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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-26824
TEGAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 00-0000000
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
0000 XXXXX XXXXXXXX XXXX.
XXXXXXXX, XXXXXXXXXX 00000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (000) 000-0000
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 xxxx 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 xxxx if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 25,
2001, as reported on the Nasdaq National Market was $34,529,463. As of June 25,
2001, 12,572,252 shares of the Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 2001 Annual Meeting of
Stockholders to be held on September 25, 2001, 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 43
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
Executive Officers.......................................... 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations.................................................. 16
Item 7A. Quantitative and Qualitative Disclosure about Market
Risks....................................................... 19
Item 8. Financial Statements and Supplementary Data................. 21
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
i
PART I
ITEM 1. BUSINESS
Information contained or incorporated by reference herein contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology or which constitute projected financial information. The
following contains cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements. See "Risk Factors."
THE COMPANY
Tegal Corporation, a Delaware Corporation ("Tegal"), designs, manufactures,
markets and services plasma etch systems used in the fabrication of integrated
circuits ("ICs") and related devices in voice and data telecommunications, 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.
We were formed in December 1989 to acquire the operations of the former
Tegal Corporation, a division of Motorola, Inc. ("Motorola"). Our predecessor
company was founded in 1972 and acquired by Motorola in 1978. We completed our
initial public offering in October 1995.
SEMICONDUCTOR INDUSTRY BACKGROUND
Growth of Semiconductor and Semiconductor Equipment Industries
The semiconductor industry has experienced significant growth over the last
20 years. This growth has resulted from the increasing demand for ICs from
traditional IC markets, such as personal computers, telecommunications, consumer
electronics, automotive electronics and office equipment, as well as developing
markets, such as wireless communications, multimedia and portable and network
computing. As a result of this increased demand, semiconductor device
manufacturers have periodically expended significant amounts of capital to build
new semiconductor fabrication facilities ("fabs") and to expand existing fabs.
In spite of the continuing growth in demand for semiconductors, the industry
periodically experiences cycles of excess supply and excess capacity as
additions to capacity are brought online in large increments which exceed the
short-term growth in demand for ICs. The industry experienced such fluctuations
from 1996 through mid 1999, and is currently experiencing a slowdown of capacity
buys. Industry experts believe that the current slow down will be substantial,
but limited in duration.
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 has become an
increasingly large part of the total cost of producing advanced ICs. Today, a
typical 200 millimeter wafer fab may cost as much as $1.4 to $1.6 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.
1
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 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
47%, 19% and 34%, respectively, of the total sales of dry etch systems in 2000.
New films are continually being developed in each of these three market
segments.
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 0.18 micron. Nonetheless,
even in the most advanced ICs, production steps can be performed with less
demanding (or "non-critical") etch performance. As a result, we believe the etch
market has also begun to segment according to the required level of etch
performance -- critical or non-critical.
Today, the semiconductor industry is faced with the need to develop and
adopt an unprecedented number of new 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, iridium and Lead Zirconium Titanate (PZT), currently being used in the
development of non-volatile, ferroelectric random access memory (FRAM) devices,
is presenting new challenges to semiconductor manufacturers. 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, customers seek to achieve zero
corrosion of metal etched wafers within 48 to 72 hours after completion of the
etch process, 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.
Market Segmentation and Tool Costs
Over time, the disparity in relative prices for etch systems capable of
etching at non-critical versus critical dimensions has grown significantly. We
believe 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, in
periods of high equipment utilization we believe 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, we believe
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, we believe 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 overall etch system costs, while meeting the
required etch process performance. We believe that a well-implemented "mix and
match" purchasing philosophy could allow a semiconductor manufacturer to realize
significant etch system savings.
2
BUSINESS STRATEGY
We have a large installed base of etch equipment exceeding 1,500 systems
and we believe that over the years Tegal has earned a reputation as a supplier
of reliable, value-oriented etch systems. Our systems are sold throughout the
world to both domestic and international customers. In our fiscal year ended
March 31, 2001, approximately 61% of our revenues resulted from international
sales. To support our systems sales, we maintain local service and support in
every major geographic market in which we have an installed base, backed up by a
spares logistics system designed to provide delivery within 24 hours anywhere in
the world.
Our objective is to build on our technical knowledge, experience and
reputation in the etch industry, as well as our 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, we are implementing a business strategy incorporating the following
elements:
- Use the performance capabilities of our 6500 series systems to generate
incremental sales from the IC and related device markets for critical
etch of specific applications and films where our products provide unique
performance capabilities; and
- Increase sales of our non-critical etch systems by focusing sales and
marketing on specialty applications that are addressed by our 900 series
etchers such as voice and data telecommunications chips using gallium
arsenide and other III-V materials, thin film heads, small flat panels,
printer heads, and the conversion from wet to dry etch technologies.
PRODUCTS
6500 Series Products
We offer several models of our 6500 series critical etch products
configured to address film types and applications desired by the customer. We
introduced the 6500 series tool in 1994 and since that time have expanded the
product line to address new applications. Etch applications addressed by the
6500 series system include:
- new high K dielectrics and associated materials used in capacitors at
sub-0.5 micron for FRAMs, high-density DRAM and magnetic memory (MRAM)
devices,
- 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,
- sub-0.5 micron multi-layer metal films composed of
aluminum/copper/silicon/titanium alloys,
- sub-0.5 micron polysilicon
- leading edge thin film head materials.
All 6500 series models offer one and two-chamber configurations and a
rinse/strip option. Prices for 6500 series systems typically range between $1.8
million and $3.0 million.
Our 6500 series systems have been engineered to provide process flexibility
and competitive throughput for wafers and substrates up to eight inches in
diameter, while minimizing cost and space requirements. A dual chamber platform
design allows for either parallel or integrated etch processes. We seek to
maximize the 6500 series systems' average throughput by incorporating a process
chamber technology and system architecture designed to minimize processing
down-time required for cleaning and maintenance. Each 6500 series system has a
central wafer handling system with full cassette vacuum loadlocks, non-contact
optical wafer alignment and a vacuum transport system. Individual process module
servicing is possible without shutting down the system or other xxxxxxxx.
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
3
6500 series are designed to enable a semiconductor manufacturer to reduce wafer
particle contamination to a level which we believe exceeds industry standards
and to improve etch results and process flexibility.
In addition, our 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.
900 Series Products
We introduced our 900 series family of etch systems in 1984 as a critical
etch tool of that era. Over the years, we have repositioned the 900 series
family as non-critical etch systems capable of performing the less demanding
etch steps required in the production of silicon-based IC devices and, more
recently, as critical etch tools for new specialty devices such as gallium
arsenide for high speed telecommunications devices. In 1994, we introduced an
eight inch wafer capable 900 series system (capable of etching five inch to
eight inch wafers) that was a scaled-up version of our three inch to six inch
wafer 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, thin film etch applications used in the
manufacture of read-write heads for the disk drive industry and gallium arsenide
and other III-V materials used in high-speed digital wireless telecommunications
applications. Our 900 series systems typically sell for a price of $250,000 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
we believe results in higher average throughput and lower operating costs.
Continued improvements in both reliability and performance have enabled us to
offer the 900 series systems as a solution for a broad range of applications
involving line widths down to 0.8 microns.
The i900 was introduced in July 2000. This system has the same
functionality of the 900 series but with added features such as user-friendly
GUI (graphical user interface) touch screens and an improved transport system
that will increase efficiency, while preserving the durability for which the
tool is known.
CUSTOMERS
We sell our systems to semiconductor and related electronic device
component manufacturers throughout the world. Major customers over the last
three fiscal years have included the following:
Advanced Wireless Semiconductor Lucent Technologies Seiko Epson
Alcatel Matsushita Microelectronics
Austria Mikro Systeme Motorola Sony
Bosch Nortel Networks Sumitomo Electric
Compound Semiconductor Mfg. Co. Oki Electric Tesla
Xxxxxxxxx Semiconductor Industry Toshiba
Fuji Film Read Rite TRW Space & Electronics
Hewlett Packard RF Micro Devices Winbond Electronics
Of these 23 customers, 15 ordered one or more systems in fiscal 2001. The
composition of our top five customers has changed from year to year, but net
system sales to our top five customers in each of fiscal 2001, 2000 and 1999
accounted for 42.0%, 53.1%, and 66.4% respectively, of our total net system
sales. Nortel and Sony represented 17.6%, and 13.0%, respectively, of our net
system sales in 2001. Motorola, Sony and ST Microelectronics represented 15.5%,
13.9% and 10.2%, respectively, of our net system sales in fiscal 2000.
Matsushita, Seiko Epson, Fuji Film and Oki represented 17.9%, 14.8%, 14.7% and
11.8%, respectively, of our net system sales in fiscal 1999. Other than the
above customers, no single customer represented more than 10% of our net system
sales in fiscal 2001, 2000 or 1999. Although the composition of the group
comprising
4
our largest customers may vary from year to year, the loss of a significant
customer or any reduction in orders by any significant customer, including
reductions due to market, economic or competitive conditions in the
semiconductor and related device manufacturing industry, may have a material
adverse effect on us.
BACKLOG
We schedule production of our systems based upon order backlog and customer
commitments. We include in our backlog only orders for which written purchase
orders have been accepted and shipment dates within the next 12 months have been
assigned. As of March 31, 2001 and 2000 our order backlog was approximately $10
million and $5.9 million, respectively. Booked system orders are subject to
cancellation by the customer, but with substantial penalties except in the case
of orders for evaluation systems or for systems 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, our backlog at any particular date is not
necessarily indicative of actual sales for any succeeding period.
MARKETING, SALES AND SERVICE
We sell our systems worldwide through a network of 16 direct sales
personnel and five independent sales representatives in 17 sales offices located
throughout the world. In the United States of America, we market our systems
through direct sales personnel located in three regional sales offices and at
our Petaluma, California headquarters. In addition, we provide field service and
applications engineers out of our regional locations and our Petaluma
headquarters in order to ensure dedicated technical and field process support
throughout the United States of America on short notice.
We maintain sales, service, and process support capabilities in Japan,
Taiwan, South Korea, Germany, Italy and the United Kingdom and service/support
operations in Austria and China. In addition to our international direct sales
and support organizations, we also market our systems through independent sales
representatives in China, Israel, South Korea and Singapore and selected markets
in Japan.
