONTINUING> (15,132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,132)
<EPS-BASIC> (1.42)
<EPS-DILUTED> (1.42)
</TABLE>