International sales, which consist of export sales from the United States
of America either directly to the end user or to one of our foreign
subsidiaries, accounted for approximately 61%, 59%, and 72% of total revenue for
fiscal 2001, 2000 and 1999, respectively. Revenues by region for each of the
last three fiscal years were as follows:
YEARS ENDED MARCH 31,
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2001 2000 1999
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United States................................. $15,087 $10,867 $ 8,111
Asia.......................................... 5,612 2,095 2,669
Europe........................................ 10,644 7,498 6,657
Japan......................................... 6,862 5,978 11,598
------- ------- -------
Total external sales................ $38,205 $26,438 $29,035
======= ======= =======
We generally sell our systems on 30-to-60 day credit terms to our domestic
and European customers. Customers in the Pacific Rim countries, other than
Japan, are generally required to deliver a letter of credit payable in U.S.
dollars upon system shipment. Sales to other international customers, including
Japan, are billed either in local currency or U.S. dollars. We anticipate that
international sales will continue to account for a significant portion of
revenue in the foreseeable future.
We generally warrant our new systems for 12 months and our refurbished
systems for six months from shipment. Installation is included in the price of
the system. Our 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 our systems. We train customer service
engineers to perform routine service for a fee and provide telephone
consultation services generally free of charge.
The sales cycles for our systems vary depending upon whether the system is
an initial design-in, reorder or used equipment. Initial design-in sales cycles
are typically 12 to 18 months, particularly for 6500 series
5
systems. In contrast, reorder sales cycles are typically four to six months, and
used system sales cycles are generally one to three months. The initial
design-in sales cycle begins with the generation of a sales lead, which is
followed by qualification of the lead, an analysis of the customer's particular
applications needs and problems, one or more presentations to the customer
(frequently including extensive participation by our senior management), two to
three wafer sample demonstrations, followed by customer testing of the results
and extensive negotiations regarding the equipment's process and reliability
specifications. Initial design-in sales cycles are monitored by senior
management for correct strategy approach and prioritization. We 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. We believe that continued and timely development of new
systems and enhancements to existing systems is necessary for us to maintain our
competitive position. Accordingly, we devote a significant portion of our
personnel and financial resources to research and development programs and seek
to maintain close relationships with our customers in order to be responsive to
their system needs.
Our 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. We employ multi-discipline teams to
facilitate short engineering cycle times and rapid product development.
As of March 31, 2001, we had 39 full-time employees dedicated to equipment
design engineering, process support and research and development. Research and
development expenses for fiscal 2001, 2000 and 1999 were $8.9 million, $10.1
million and $9.6 million, respectively, and represented 23.4%, 38.0% and 33.0%
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 our demonstration labs and
providing process engineering support at customer sites.
MANUFACTURING
Our etch systems are produced at our headquarters in Petaluma, California.
Our manufacturing activities consist of assembling and testing components and
sub-assemblies which are then integrated into finished systems. We have
structured our production facility to be driven either by orders or by forecasts
and have adopted a modular system architecture to increase assembly efficiency
and design flexibility. We have also implemented "just-in-time" manufacturing
techniques in our assembly processes. Through the use of such techniques, 900
series system manufacturing cycle times take approximately 14 days and cycle
times for our 6500 series products take two to three months.
COMPETITION
The semiconductor capital equipment industry is highly competitive. We
believe that the principal competitive factor in the critical segments of the
etch industry is technical performance of the system, followed closely by the
existence of customer relationships, the system price, the ability to provide
service and technical support on a global basis and other related cost factors.
We believe that the principal competitive factor in the non-critical segments of
the etch industry is system price, followed closely by the technical performance
of the system, the existence of established customer relationships, the ability
to provide service and technical support on a global basis and other related
cost factors.
INTELLECTUAL PROPERTY
We hold an exclusive license and/or ownership of 00 Xxxxxx Xxxxxx xx
Xxxxxxx patents, including our dual frequency tri-electrode control system, and
28 corresponding foreign patents covering various aspects of our systems. We
have also applied for 15 additional United States of America patents and 46
additional
6
foreign patents. Of these patents, a few expire as early as 2003, others expire
as late as 2019 with the average expiration occurring in approximately 2011. We
believe that the duration of such patents generally exceeds the life cycles of
the technologies disclosed and claimed therein. We believe that although the
patents we have exclusively licensed or hold directly will be of value, they
will not determine our success, which depends principally upon our engineering,
marketing, service and manufacturing skills. However, in the absence of patent
protection, we may be vulnerable to competitors who attempt to imitate our
systems, processes, and manufacturing techniques. We have signed a non-exclusive
field of use license to two of our patents which validates and protects our
strategic application sets. In addition, other companies and inventors may
receive patents that contain claims applicable to our systems and processes. The
sale of our systems covered by such patents could require licenses that may not
be available on acceptable terms, if at all. We also rely on trade secrets and
other proprietary technology that we seek to protect, in part, through
confidentiality agreements with employees, vendors, consultants and other
parties. There can be no assurance that these agreements will not be breached,
that we will have adequate remedies for any breach, or that our trade secrets
will not otherwise become known to or independently developed by others.
The original version of the system software for our 6500 series systems was
jointly developed by us and Realtime Performance, Inc., a third party software
vendor. We hold a perpetual, non-exclusive, non-royalty bearing license to use
and enhance this software. The enhanced version of the software currently used
on our 6500 series systems has undergone multiple releases of the original
software, and such enhancements were developed exclusively by us. Neither the
software vendor nor any other party has any right to use our current release of
the system software.
EMPLOYEES
As of March 31, 2001, we had a total of 188 employees consisting of 178
regular full-time employees and 10 temporary or contract personnel, including 41
in engineering, research and development, 47 in manufacturing, 75 in marketing,
sales and customer service and support and 25 in executive and administrative
positions. Many of our employees are highly skilled, and our success will depend
in part upon our ability to attract, retain and develop such employees. Skilled
employees, especially employees with extensive technological backgrounds, are
currently in great demand. There can be no assurance that we will be able to
attract or retain the skilled employees which may be necessary to continue our
research and development, manufacturing or marketing programs. The loss of any
such persons, as well as the failure to recruit additional key personnel in a
timely manner, could have a material adverse effect on us.
None of our employees is represented by a labor union or covered by a
collective bargaining agreement. We consider our employee relations to be good.
7
RISK FACTORS
The semiconductor industry is cyclical and may experience periodic downturns
which may negatively affect customer demand for our products and result in
losses such as those experienced in the past.
Our business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits. The semiconductor industry is highly cyclical and
historically has experienced periodic downturns, which often have had a material
adverse effect on the semiconductor industry's demand for semiconductor capital
equipment, including etch systems manufactured by us. 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 our ability to reduce expenses in response to
any such downturn or slowdown in the future.
Our competitors have greater financial resources and greater name recognition
than we do and therefore may compete more successfully in the critical etch
industry than we can.
We believe that to be competitive, we will require significant financial
resources in order to offer a broad range of systems, to maintain customer
service and support centers worldwide and to invest in research and development.
Many of our existing and potential competitors, including, among others, Applied
Materials, Inc., Xxx Research Corporation 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 we
do. We cannot assure you that we will be able to compete successfully against
these companies in the United States of America or worldwide.
We depend on sales of our 6500 series systems in critical etch markets that may
not fully adopt our product for production use.
We have designed our 6500 series systems for sub-0.35 micron critical etch
applications in emerging films, polysilicon and metal which we believe to be the
leading edge of critical etch applications. Revenues from the sale of 6500
series systems have accounted for 21% and 19% of total revenues in fiscal 2001
and 2000, respectively. Our 6500 series systems are currently being used
primarily for research and development activities or low volume production. For
the 6500 series systems to achieve full market adoption, our customers must
utilize these systems for volume production. 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 we expect.
If the 6500 series does not achieve significant sales or volume production
due to a lack of full customer adoption, our business, financial condition,
results of operations and cash flows would be materially adversely affected.
Our potential customers may not adopt our products because of their significant
cost or because our potential customers are already using a competitor's tool.
A substantial investment is required to install and integrate capital
equipment into a semiconductor production line. Additionally, we believe that
once a device manufacturer has selected a particular vendor's capital equipment,
that manufacturer generally relies upon that vendor's equipment for that
specific production line application and, to the extent possible, subsequent
generations of that vendor's systems. Accordingly, it may be extremely difficult
to achieve significant sales to a particular customer once 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. Any
failure to gain access and achieve sales to new customers will adversely affect
the successful commercial adoption of our products and could have a material
adverse effect on us.
8
Our quarterly operating results may continue to fluctuate.
Our revenue and operating results have fluctuated and are likely to
continue to fluctuate significantly from quarter to quarter, and there can be no
assurance as to future profitability.
Our 900 series etch systems typically sell for prices ranging between
$250,000 and $600,000, while prices of our 6500 series critical etch systems
typically range between $1.8 million and $3.0 million. To the extent we are
successful in selling our 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 timing of new systems and technology announcements and releases by us
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 our existing product lines. Our 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 us, our competitors or suppliers. Additionally, a
substantial amount of income may be derived from patent license fees. Such fees
are volatile and we cannot predict we will receive similar fees in the future.
The impact of these and other factors on our revenue, operating results and cash
flows in any future periods is, and will continue to be, difficult for us to
forecast.
Because technology changes rapidly, we may not be able to introduce our products
in a timely enough fashion.
The semiconductor manufacturing industry is subject to rapid technological
change and new system introductions and enhancements. We believe that our future
success depends on our ability to continue to enhance our existing systems and
their process capabilities, and to develop and manufacture in a timely manner
new systems with improved process capabilities. We may incur substantial
unanticipated costs to ensure product functionality and reliability early in our
products' life cycles. There can be no assurance that we will be successful in
the introduction and volume manufacture of new systems or that we will be able
to develop and introduce, in a timely manner, new systems or enhancements to our
existing systems and processes which satisfy customer needs or achieve market
adoption.
Some of our sales cycles are lengthy, exposing us to the risks of inventory
obsolescence and fluctuations in operating results.
Sales of our systems depend, in significant part, upon the decision of a
prospective customer to add new manufacturing capacity or to expand existing
manufacturing capacity, both of which typically involve a significant capital
commitment. We often experience delays in finalizing system sales following
initial system qualification while the customer evaluates and receives approvals
for the purchase of our systems and completes a new or expanded facility. Due to
these and other factors, our systems typically have a lengthy sales cycle (often
12 to 18 months in the case of critical etch 6500 systems) during which we may
expend substantial funds and management effort. Lengthy sales cycles subject us
to a number of significant risks, including inventory obsolescence and
fluctuations in operating results over which we have little or no control.
We may not be able to protect our intellectual property or obtain licenses for
third parties' intellectual property and therefore we may be exposed to
liability for infringement or the risk that our operations may be adversely
affected.
Although we attempt to protect our intellectual property rights through
patents, copyrights, trade secrets and other measures, we may not be able to
protect our technology adequately and competitors may be able to develop similar
technology independently. Additionally, patent applications that we may file may
not be issued and foreign intellectual property laws may not protect our
intellectual property rights. There is also a risk that patents licensed by or
issued to us will be challenged, invalidated or circumvented and that the rights
granted thereunder will not provide competitive advantages to us. Furthermore,
others may independently develop similar systems, duplicate our systems or
design around the patents licensed by or issued to us.
9
Existing litigation and any future litigation could result in substantial
cost and diversion of effort by us, which by itself could have a material
adverse effect on our financial condition, operating results and cash flows.
Further, adverse determinations in such litigation could result in our loss of
proprietary rights, subject us to significant liabilities to third parties,
require us to seek licenses from third parties or prevent us from manufacturing
or selling our systems. In addition, licenses under third parties' intellectual
property rights may not be available on reasonable terms, if at all.
Our future capital needs may exceed our ability to raise capital.
The development, manufacture and marketing of etch systems are highly
capital intensive. In order to be competitive, we must continue to make
significant expenditures for, among other things, capital equipment and the
manufacture of evaluation and demonstration unit inventory for our 6500 series
etch systems. We believe that our existing cash balances, anticipated cash flow
from operations and funds available under our existing lines of credit will
satisfy our financing requirements for the next twelve months. Rapid revenue
growth may require that we seek additional capital to meet our working capital
needs beyond the next 12 months. Likewise, a sharp decline in future orders and
revenues might have a similar effect should we be unable to reduce our expenses
to the degree necessary to avoid incurring losses. There can be no assurance
that additional financing, if required, 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 our stockholders.
Our customers are concentrated and therefore the loss of a significant customer
may harm our business.
Our top five customers accounted for 42.0%, 53.1%, and 66.4% of our systems
revenues in fiscal 2001, 2000 and 1999, respectively. Two customers accounted
for more than 10% of net systems sales in fiscal 2001. Although the composition
of the group comprising our largest customers may vary from year to year, the
loss of a significant customer or any reduction in orders by any significant
customer, including reductions due to market, economic or competitive conditions
in the semiconductor manufacturing industry, may have a material adverse effect
on our business, financial condition, results of operations and cash flows. Our
ability to increase our sales in the future will depend, in part, upon our
ability to obtain orders from new customers, as well as the financial condition
and success of our existing customers and the general economy, which is largely
beyond our ability to control.
We are exposed to additional risks associated with international sales and
operations.
International sales accounted for 61%, 59%, and 72% of total revenue for
fiscal 2001, 2000 and 1999, respectively. International sales are subject to
certain risks, including the imposition of government controls, fluctuations in
the U.S. dollar (which could increase the sales price in local currencies of our
systems in foreign markets), changes in export license and other regulatory
requirements, tariffs and other market barriers, political and economic
instability, potential hostilities, restrictions on the export or import of
technology, difficulties in accounts receivable collection, difficulties in
managing 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 our operations and financial results.
Sales of our systems in certain countries are billed in local currency, and
we have two lines of credit denominated in Japanese Yen. We generally attempt to
offset a portion of our U.S. dollar denominated balance sheet exposures subject
to foreign exchange rate remeasurement by purchasing currency options and
forward currency contracts for future delivery. There can be no assurance that
our future results of operations and cash flows will not be adversely affected
by foreign currency fluctuations. In addition, the laws of certain countries in
which our products are sold may not provide our products and intellectual
property rights with the same degree of protection as the laws of the United
States of America.
10
Our stockholder rights plan may deter takeover attempts.
Under the terms of our stockholder rights plan, our board of directors is
authorized to issue preferred stock without further stockholder approval or to
exercise the anti-takeover provisions of our stockholder rights plan in the
event of an unsolicited attempt to assume control over Tegal. Should our board
of directors exercise such rights, such action could have the effect of
delaying, deferring or preventing a change in control of Tegal.
Our stock price is volatile and could result in a material decline in the value
of your investment in Tegal.
We believe that factors such as announcements of developments related to
our business, fluctuations in our operating results, sales of our common stock
into the market place, failure to meet or changes in analysts' expectations,
general conditions in the semiconductor industry or the worldwide economy,
announcements of technological innovations or new products or enhancements by us
or our competitors, developments in patents or other intellectual property
rights, developments in our relationships with our customers and suppliers,
natural disasters and outbreaks of hostilities could cause the price of our
common stock to fluctuate substantially. In addition, in recent years the stock
market in general, and the market for shares of small capitalization stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of our common stock will not experience
significant fluctuations in the future, including fluctuations that are
unrelated to our performance.
Potential disruption of our supply of materials required to build our systems
could have a negative effect on our operations and damage our customer
relationships.
Materials delays have not been significant in recent years. Nevertheless,
we procure certain components and sub-assemblies included in our systems from a
limited group of suppliers, and occasionally from a single source supplier. For
example, we depend on MECS Corporation, a robotic equipment supplier, as the
sole source for the robotic arm used in all of our 6500 series systems. We
currently have no existing supply contract with MECS Corporation, and we
currently purchase all robotic assemblies from MECS Corporation on a purchase
order basis. Disruption or termination of certain of these sources, including
our robotic sub-assembly source, could have an adverse effect on our operations
and damage our relationship with our customers.
Any failure by us to comply with environmental regulations imposed on us could
subject us to future liabilities.
We are subject to a variety of governmental regulations related to the use,
storage, handling, discharge or disposal of toxic, volatile or otherwise
hazardous chemicals used in our manufacturing process. We believe that we are
currently in compliance in all material respects with these regulations and that
we have obtained all necessary environmental permits generally relating to the
discharge of hazardous wastes to conduct our business. Nevertheless, our failure
to comply with present or future regulations could result in additional or
corrective operating costs, suspension of production, alteration of our
manufacturing processes, or cessation of our operations.
Special Note Regarding Forward Looking Statements
This Form 10-K includes or incorporates by reference forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Forward-looking statements, which are based on
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by the use of the words "anticipate", "believe",
"estimate", "expect", "intend", "project", or similar expressions. These
forward-looking statements are subject to risks, uncertainties and assumptions
about us. Important factors that could cause actual results to differ materially
from the forward-looking statements we make in this Form 10-K are set forth
under the caption "Risk Factors" and elsewhere in this prospectus and the
documents incorporated by reference in this Form 10-K. If one or more of these
risks or uncertainties materialize, or if any underlying assumptions prove
incorrect, our actual results, performance or achievements may vary materially
from any future results, performance or achievements expressed or implied by
these
11
forward-looking statements. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirely by the
cautionary statements in this paragraph.
ITEM 2. PROPERTIES
We maintain our headquarters, encompassing our executive office,
manufacturing, engineering and research and development operations, in one
leased 120,000 square foot facility in Petaluma, California. We currently occupy
90,000 square feet of this building, with the remaining portion sublet or being
offered for sublet. The lease expires in March 2004 and carries one five-year
renewal option. Other than certain large pieces of capital equipment leased by
us, we own substantially all of the machinery and equipment used in our
facilities. We believe that our existing facilities are adequate to meet our
requirements for several years.
We lease sales, service and process support space in Santa Clara,
California; Munich, Germany; Kawasaki, Japan; Catania, Italy; Seoul, South
Korea; and Xxxx Xxx City, Taiwan.
ITEM 3. LEGAL PROCEEDINGS
On March 17, 1998, we filed a suit in the United States of America 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 65DI
and 00XX XXX etch equipment infringe certain of our patents. The suit was tried
to the court in May 1999, and on August 31, 1999, the court found both
patents-in-suit valid, and found that TEL had willfully infringed our '223
dual-frequency triode etcher patent. The court enjoined TEL from further sales
or service of its IEM etchers. In addition, the court ordered TEL to pay
attorney's fees and court costs to us. TEL filed an appeal of the court's
ruling. A follow-on action against TEL concerning a later generation of IEM
equipment is pending in the same court. The District Court granted summary
judgment of non-infringement in the follow-on action against TEL in August 2000.
We are appealing that ruling. We cannot assure you of the timing or outcome of
either appeal or of the effect of any such outcome on our business.
On September 1, 1999, we filed a patent infringement action against Xxx
Research Corporation ("Xxx"), asserting infringement of the '223 patent and a
second, related patent. That suit was also filed in the Eastern District of
Virginia, Richmond Division. We are seeking injunctive relief barring Xxx from
manufacturing, selling and supporting products that incorporate our patented
technology. We are further seeking enhanced damages for willful infringement of
our patents. Xxx filed a motion to dismiss that action for lack of jurisdiction,
or in the alternative to transfer that action to the Northern District of
California. On December 7, 1999, the motion to transfer was granted. The case
has since been transferred to the Northern District of California. Discovery has
begun in that action. A Xxxxxxx hearing, previously scheduled for May 2001, has
been taken off calendar pending decision of TEL's appeal to the Federal Circuit.
We cannot assure you of the timing or outcome of this lawsuit or of the effect
of any such outcome on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
fourth quarter ended March 31, 2001.
12
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding our executive
officers as of March 31, 2001:
NAME AGE POSITION
---- --- --------
Xxxxxxx X. Xxxxxx................. 52 Chairman of the Board of Directors,
President and Chief Executive Officer
Xxxx X. Xxxxxxxx.................. 65 Chief Financial Officer
Xxxxxxx X. XxXxxxxxxx............. 46 Vice President, Technology and Corporate
Development and Chief Technical Officer
Xxxxxx X. Xxxxxxxx................ 46 Vice President, Product Development
Xxxxx X. XxXxxxxx................. 50 Vice President, Worldwide Sales and
Marketing
Xxxxx X. Xxxxxxx.................. 54 Vice President, Worldwide Operations and
Customer Support
XXXXXXX X. XXXXXX joined us 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, Xx. Xxxxxx 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").
Xx. Xxxxxx 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, Xx. Xxxxxx led the acquisition of SSI from General Signal Corporation.
Prior to 1990, Xx. Xxxxxx held various senior engineering and operations
management positions with General Signal Corporation, Signetics Corporation,
Raytheon Company, Xxxxxxxxx Semiconductor Corporation and National Semiconductor
Corporation. Xx. Xxxxxx currently is a member of the Semiconductor Equipment and
Materials International Board of Directors.
XXXX X. XXXXXXXX joined us as Chief Financial Officer in October 2000 and
is responsible for overseeing our day-to-day financial and administrative
operations. Prior to joining us, Xx. Xxxxxxxx was principal of Strategic
Consulting Services, a comprehensive management consulting and interim executive
services company, which he founded in 1983. Xx. Xxxxxxxx has nearly 40 years of
experience in strategic development and mergers and acquisitions. His past
experience includes working with a number of large public and privately held
companies in senior management positions, including Good Guys Inc., Consolidated
Fibres and Xxxxx Fargo & Company.
XXXXXXX X. XXXXXXXXXX joined us 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 Xxx Research
Corporation where he had responsibility for the development and introduction of
the Xxx Autoetch and Rainbow product lines.
XXXXXX X. XXXXXXXX joined us in November 1992 as Manager of Mechanical
Engineering where he was responsible for directing the development of our 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 us, Xx. Xxxxxxxx held product
development engineering management and design engineering positions with KLA,
Silicon Valley Group, Inc., Optoscan Corporation, Xxxxx Corporation, Siltec
Corporation and Peterbilt Motors.
XXXXX X. XXXXXXXX joined us in June 1996 as Vice President, Worldwide
Sales. In November 1998, he assumed the additional role of Vice President,
Marketing. Prior to joining us, from 1995 to 1996 and from 1988 to 1992, Xx.
XxXxxxxx 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
13
Xxxxx Industries, Inc., a maker of wire bonders and other back-end assembly
equipment for the IC industry. Prior to 1988, Xx. XxXxxxxx held several sales
and service management positions with Wild/Xxxxx, Inc., GCA Corporation and X.X.
Xxxxx Chemical Company.
XXXXX X. XXXXXXX joined us 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, Xx. Xxxxxxx served as Vice President, Operations with Xxx Research
Corporation where he led worldwide operations and facilities functions and
directed projects to integrate several acquisitions. Prior to 1988, Xx. Xxxxxxx
held senior operations positions with Scientific Microsystems, Inc., Ultratech
Stepper, Inc. and Diablo Systems Inc., a division of Xerox Corporation.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since October 19, 1995, our 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 our common stock for each quarter during
the prior two fiscal years.
HIGH LOW
---- ---
FISCAL YEAR 2000
First Quarter............................................... 3.938 2.875
Second Quarter.............................................. 4.750 2.000
Third Quarter............................................... 13.500 2.000
Fourth Quarter.............................................. 9.688 5.500
FISCAL YEAR 2001
First Quarter............................................... 6.875 2.875
Second Quarter.............................................. 8.000 3.031
Third Quarter............................................... 3.750 1.131
Fourth Quarter.............................................. 4.500 1.781
The approximate number of record holders of our common stock as of March
31, 2001 was 213. We have not paid any cash dividends since our inception and do
not anticipate paying cash dividends in the foreseeable future. Further, our
domestic line of credit restricts the declaration and payment of cash dividends.
14
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31,
---------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue................................ $38,205 $26,438 $29,035 $41,472 $57,423
Gross profit........................... 13,915 9,231 8,161 17,095 25,901
Operating income (loss)................ (7,226) (12,932) (15,402) (6,673) 3,180
Income (loss) before provision for
income taxes and cumulative effect
of change in accounting principle... 1,096 (12,571) (14,997) (5,545) 4,180
Net income (loss)...................... 699 (12,571) (15,132) (5,545) 3,140
Net income (loss) per share:(1)
Basic............................... 0.06 (1.15) (1.42) (0.54) 0.31
Diluted............................. 0.05 (1.15) (1.42) (0.54) 0.29
Shares used in per share computation:
Basic............................... 12,499 10,964 10,630 10,364 10,124
Diluted............................. 12,838 10,964 10,630 10,364 10,764
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $12,649 $12,627 $17,569 $25,660 $30,323
Working capital........................ 26,551 24,993 27,298 39,574 45,392
Total assets................... 42,252 35,573 39,652 55,146 63,524
Short-term notes payable to banks and
others.............................. 3,840 430 223 285 252
Long-term obligations.................. 44 130 30 101 301
Stockholders' equity................... 28,609 27,431 30,816 44,804 50,542
Pro forma statements of operations data assuming application of SAB 101
"Revenue Recognition in Financial Statements" is applied retroactively is as
follows:
YEAR ENDED MARCH 31,
----------------------------------------------------
AS PRO PRO PRO PRO
REPORTED FORMA FORMA FORMA FORMA
2001 2000 1999 1998 1997
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue................................ $38,205 $26,216 $29,165 $41,942 $56,567
Gross profit........................... 13,915 8,987 8,226 17,330 25,473
Operating income (loss)................ (7,226) (13,176) (15,337) (6,438) 2,752
Income (loss) before provision for
income taxes and cumulative effect
of change in accounting
principles.......................... 1,096 (12,815) (14,932) (5,310) 3,752
Net income (loss)...................... 699 (12,815) (15,067) (5,310) 2,712
Net income (loss) per share:(1)
Basic............................... 0.06 (1.17) (1.42) (0.51) 0.27
Diluted............................. 0.05 (1.17) (1.42) (0.51) 0.25
Shares used in per share computation:
Basic............................... 12,499 10,964 10,630 10,364 10,124
Diluted............................. 12,838 10,964 10,630 10,364 10,764
---------------
(1) See Note 1 of our Consolidated Financial Statements for an explanation of
the computation of earnings per share.
15
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:
MARCH 31,
-----------------------
2001 2000 1999
----- ----- -----
Revenue............................................. 100.0% 100.0% 100.0%
Cost of sales....................................... 63.6 65.1 71.9
----- ----- -----
Gross profit........................................ 36.4 34.9 28.1
----- ----- -----
Operating expenses:
Research and development expenses................. 23.4 38.0 33.0
Sales and marketing expenses...................... 13.5 18.1 18.0
General and administrative expenses............... 18.4 27.7 30.1
----- ----- -----
Total operating expenses.................. 55.3 83.8 81.1
----- ----- -----
Operating loss...................................... (18.9) (48.9) (53.0)
Other income, net................................... 21.8 1.4 1.4
----- ----- -----
Income (loss) before provision for income taxes and
cumulative effect of change in accounting
principle......................................... 2.9 (47.5) (51.6)
Provision for income taxes.......................... 0.1 0.0 (0.5)
----- ----- -----
Income (loss) before cumulative effect of change in
accounting principle.............................. 2.8 (47.5) (52.5)
----- ----- -----
Cumulative effect of change in accounting
principle......................................... (1.0) -- --
----- ----- -----
Net income (loss)......................... 1.8% (47.5)% (52.1)%
===== ===== =====
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
Revenue
Our revenue is derived from sales of new and refurbished systems, spare
parts and non-warranty service. Revenue increased 45% in fiscal 2001 from fiscal
2000 (to $38.2 million from $26.4 million). Revenue declined 9 percent in fiscal
2000 from fiscal 1999 (to $26.4 million from $29.0 million). The revenue
increase in fiscal 2001 compared to fiscal 2000 was principally attributable to
an increase in sales of our 900 and 6500 series etch systems. There was a slight
increase in spares and service which we believe is due to the increased usage of
systems previously installed. The revenue decline in fiscal 2000 as compared to
fiscal 1999 was principally attributable to selling one less 6500 series system
resulting in $1.6 million less revenue in fiscal 2000. In addition, our service
revenue declined by $0.6 million in fiscal 2000 over fiscal 1999.
International sales accounted for approximately 61, 59, and 72 percent of
total revenue in fiscal 2001, 2000 and 1999, respectively. We expect that
international sales will continue to account for a significant portion of our
revenue.
Gross Profit
Our gross profit as a percentage of revenue (gross margin) increased
slightly to 36 percent in fiscal 2001 from 35 percent in fiscal 2000, which was
up from 28 percent in fiscal 1999. The gross margin increase in fiscal
16
2001 as compared to fiscal 2000 was principally due to higher gross margins for
systems because of higher volumes, partially offset by lower margins in the
service and spares. The gross margin increase in fiscal 2000 as compared to
fiscal 1999 is principally due to reduced costs in service and spare parts. In
the case of service, expenses in fiscal 2000 were materially less due to reduced
headcount and in the case of spares, margins were improved due to a favorable
mix of parts sold and other inventory related costs including reduced provisions
for excess and obsolete inventory of $0.3 million.
Our gross profit as a percentage of revenue has been, and will continue to
be, affected by a variety of factors, including the mix and average selling
prices of systems sold and the costs to manufacture, service and support new
product introductions and enhancements. Gross margins for our 6500 series
systems are typically lower than those of our more mature 900 series systems due
to the inefficiencies and lower vendor discounts associated with lower order
volumes and increased service installation and warranty support.
Research and Development
Research and development expenses consist primarily of salaries, prototype
material and other costs associated with our research and product development
efforts. In absolute dollars, research and development expenses decreased to
$9.0 million in fiscal 2001 from $10.1 million in fiscal 2000, which had
increased slightly from $9.6 million in fiscal 1999. Research and development as
a percentage of revenue decreased to 23 percent from 38 percent in fiscal 2000,
which had increased from 33 percent in fiscal 1999. The absolute dollar decrease
in fiscal 2001 expenses over fiscal year 2000 was due primarily to the
completion of a project that had produced increased spending in the prior fiscal
year for prototype material enhancements to the 6500 series system. The absolute
dollar increase in fiscal 2000 expenses over fiscal 1999 expenses was
attributable to that same project. We anticipate that fiscal 2002 research and
development expenses in absolute dollars will continue at or decline slightly
from fiscal 2001 levels to permit us to support new process applications at our
6500 series customer installations and to further enhance the 6500 series
product line, while permitting research and development expenses as a percentage
of sales to decline to a more sustainable ratio.
Sales and Marketing
Sales and marketing expenses primarily consist of salaries, commissions,
trade show promotion and advertising expenses. In absolute dollars, sales and
marketing expenses increased to $5.1 million in fiscal year 2001 from $4.8
million in fiscal 2000, which had decreased from $5.2 million in fiscal 1999. As
a percentage of revenue, sales and marketing expenses decreased to 13% in fiscal
year 2001 from 18 percent in fiscal 2000 and fiscal 1999. The absolute dollar
increase in fiscal 2001 from fiscal year 2000 was primarily due to expenses
related to the increased systems sales. The declines in sales and marketing
expenses in fiscal 2000 versus fiscal 1999 were principally due to declines in
systems sales volumes, resulting in lower commission spending, and to reduced
spending on advertising. We expect to slightly decrease our absolute dollar
spending on sales and marketing in fiscal 2002 due to our continued efforts to
cut advertising and trade show spending.
General and Administrative
General and administrative expenses consist of salaries, legal, accounting
and related administrative services and expenses associated with general
management, finance, information systems, human resources and investor relations
activities. General and administrative expenses in absolute dollars decreased to
$7.1 million in fiscal 2001 from $7.3 million in fiscal 2000, which had
decreased from $8.7 million in fiscal 1999. As a percentage of revenues, general
and administrative expenses declined to 18%, down from 28 percent in fiscal 2000
and 30 percent in fiscal 1999. The absolute dollar decrease in general and
administrative expenses in fiscal 2001 over fiscal 2000 was primarily
attributable to a $0.6 million decline in litigation expense in 2001. The
decrease in general and administrative expenses in fiscal 2000 over fiscal 1999
was primarily attributable to a $1.1 million decline in litigation-related
expenses in fiscal 2000. We anticipate that our general and administrative
expenses for fiscal 2002 will be somewhat lower than fiscal 2001 spending due
primarily to anticipated reductions in legal costs associated with our
intellectual property.
17
Other Income, Net
Other income, net, consists principally of royalty income, interest income,
interest expense, gains and losses on foreign exchange and the sale of fixed
assets. We recorded net non-operating income of $8.3 million, $0.4 million, and
$0.4 million in fiscal 2001, 2000 and 1999, respectively. In 2001, net
non-operating income was primarily due to licensing fees received for
non-exclusive patent rights. In the previous two years, net non-operating income
was primarily attributable to interest income on outstanding cash balances.
Provision for Income Taxes
Our effective tax rate was 2.3 percent in fiscal 2001, and zero percent in
fiscal 2000 and 1999. We recorded a small provision for federal alternative
minimum tax in fiscal year 2001. We believe that we have sufficient tax loss
carry forward balances to offset any other tax liability related to the current
year earnings. We incurred net losses before taxes in the previous two years and
therefore recorded no tax provision in fiscal 2000 and recorded a tax provision
of $0.1 million in fiscal 1999 associated with our operations in Japan.
Cumulative Effect of Change in Accounting Principle
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition. Historically,
we recognized revenue from the sales of our products when title passed to the
customer, and accrued for the costs of installation and estimated warranty
costs. Under the new accounting method adopted retroactively to April 1, 2000,
no revenues are recognized until both title and risk of loss have passed to the
customer. In addition, we defer revenue recognition for new product sales until
installation and customer acceptance have occurred. For sales of existing
products, upon the transfer of title and risk of loss, revenue is recorded at
the lesser of the fair value of the equipment or the contractual amount billable
upon shipment. The remainder is recorded as deferred revenue and recognized as
revenue upon installation and customer acceptance. Revenue recognition for spare
part sales has generally not changed under the provisions of SAB 101. Services
revenue recognition is also unchanged, with such revenue recognized as the
related services are provided, unless services are paid for in advance according
to service contracts, in which case revenue is deferred and recognized over the
service period using the straight-line method. In all cases, revenue is only
recognized when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, our price is fixed or determinable, and
collectibility is reasonably assured.
During the fourth quarter of fiscal 2001, we implemented SAB 101,
retroactive to the beginning of the fiscal year. This was reported as a
cumulative effect of a change in accounting principle as of April 1, 2000. The
cumulative effect of the change in accounting principle on prior years resulted
in a charge to income of $372K (net of income taxes of $0), which has been
included in income for the year ended March 31, 2001. For fiscal 2001, we
recognized $478K in revenue that is included in the cumulative effect of the
change in accounting principle.
Liquidity and Capital Resources
Net cash used in operations was $2.9 million in fiscal 2001 due principally
to income of $2.1 million (after adjusting for depreciation) and an increase in
accounts payable and other accrued liabilities, offset by an increase in
accounts receivable, inventory, and prepaid expenses. Net cash used in
operations was $13.6 million in fiscal 2000, due principally to a net loss of
$11.0 million after adjusting for depreciation, an increase in accounts
receivable and inventories, offset in part by a decline in other current assets
and an increase in accrued expenses and accounts payable. Net cash used in
operations was $8.2 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 capital expenditures totaled $0.9 million, $0.6 million, and $0.1
million in fiscal 2001, 2000 and 1999, respectively. Capital expenditures in all
three years were incurred principally for demonstration equipment, leasehold
improvements and to acquire design tools, analytical equipment and computers.
18
Net cash provided by financing activities totaled $3.6 million for fiscal
2001 due principally to increased borrowings against the domestic line of
credit. Net cash provided by financing activities totaled $9.2 million for
fiscal 2000, due principally to proceeds from the sale of 1.3 million shares of
our common stock and from the exercise of employee stock options and employee
participation in our stock purchase plan. Net cash provided by financing
activities for fiscal 1999 was immaterial.
As of March 31, 2001, we had approximately $12.6 million of cash and cash
equivalents. In addition to cash and cash equivalents, our other principal
sources of liquidity consist of unused portions of several bank borrowing
facilities. As of March 31, 2001, we had available $0.3 million of unused
domestic credit line availability with $3.5 million borrowed against that line.
The domestic credit line bears interest at prime plus 1.5 percent, or 10.0% as
of March 31, 2001. The domestic line of credit has a $10 million maximum
borrowing capacity secured by substantially all of our assets. This facility
will be available until April 2003. In addition to the foregoing facility, as of
March 31, 2001, our Japanese subsidiary had two lines of credit available for a
total of 450 million Yen (approximately $3.7 million at exchange rates
prevailing on March 31, 2001) collateralized by Japanese customer promissory
notes held by such subsidiary in advance of payment on customers' accounts
receivable. The two Japanese bank lines bear interest at Japanese prime (1.375
percent as of March 31, 2001) plus 0.25 percent and 0.625 percent, respectively.
We believe that anticipated cash flows from operations, funds available
under our lines of credit and existing cash and cash equivalent balances will be
sufficient to meet our cash requirements for the next twelve months. After that
time, we cannot be certain that additional funding will be available on
acceptable terms, or at all. If we require additional capital resources to grow
our business, execute our operating plans, or acquire complimentary technologies
or businesses at any time in the future, we may seek to sell additional equity
or debt securities or secure additional lines of credit, which may result in
additional dilution to our stockholders. In addition, we cannot be assured that
additional financing, if needed, will be available on favorable terms, or at
all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK DISCLOSURE
We are exposed to financial market risks, including changes in foreign
currency exchange ("FX") rates and interest rates. To mitigate the risks
associated with FX rates, we utilize derivative financial instruments. We do not
use derivative financial instruments for speculative or trading purposes.
We manufacture the majority of our products in the United States of
America; however, we service customers worldwide and thus have a cost base that
is diversified over a number of European and Asian currencies as well as the
U.S. dollar. This diverse base of local currency costs serves to mitigate
partially the earnings effect of potential changes in value of our local
currency denominated revenue. Additionally, we denominate our export sales in
U.S. dollars, whenever possible.
We manage short-term exposures to changing FX rates with financial market
transactions, principally through the purchase of forward FX contracts to offset
the earnings and cash-flow impact of the nonfunctional currency-denominated
receivables. Forward FX contracts are denominated in the same currency as the
receivable being hedged, and the term of the forward FX contract matches the
term of the underlying receivable. The receivables being hedged arise from trade
transactions and other firm commitments affecting us.
We do not hedge our foreign currency exposures in a manner that would
entirely eliminate the effects of changes in FX rates on our operations.
Accordingly, our reported revenue and results of operations have been, and may
in the future be, affected by changes in the FX rates. We have utilized a
sensitivity analysis for the purpose of identifying market risk in relation to
underlying transactions that are sensitive to FX rates including foreign
currency forward exchange contracts and nonfunctional currency denominated
receivables. The net amount that is exposed to changes in foreign currency rates
was evaluated against a 10% change in the value of the foreign currency versus
the U.S. dollar. Based on this analysis, we believe that we are not materially
sensitive to changes in foreign currency rates on our net exposed FX position.
19
A 78 basis-point move in the weighted average interest rates (10% of our
weighted average interest rates in 2001) affecting our floating rate financial
instruments as of March 31, 2001, would have an immaterial effect on our pretax
results of operations over the next fiscal year.
All of the potential changes noted above are based on sensitivity analyses
performed on our balances as of March 31, 2001.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEGAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
MARCH 31,
--------------------
2001 2000
-------- --------
Current assets:
Cash and cash equivalents................................. $ 12,649 $ 12,627
Accounts receivable, net of allowances for sale returns
and doubtful accounts of $127 and $449 at March 31,
2001 and 2000, respectively............................ 7,967 6,438
Inventory, net............................................ 17,759 13,261
Prepaid expenses and other current assets................. 1,775 679
-------- --------
Total current assets.............................. 40,150 33,005
Property and equipment, net................................. 1,772 2,223
Other assets................................................ 330 345
-------- --------
Total assets...................................... $ 42,252 $ 35,573
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 3,840 $ 430
Accounts payable.......................................... 4,139 2,538
Accrued expenses and other current liabilities............ 5,620 5,044
-------- --------
Total current liabilities......................... 13,599 8,012
Long term portion of capital lease obligations.............. 44 130
-------- --------
Total liabilities................................. 13,643 8,142
-------- --------
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; 12,572,252 and 12,452,744 shares issued and
outstanding at March 31, 2001 and 2000, respectively... 126 124
Additional paid-in capital................................ 65,087 64,699
Accumulated other comprehensive income.................... 350 261
Accumulated deficit....................................... (36,954) (37,653)
-------- --------
Total stockholders' equity........................ 28,609 27,431
-------- --------
Total liabilities and stockholders' equity........ $ 42,252 $ 35,573
======== ========
See accompanying notes to consolidated financial statements.
21
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
-------------------------------
2001 2000 1999
------- -------- --------
Revenue..................................................... $38,205 $ 26,438 $ 29,035
Cost of sales............................................... 24,290 17,207 20,874
------- -------- --------
Gross profit.............................................. 13,915 9,231 8,161
------- -------- --------
Operating expenses:
Research and development expenses......................... 8,939 10,061 9,594
Sales and marketing expenses.............................. 5,140 4,782 5,221
General and administrative expenses....................... 7,062 7,320 8,748
------- -------- --------
Total operating expenses.......................... 21,141 22,163 23,563
------- -------- --------
Operating loss............................................ (7,226) (12,932) (15,402)
Other income, net........................................... 8,322 361 405
------- -------- --------
Income (loss) before provision for income taxes and
cumulative effect of change in accounting principle....... 1,096 (12,571) (14,997)
Provision for income taxes.................................. 25 0 135
------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle...................................... 1,071 (12,571) (15,132)
------- -------- --------
Cumulative effect of change in accounting principle, net of
tax of $0................................................. (372) 0 0
------- -------- --------
Net income (loss)......................................... $ 699 $(12,571) $(15,132)
======= ======== ========
Income (loss) per share before cumulative effect of change
of accounting principle:
Basic..................................................... $ 0.09 $ (1.15) $ (1.42)
Diluted................................................... 0.08 (1.15) (1.42)
Cumulative effect of change in accounting principle:
Basic..................................................... $ (0.03) -- --
Diluted................................................... (0.03) -- --
Net income (loss) per share:
Basic..................................................... $ 0.06 $ (1.15) $ (1.42)
Diluted................................................... 0.05 (1.15) (1.42)
Weighted average shares used in per share computations:
Basic..................................................... 12,499 10,964 10,630
Diluted................................................... 12,838 10,964 10,630
See accompanying notes to consolidated financial statements.
22
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT EQUITY
---------- ------ ---------- ------------- ----------- -------------
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 loss...................... (15,132)
Cumulative translation
adjustment.................. 685
Total comprehensive loss...... (14,447)
---------- ---- ------- ----- -------- -------
Balances at March 31, 1999.... 10,725,650 $107 $55,635 $ 156 $(25,082) $30,816
Common stock sold, net of
issuance costs of $480...... 1,292,336 13 7,507 7,520
Common stock issued under
option and stock purchase
plans....................... 434,758 4 1,557 1,561
Net loss...................... (12,571)
Cumulative translation
adjustment.................. 105
Total comprehensive loss...... (12,466)
---------- ---- ------- ----- -------- -------
Balances at March 31, 2000.... 12,452,744 $124 $64,699 $ 261 $(37,653) $27,431
Common stock issued under
option and stock purchase
plans....................... 119,508 2 388 390
Net income.................... 699
Cumulative translation
adjustment.................. 89
Total comprehensive loss...... 788
---------- ---- ------- ----- -------- -------
Balances at March 31, 2001.... 12,572,252 $126 $65,087 $ 350 $(36,954) $28,609
========== ==== ======= ===== ======== =======
See accompanying notes to consolidated financial statements.
23
TEGAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income (loss)........................................ $ 699 $(12,571) $(15,132)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Deferred income taxes............................... -- -- 239
Depreciation and amortization....................... 1,362 1,559 1,904
Allowance for doubtful accounts and for sales
return........................................... (322) 185 (277)
Cumulative effect of change in accounting
principle........................................ 372 -- --
Changes in operating assets and liabilities:
Accounts receivable.............................. (1,232) (1,545) 4,763
Inventory........................................ (4,961) (1,067) 1,963
Prepaid expenses and other assets................ (1,102) 872 1,168
Accounts payable and other current liabilities... 2,326 (979) (2,817)
-------- -------- --------
Net cash used in operating activities............ (2,858) (13,546) (8,189)
-------- -------- --------
Cash flows used in investing activities for the purchases
of property and equipment................................ (910) (597) (106)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock............... 390 9,081 460
Borrowings under notes payable........................... 40,757 9,264 2,164
Repayment of notes payable............................... (37,433) (9,057) (2,226)
Repayment of capital lease obligations................... (104) (105) (224)
-------- -------- --------
Net cash provided by financing activities........ 3,610 9,183 174
-------- -------- --------
Effect of exchange rates on cash and cash equivalents...... 180 18 30
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 22 (4,942) (8,091)
Cash and cash equivalents at beginning of year............. 12,627 17,569 25,660
-------- -------- --------
Cash and cash equivalents at end of year................... $ 12,649 $ 12,627 $ 17,569
======== ======== ========
Supplemental disclosures of cash paid during the year
Interest................................................. $ 557 $ 123 $ 28
======== ======== ========
Income taxes............................................. $ 35 $ 332 $ --
======== ======== ========
Supplemental disclosure of non-cash investing and financing
activities
Transfer of demo lab equipment between inventory and
fixed assets.......................................... $ 380 $ 255 $ (249)
======== ======== ========
See accompanying notes to consolidated financial statements.
24
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Tegal Corporation (the "Company") designs, manufactures, markets, and
services plasma etch systems used in the fabrication of integrated circuits
("ICs") and related devices in voice and data telecommunications, 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. The effects of translating the financial statements of foreign
subsidiaries into U.S. dollars are reported as cumulative other comprehensive
income, a separate component of stockholders' equity. 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 in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could vary from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments having a maturity
of three months or less on the date of purchase to be cash equivalents.
At March 31, 2001 and 2000, all of the Company's investments are classified
as cash equivalents on the balance sheet. The investment portfolio at March 31,
2001 and 2000 is comprised of money market funds. At March 31, 2001 and 2000,
the fair value of the Company's investments approximated cost.
Financial Instruments Disclosures
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 xxxxxx and
realized and unrealized gains and losses are deferred until settlement of the
hedged items. They are recognized as other gains or losses when a hedged
transaction is no longer expected to occur. Deferred gains and losses were not
significant at March 31, 2001 or 2000. Foreign currency gains and losses
included in other income (expense) were not significant for the years ended
March 31, 2001, 2000 and 1999.
25
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
At March 31, 2001 the Company had forward exchange contracts maturing at
various dates throughout fiscal 2002 to exchange 250 million Yen into $2.2
million. The fair value of these instruments was immaterial at March 31, 2001.
At March 31, 2000, the Company had no forward exchange contracts.
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 Asia.
The Company performs ongoing credit evaluations of its customers and generally
requires no collateral. The Company maintains reserves for potential credit
losses. Write-offs during the periods presented have been insignificant. As of
March 31 2001, two customers accounted for approximately 20 percent and 23
percent of the accounts receivable balance. As of March 31, 2000, two customers
accounted for approximately 34 percent and 12 percent of the accounts receivable
balance.
Inventory
Inventory is stated at the lower of cost or market net of an allowance for
obsolescence. Cost is computed using standard cost, which approximates actual
cost on a first-in, first-out basis and includes material, labor and
manufacturing overhead costs.
Warranty Costs
A warranty is provided under the terms of our system contract. Typically
our warranty period is six to 12 months depending on the contract
specifications. We provide for these costs at the time of revenue recognition
based upon prior experience.
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. When assets are disposed of,
the cost and related accumulated depreciation are removed from the accounts and
the resulting gains or losses are included in the results of operations. We
generally depreciate our assets over the following periods:
YEARS
-----
Furniture and machinery and equipment..... 7
Computer and software..................... 3
Demo lab equipment........................ 7
5or
remaining
lease
Leasehold improvements.................... life
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
undiscounted expected future cash flows are less than the carrying value of the
assets, an impairment loss is recognized based on the excess of the carrying
amount over the fair value of the assets.
26
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
Income Taxes
Deferred income taxes are recognized for the differences between the tax
bases of assets and liabilities and their financial reporting amounts based on
enacted tax rates. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition. Historically,
the Company recognized revenue from the sales of its products when title passed
to the customer, and accrued for the costs of installation and estimated
warranty costs. Under the new accounting method adopted retroactively to April
1, 2000, no revenues are recognized until both title and risk of loss have
passed to the customer. In addition, the Company defers revenue recognition for
new product sales until installation and customer acceptance have occurred. For
sales of existing products, upon the transfer of title and risk of loss, revenue
is recorded at the lesser of the fair value of the equipment or the contractual
amount billable upon shipment. The remainder is recorded as deferred revenue and
recognized as revenue upon installation and customer acceptance. Revenue
recognition for spare part sales has generally not changed under the provisions
of SAB 101. Services revenue recognition is also unchanged, with such revenue
recognized as the related services are provided, unless services are paid for in
advance according to service contracts, in which case revenue is deferred and
recognized over the service period using the straight-line method. In all cases,
revenue is only recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the sales price is fixed
or determinable, and collectibility is reasonably assured.
During the fourth quarter of fiscal 2001, the Company implemented SAB 101,
retroactive to the beginning of the fiscal year. This was reported as a
cumulative effect of a change in accounting principle as of April 1, 2000. The
cumulative effect of the change in accounting principle on prior years resulted
in a charge to income of $372 (net of income taxes of $0), or $0.03 per share,
which has been included in income for the year ended March 31, 2001. For fiscal
2001, the Company recognized $478 in revenue that is included in the cumulative
effect of the change in accounting principle as of April 1, 2000. The results
for the first three quarters of the year ended March 31, 2001 have been restated
in accordance with SAB 101. Pro forma amounts for the years ended March 31, 2000
and 1999, assuming SAB 101 had been applied in those years, are as follows:
YEAR ENDED MARCH 31,
--------------------
2000 1999
-------- --------
AS REPORTED:
Net loss............................................... $(12,571) $(15,132)
Net loss per share, basic and diluted.................. (1.15) (1.42)
PROFORMA:
Net loss............................................... $(12,815) $(15,067)
Net loss per share, basic and diluted.................. (1.17) (1.42)
Earnings Per Share
Basic earnings per share ("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.
27
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND 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 proforma disclosures as required under Statement of
Financial Accounting Standards Xx. 000 ("XXXX Xx. 000"), "Accounting for
Stock-Based Compensation" (see Note 7).
The value of warrants, options or stock exchanged for services from
non-employees is generally expensed over the period benefited. Such warrants and
options are valued using the Black-Scholes option pricing model. To calculate
the expense, the Company uses either the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation 44 ("FIN 44"), "Accounting for Certain Transactions involving
Stock Compensation -- an interpretation of APB Opinion No. 25," The Company has
adopted the provisions of FIN 44 and such adoption did not materially impact the
Company's financial position, result of operations or cash flows.
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
attributable to foreign currency translation adjustments. Comprehensive income
is shown in the statement of stockholders' equity.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency xxxxxx and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 pursuant to the issuance of SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which deferred the effective date of
SFAS No. 133 by one year. Upon adoption of SFAS No. 133, the Company will be
required to adjust hedging instruments to fair value in the consolidated balance
sheet and recognize the offsetting gain or loss as a transition adjustment to be
reported in net income or other comprehensive income, as appropriate, and
presented in a manner similar to the cumulative effect of a change in accounting
principle. The Company believes that the adoption of this statement will not
have a significant effect on the Company's financial position, results of
operations or cash flows.
28
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
NOTE 2. BALANCE SHEET AND INCOME STATEMENT DETAIL
Inventory consisted of:
MARCH 31,
------------------
2001 2000
------- -------
Raw materials............................................ $ 4,810 $ 2,579
Work in process.......................................... 4,369 633
Finished goods and spares................................ 8,580 10,049
------- -------
$17,759 $13,261
======= =======
Property and equipment consisted of:
MARCH 31,
--------------------
2001 2000
-------- --------
Machinery and equipment................................ $ 8,586 $ 8,229
Demo lab equipment..................................... 2,251 2,795
Leasehold improvements................................. 3,407 2,998
-------- --------
14,244 14,022
Less accumulated depreciation and amortization......... (12,472) (11,799)
-------- --------
$ 1,772 $ 2,223
======== ========
Machinery and equipment at March 31, 2001 and 2000 includes approximately
$255 and $484, respectively, of assets under leases that have been capitalized.
Accumulated amortization for such equipment approximated $127 and $265,
respectively.
A summary of accrued expenses and other current liabilities follows:
MARCH 31,
----------------
2001 2000
------ ------
Accrued compensation costs................................. $1,312 $1,193
Income taxes payable....................................... 603 596
Product warranty........................................... 1,542 1,188
Other...................................................... 2,119 2,067
------ ------
$5,576 $5,044
====== ======
Other income, net, consisted of the following:
YEAR ENDED MARCH 31,
------------------------
2001 2000 1999
------ ----- -----
Interest income................................... $ 597 $ 384 $ 951
Interest expense.................................. (731) (132) (28)
Foreign currency exchange gain (loss), net........ 276 48 (549)
Non-exclusive licensing fees...................... 8,350 0 0
Other............................................. (170) 61 31
------ ----- -----
$8,322 $ 361 $ 405
====== ===== =====
NOTE 3. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share", requires dual presentation of basic and
diluted net income (loss) per share on the face of the income statement. Basic
EPS is computed by dividing income
29
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
(loss) available to common stockholders (numerator) by the weighted average
number of common shares outstanding (denominator) for the period. Diluted EPS
gives effect to all dilutive potential common shares outstanding during the
period. The computation of diluted EPS uses the average market prices during the
period. All amounts in the following table are in thousands except per share
data.
YEAR ENDED MARCH 31,
-------------------------------
2001 2000 1999
------- -------- --------
Basic net income (loss) per share:
Income available to common stockholders... $ 699 $(12,571) $(15,132)
Weighted average common shares
outstanding............................ 12,499 10,964 10,630
Basic net income (loss) per share......... $ 0.06 $ (1.15) $ (1.42)
Diluted net income (loss) per share:
Income available to common stockholders... $ 699 $(12,571) $(15,132)
Weighted average common shares
outstanding............................ 12,499 10,964 10,630
Diluted potential common shares from stock
options................................ 339 -- --
------- -------- --------
Weighted average common shares and
dilutive potential common shares....... 12,838 10,964 10,630
Diluted net income (loss) per share....... $ 0.05 $ (1.15) $ (1.42)
Total stock options outstanding at March 31, 2000 of 3,098,733 and March
31, 1999 of 2,441,000 were excluded from the computations of diluted net income
(loss) per share because of their anti-dilutive effect on diluted earnings
(loss) per share.
NOTE 4. NOTES PAYABLE TO BANKS AND OTHERS
In April 2000, the Company replaced its prior line of credit with a
replacement line of credit totaling $10 million with a U.S. financial
institution. The amount outstanding as of March 31, 2001 was $3.5 million. No
amount was outstanding under the old line of credit as of March 31, 2000 and
March 31, 1999. The current line bears interest at prime plus 1.5 percent, is
secured by a blanket security on all of the Company's assets, and is available
until April 2003. 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 levels of cash and tangible net worth.
The Company's Japanese subsidiary has two lines of credit available for 300
million Yen and 150 million Yen (approximately $2.5 million and $1.2 million,
respectively, at exchange rates prevailing as of March 31, 2001), bearing
interest at 1.625 percent and 2.0 percent in excess of Japanese prime (1.375
percent as of March 31, 2001). The lines of credit are available until June 30,
2001 and September 30, 2001, respectively, 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, 2001 and 2000, were $226 and $417,
respectively.
NOTE 5. INCOME TAXES
The components of income (loss) before provision for income taxes and
cumulative effect of change in accounting principle are as follows:
YEAR ENDED MARCH 31,
------------------------------
2001 2000 1999
------ -------- --------
Domestic..................................... $1,447 $(12,664) $(14,563)
Foreign...................................... (351) 93 (434)
------ -------- --------
$1,096 $(12,571) $(14,997)
====== ======== ========
30
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31,
---------------------
2001 2000 1999
---- ---- -----
Current:
U.S. federal........................................ $25 $-- $(257)
State and local..................................... -- -- --
Foreign............................................. -- -- 153
--- ---- -----
25 -- (104)
--- ---- -----
Deferred:
U.S. federal........................................ -- -- 239
State and local..................................... -- -- --
--- ---- -----
-- -- 239
--- ---- -----
Total....................................... $25 $-- $ 135
=== ==== =====
The income tax provision differs from the amount computed by applying the
statutory U.S. federal income tax rate as follows:
YEAR ENDED MARCH 31,
---------------------------
2001 2000 1999
----- ------- -------
Income tax provision at U.S. statutory rate..... $ 373 $(4,276) $(5,099)
State taxes net of federal benefit.............. 0 (733) (874)
Utilization of foreign losses................... 209 -- --
Reversal of deferred tax assets previously
reserved...................................... 160 -- --
Utilization of net operating losses and
credits....................................... (643) (1,027) 638
Increase (decrease) in valuation allowance...... (74) 6,015 5,419
Other........................................... -- 21 51
----- ------- -------
Income tax expense............................ $ 25 $ -- $ 135
===== ======= =======
The components of deferred taxes are as follows:
MARCH 31,
--------------------
2001 2000
-------- --------
Revenue recognized for tax and deferred for book....... $ 412 $ 412
Non-deductible accruals and reserves................... 3,280 3,440
Domestic net operating loss carryforward............... 7,543 9,178
Credits................................................ 3,418 3,128
Uniform capitalization adjustment...................... 885 215
Other.................................................. 716 523
-------- --------
Total........................................ 16,254 16,896
Valuation allowance.................................... (16,254) (16,896)
-------- --------
Net deferred tax asset............................... $ -- $ --
======== ========
We have recorded no net deferred tax assets for the years ended March 31,
2001 and 2000, respectively. The Company has provided a valuation allowance of
$16.3 million and $16.9 million at March 31, 2001 and March 31, 2000,
respectively. The valuation allowance is primarily for net operating loss
carryforward, credits and non-deductible accruals and reserves, for which
realization of future benefit is uncertain.
31
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
At March 31, 2001, the Company had federal and state operating loss
carryforwards of approximately $21.2 million which begin to expire in the year
ended March 31, 2020.
At March 31, 2001, the Company also has research and experimentation credit
carryforwards of $2.4 million and $1.0 million for federal and state income tax
purposes, respectively, which expire through 2015.
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:
CAPITAL OPERATING
YEAR ENDING MARCH 31, LEASES LEASES
--------------------- ------- ---------
2002...................................................... $ 86 $1,843
2003...................................................... 44 1,642
2004...................................................... -- 1,517
2005...................................................... -- 6
---- ------
Total minimum lease payments.............................. 130 $5,008
======
Less amount representing interest......................... (9)
----
Present value of minimum lease payments................... 121
Less current portion...................................... 77
----
Long term capital lease obligation........................ $ 44
====
The above schedule of minimum payments excludes minimum annual sublease
rentals payable to the Company totaling $1.3 million through October 31, 2003,
under operating subleases. In addition, most leases provide for the Company to
pay real estate taxes and other maintenance expenses. Rent expense for operating
leases was $1.7 million, $1.9 million, and $2.1 million, during the years ended
March 31, 2001, 2000 and 1999, respectively.
After adjusting for the revenue recognition guidance of SAB 101 in fiscal
2001, the Company recorded net losses in seven of the last eight quarters in an
aggregate amount of approximately $11.9 million. It faces significant risks in
the execution of its current business strategy, particularly in light of the
volatile and uncertain market environment and the sharp reduction in the
worldwide demand for semiconductor manufacturing capital equipment. These risks
include, but are not limited to, process and product development, market
acceptance of products and services, competition in both technology and price,
retention of key personnel, maintenance of the largely fixed-cost global sales
and service infrastructure and liquidity. Management believes that its responses
to the unfolding business climate and currently available financial resources,
including cash on hand, unused borrowing capacity and access to additional
external financing sources if necessary, will be adequate to fund operations
through fiscal year 2002.
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 could be granted to management and consultants. The exercise
price of options and the purchase price of stock purchase rights generally has
been the fair value of the Company's common stock on the date of grant. At the
date of issuance of the stock options, all options are exercisable; however the
Company has the right to repurchase any stock acquired
32
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
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. The Equity
Incentive Plan expired in December 1999. Consequently no shares were available
for issuance under the Equity Incentive Plan as of March 31, 2001.
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 could 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. The 1990 Stock Option Plan
expired on March 10, 2000. Consequently no shares were available for issuance
under the Option Plan as of March 31, 2001.
1998 Equity Participation Plan
Pursuant to the terms of the Company's Amended 1998 Equity Participation
Plan ("Equity Plan"), which was authorized as a successor plan to the Company's
Equity Incentive Plan and Option Plan, 1,900,000 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, 2001,
986,316 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 600,000 shares of common stock may be
granted to outside directors. Under the Directors Plan, each outside director
who was elected or appointed to the Board on or after September 15, 1998, shall
be granted an option to purchase 20,000 shares of common stock and on each
second anniversary after the applicable election or appointment shall receive an
additional option to purchase 20,000 shares, provided that such outside director
continues to serve as an outside director on that date. 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, 2001, 340,000 shares were available for issuance under the
Directors Plan.
33
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
The following table summarizes the Company's stock option activity for the
four plans described above ("stock option awards") and weighted average exercise
price within each transaction type for each of the years ended March 31, 2001,
2000 and 1999 (number of shares in thousands):
2001 2000 1999
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
Options outstanding at beginning of
year............................... 3,099 $4.19 2,532 $4.53 2,036 $5.46
Options canceled..................... (730) 4.68 (96) 5.16 (184) 6.23
Options granted...................... 343 3.00 1,037 3.29 742 2.15
Options exercised.................... (56) 1.71 (374) 3.76 (62) 1.31
----- ----- ----- ----- ----- -----
Options outstanding March 31......... 2,656 $3.95 3,099 $4.19 2,532 $4.53
===== ===== ===== ===== ===== =====
At March 31, 2001, the repurchase right associated with 1,285,990 of the
options outstanding had expired.
The following table summarizes information with respect to stock options
outstanding as of March 31, 2001 (number of shares in thousands):
OPTIONS IN WHICH UNDERLYING
OUTSTANDING OPTIONS AS OF MARCH 31, 2001 SHARES NO LONGER SUBJECT TO
---------------------------------------------- REPURCHASE RIGHTS EXERCISABLE AT MARCH 31, 2001
WEIGHTED WEIGHTED ---------------------------- ------------------------------
RANGE OF NUMBER OF AVERAGE AVERAGE REMAINING NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES SHARES EXERCISE PRICE CONTRACTUAL LIFE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------------- --------- -------------- ----------------- --------- ---------------- ---------- -----------------
(IN YEARS)
$ .24 - $ 2.25 464 $1.58 10.48 341 $1.40 439 $1.54
$2.47 - $ 3.19 342 2.60 10.56 29 2.73 96 2.75
$3.25 - $ 3.25 663 3.25 8.44 2 3.25 48 3.25
$3.38 - $ 4.25 506 3.91 12.06 302 4.01 443 3.91
$4.75 - $ 7.69 464 5.82 6.88 416 5.78 439 5.88
$8.00 - $12.00 217 9.40 9.02 196 9.47 217 9.40
-------------- ----- ----- ----- ----- ----- ----- -----
$ .24 - $12.00 2,656 $3.95 9.53 1,286 $4.69 1,682 $4.42
===== ===== =====
As described in Note 1, the Company has adopted the disclosure provisions
of SFAS No. 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 No. 123 for pro forma disclosure purposes only, the
Company has calculated the estimated grant date fair value of its stock option
awards using the Black-Scholes model. The Black-Scholes model, as well as other
currently accepted option valuation models, was developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions. These models also require highly subjective assumptions, including
future stock price volatility and expected time until exercise, which greatly
affect the calculated grant date fair value.
34
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
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"):
2001 2000 1999
---- ---- ----
Expected life (years):
Stock options........................................ 4.0 4.0 4.0
Employee plan........................................ 0.5 0.5 0.5
Volatility:
Stock options........................................ 108% 95% 75%
Employee plan........................................ 115% 160% 130%
Risk-free interest rate................................ 5.5% 5.60% 5.20%
Dividend yield......................................... 0% 0% 0%
The weighted average estimated grant date fair value, as defined by SFAS
No. 123, for stock option awards granted during 2001, 2000 and 1999 was $2.23,
$2.28 and $1.27 per option, respectively.
Employee Qualified 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 500,000 shares of common stock. 63,360 common stock
shares were purchased in fiscal 2001 and 60,934 common shares were purchased in
fiscal 2000. Shares available for future purchase under the Employee Plan were
216,897 at March 31, 2001.
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 No. 123,
of the purchase rights granted under the Employee Plan was calculated using the
Black-Scholes model and the assumptions outlined above. The weighted average
estimated grant date fair values per share, as defined by SFAS No. 123, for
rights granted under the Employee Plan during fiscal 2001, 2000 and 1999 were
$1.29, $3.31 and $1.48, respectively.
Pro Forma Net Loss and Net Loss 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 loss and loss per share
would have been increased to the pro forma amounts below for the years ended
March 31, 2001, 2000 and 1999:
2001 2000 1999
------- -------- --------
Pro forma net loss.......................... $(1,124) $(14,785) $(16,895)
Pro forma net loss per share:
Basic and diluted......................... $ (0.09) $ (1.35) $ (1.59)
The pro forma effect on net loss and net loss per share takes into
consideration pro forma compensation related only to grants made after December
15, 1995. Consequently, the pro forma effect on net loss and net loss per share
for 2001, 2000 and 1999 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 four percent
35
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
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 $25,
$27 and $27 in the years ended March 31, 2001, 2000, and 1999, respectively.
NOTE 8. STOCKHOLDER 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.
NOTE 9. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise", replacing the "industry segment" approach with the
"management" approach. SFAS No. 131 establishes standards for reporting
information about operating segments, geographic areas and major customers in
financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker, or chief decision
making group, in deciding how to allocate resources and in assessing
performance. The Company's business is completely focused on one industry
segment, 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 by geography:
YEARS ENDED MARCH 31,
-----------------------------
2001 2000 1999
------- ------- -------
Revenues:
Sales to customers located in:
United States............................ $15,087 $10,867 $ 8,111
Asia..................................... 5,612 2,095 2,669
Europe................................... 10,644 7,498 6,657
Japan.................................... 6,862 5,978 11,598
------- ------- -------
Total external sales................ $38,205 $26,438 $29,035
======= ======= =======
MARCH 31,
----------------
2001 2000
------ ------
Long-lived assets at year-end:
United States............................................ $1,787 $ 191
Europe................................................... 74 2,073
Japan.................................................... 198 237
Asia..................................................... 43 67
------ ------
Total identifiable assets........................ $2,102 $2,568
====== ======
36
TEGAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE DATA, UNLESS
OTHERWISE NOTED)
The Company's sales are primarily to domestic and international
semiconductor manufacturers. The top five customers accounted for approximately
46 percent, 53 percent, and 41 percent of the Company's total net sales for the
years ended March 31, 2001, 2000, and 1999, respectively. One customer accounted
for 13% and two customers accounted for 11% of the Company's total net sales for
the year ended March 31, 2001. Three customers accounted for 16 percent, 14
percent and 10 percent of the Company's total net sales for the year ended March
31, 2000, and no customer accounted for more than 10 percent of net sales for
the year ended March 31, 1999.
NOTE 10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth our unaudited selected financial data for
each of the eight quarterly periods ended March 31, 2001. The data for the four
quarterly periods for the fiscal year 2000 are under the historical shipment
method of recognizing revenue, and the data for the four quarterly periods for
fiscal year 2001 are under SAB 101.
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
2001 2000 2000 2000 2000 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTERLY FINANCIAL DATA: Revised Revised Revised
Revenue............................... $ 6,235 $11,723 $12,779 $ 7,468 $ 8,538 $ 6,541 $ 4,700 $ 6,659
Gross profit.......................... 1,283 4,323 5,216 3,093 3,357 2,181 1,536 2,157
Net income (loss)..................... (3,826) 7,576 (236) (2,815) (1,921) (2,897) (3,988) (3,765)
Net income (loss) per share*
Basic............................... (0.31) 0.61 (0.02) (0.23) (0.17) (0.27) (0.37) (0.35)
Diluted............................. (0.31) 0.60 (0.02) (0.23) (0.17) (0.27) (0.37) (0.35)
---------------
* Net income/(loss) per share is computed independently for each of the quarters
presented, therefore, the sum of the quarterly net income/(loss) per share may
not equal the annual net income/(loss) per share.
REVISED QUARTERLY RESULTS (UNAUDITED)
The results of operations as previously reported in the Company's interim
fiscal 2001 financial statements filed on Form 10-Q have been revised to reflect
the application of SAB 101 effective April 1, 2000. The proforma results of
operations data for the three months ended March 31, 2000 is presented for
comparison purposes as if the application of SAB 101 were adopted January 1,
2000.
The net effect of the adoption of SAB 101 was:
THREE MONTHS ENDED
---------------------------------------------------
DECEMBER 31, 2000 SEPTEMBER 30, 2000
------------------------ ------------------------
AS REPORTED AS REVISED AS REPORTED AS REVISED
----------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues...................... $11,468 $11,723 $13,276 $12,779
Gross profit.................. 3,928 4,323 5,614 5,216
Net income (loss)............. 7,181 7,576 162 (236)
Net income (loss) per share:
Basic....................... 0.57 0.61 0.01 (0.02)
Diluted..................... 0.57 0.60 0.01 (0.02)
THREE MONTHS ENDED
-------------------------------------------------
JUNE 30, 2000 MARCH 31, 2000
------------------------ ----------------------
AS REPORTED AS REVISED AS REPORTED PROFORMA
----------- ---------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues...................... $ 7,684 $ 7,468 $ 8,538 $ 8,060
Gross profit.................. 3,246 3,093 3,357 2,985
Net income (loss)............. (2.290) (2,815) (1,921) (2,293)
Net income (loss) per share:
Basic....................... (0.18) (0.23) (0.17) (0.20)
Diluted..................... (0.18) (0.23) (0.17) (0.20)
37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Tegal Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Tegal Corporation and its subsidiaries at March 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
May 4, 2001
38
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
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:
PAGE
----
Consolidated Balance Sheets as of March 31, 2001 and 2000... 21
Consolidated Statements of Operations for the years ended
March 31, 2001, 2000
and 1999.................................................. 22
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2001, 2000 and 1999................. 23
Consolidated Statements of Cash Flows for the years ended
March 31, 2001, 2000 and 1999............................. 24
Notes to Consolidated Financial Statements.................. 25
Report of Independent Accountants........................... 38
(2) Financial Statement Schedule
PAGE
----
Schedule II -- Valuation and Qualifying Accounts............ 43
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:
EXHIBIT DESCRIPTION
------- -----------
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
*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))
10.10 Employment Agreement between the Registrant and Xxxxxxx X.
XxXxxxxxxx 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 XxXxxxxx Investments
40
EXHIBIT DESCRIPTION
------- -----------
*10.12 Technology License Agreement between the Registrant and
Motorola, Inc. dated December 19, 1989
*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 Xxxxxxx X.
Xxxxxx 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))
**10.20 Security and Loan Agreement between Registrant and Coast
Business Credit dated as of April 14, 2000
*21 List of Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
24.1 Power of Attorney (incorporated by reference in the
signature page to the Registration Statement)
---------------
* 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.
** Previously filed.
(b) Reports on Form 8-K.
None.
41
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/ XXXXXXX X. XXXXXX
------------------------------------
Xxxxxxx X. Xxxxxx
Chairman, President & Chief
Executive Officer
Dated: June 28, 2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Xxxxxxx X. Xxxxxx, his attorney-in-fact,
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ XXXXXXX X. XXXXXX Chairman, President, Chief June 28, 2001
--------------------------------------------------- Executive Officer and Director
Xxxxxxx X. Xxxxxx (Principal Executive Officer)
/s/ XXXX X. XXXXXXXX Chief Financial Officer (Principal June 28, 2001
--------------------------------------------------- Financial Officer)
Xxxx X. Xxxxxxxx
/s/ XXXXX XXXXXXX Corporate Controller (Principal June 28, 2001
--------------------------------------------------- Accounting Officer)
Xxxxx Xxxxxxx
/s/ XXXXXXX XXXXXX Director June 28, 2001
---------------------------------------------------
Xxxxxxx Xxxxxx
/s/ XXXXXX X. XXXX Director June 28, 2001
---------------------------------------------------
Xxxxxx X. Xxxx
/s/ XXXXXX X. XXXXXXX Director June 28, 2001
---------------------------------------------------
Xxxxxx X. Xxxxxxx
42
TEGAL CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1999, 2000, 2001
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- ---------- ---------- -------- ---------- -------
Year ended March 31, 1999:
Doubtful accounts............................. 297 35 -- (130) 202
Sales returns and allowances.................. 238 (25) -- (170) 43
Cash discounts................................ 7 49 -- (37) 19
Year ended March 31, 2000:
Doubtful accounts............................. 202 93 8 51 354
Sales returns and allowances.................. 43 189 (8) (158) 66
Cash discounts................................ 19 60 -- (50) 29
Year ended March 31, 2001:
Doubtful accounts............................. 354 24 (11) (253) 114
Sales returns and allowances.................. 66 298 (51) (305) 8
Cash discounts................................ 29 25 (2) (47) 5
43
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
23.1 Consent of Independent Accountants