UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended March 31, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 01-26824
TEGAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 68-0370244
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2201 SOUTH MCDOWELL BLVD., P.O. BOX 6020, PETALUMA, CALIFORNIA 94955-6020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (707) 763-5600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
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 14,
1996, as reported on the Nasdaq National Market was $27,750,451. As of June 14,
1996, 10,076,791 shares of the Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1996 Annual Meeting of
Stockholders to be held on September 10, 1996 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 59. Index to Exhibits appears on page 55.
TABLE OF CONTENTS
PART I
Page
Item 1. Business 3
Item 2. Properties 25
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters 28
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 29
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 33
PART III
Item 10. Directors and Executive Officers of the Registrant 34
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners and Management 34
Item 13. Certain Relationships and Related Transactions 34
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 35
Signatures 52
2
PART I
ITEM 1. BUSINESS
Information contained or incorporated by reference herein contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology or which constitute projected financial information. The
following contains cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements.
THE COMPANY
Tegal Corporation ("Tegal" or the "Company") designs, manufacturers,
markets and services plasma etch systems used in the fabrication of integrated
circuits ("ICs"). Etching constitutes one of the principal IC production process
steps and must be performed numerous times in the production of an IC.
The Company was formed in December 1989 to acquire the operations of
the former Tegal Corporation, a division of Motorola. The predecessor company
was founded in 1972 and acquired by Motorola in 1978. The Company's current
management was recruited in 1991.
SEMICONDUCTOR INDUSTRY BACKGROUND
GROWTH OF SEMICONDUCTOR AND SEMICONDUCTOR EQUIPMENT INDUSTRIES
The semiconductor industry has experienced significant growth in recent
years. This growth has resulted from the increasing demand for ICs from
traditional IC markets, such as personal computers, telecommunications, consumer
electronics, automotive electronics and office equipment, as well as the
recently developing markets, such as multimedia, wireless communications and
portable and network computing. As a result of this increased demand,
semiconductor device manufacturers in recent years have expended significant
amounts of capital to build new semiconductor fabrication facilities ("fabs")
and to expand existing fabs. In spite of the continuing growth in demand for
semiconductors, the industry periodically experiences periods of excess supply
and excess capacity as additions to capacity are brought online in large
increments which exceed the short-term growth in demand for ICs such as has
occurred in late 1995 and continues through the date of this report.
Growth in the semiconductor industry has been driven, in large part, by
advances in semiconductor performance at a decreasing cost per function.
Increasingly advanced semiconductor processing technologies allow semiconductor
manufacturers to produce ICs with smaller features, thereby increasing
processing speed and expanding device functionality and
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memory capacity. As ICs have become more complex, however, both the number and
price of state of the art process tools required to manufacture ICs have
increased significantly. As a result, the cost of semiconductor manufacturing
equipment is becoming an increasingly large part of the total cost in producing
advanced ICs. Today, the average state of the art dynamic random access memory
(DRAM) fab costs from $500 million to over $1.0 billion, with semiconductor
manufacturing equipment costs representing the majority of total fab costs.
SEMICONDUCTOR PRODUCTION PROCESSES
To create an IC, semiconductor wafers are subjected to a large number
of complex process steps. The three primary steps in manufacturing ICs are (1)
deposition, in which a layer of insulating or conducting material is deposited
on the wafer surface, (2) photolithography, in which the circuit pattern is
projected onto a light sensitive material (the photoresist), and (3) etch, in
which the unmasked parts of the deposited material on the wafer are selectively
removed to form the IC circuit pattern.
Each step of the manufacturing process for ICs requires specialized
manufacturing equipment. Today, plasma etch systems are used for the great
majority of etching processes. During a plasma etch process (also known as "dry
etch"), a semiconductor wafer is exposed to a plasma composed of a reactive gas,
such as chlorine, which etches away selected portions of the layer underlying
the patterned photoresist layer.
SEGMENTATION OF THE ETCH MARKET
The Company believes that the dry etch market is becoming increasingly
segmented. Certain dry etch technologies or processes are better suited for
etching different types of materials (films) and, as a result, the dry etch
market may be segmented according to the type of film being etched. In addition,
as ICs become increasingly complex, certain etch steps required to manufacture a
state of the art IC demand leading edge (or "critical") etch performance. For
example, to produce a 64-megabit DRAM device, semiconductor manufacturers are
required to etch certain device features at dimensions as small as 0.35 micron.
Nonetheless, even in the most advanced ICs, a significant number of production
steps can be performed with a significantly less demanding (or "non-critical")
etch performance. As a result, the Company believes the etch market is also
beginning to segment according to the required level of etch performance --
critical or non-critical.
Traditional Segmentation of the Etch Market by Film.
The dry etch market is generally segmented into the following market
segments, defined according to the class of film being etched: polysilicon,
oxide (dielectric) and metal. In 1995, the polysilicon, oxide and metal segments
of the dry etch market represented approximately 33%, 42% and 25%, respectively,
of the total sales of dry etch systems. New films are continually being
developed in each of these three market segments.
Certain films present unique etch production problems. For example, the
use of certain new films, such as platinum, currently being used in the
development of high-density DRAM
4
devices, and lead-zirconium-titinate (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, their unique properties make them
particularly difficult to etch and, therefore, require more advanced etch
process technologies. Similarly, corrosion of metal etched wafers within 48 to
72 hours after completion of the etch process has been a chronic problem for
semiconductor manufacturers, regardless of the line geometries involved. The
reaction byproducts of a chlorine based metal etch process tend to redeposit on
the wafer and corrode when exposed to water in the atmosphere. Removal of these
contaminants from the wafer is essential to prevent this corrosion.
Emerging Segmentation of the Etch Market into Critical and Non-Critical
Production Steps.
As device complexity has increased, the number of process steps
required to manufacture a state of the art IC has increased dramatically. The
Company estimates that a 64-megabit DRAM device requires more than 500 process
steps, and the Company believes approximately 50 of these process steps are
etch. Each etch step varies significantly in the degree of etch performance
required to complete that step successfully. As a result, the Company estimates
that approximately 20% to 25% of the etch systems currently required to produce
a 64-megabit DRAM device need only provide non-critical etch performance.
Examples of non-critical etch processes involved in the production of a
64-megabit DRAM device include pad etching, zero layer etching and backside
etching. The pad etching process involves the formation of relatively sizable
areas, or pads, on which wires are bonded to attach to the metal leads of the
IC's package. Pad etching typically requires a relatively large, non-critical
etch 20 to 50 microns square. Zero layer etching, the etching of targets into
the wafer for alignment of photolithography equipment, usually requires
dimensions of 2 to 5 microns. Backside etching, in which the build-up of films
resulting from the deposition process is removed from the backside of the wafer,
has no dimensional requirement. Each of these process requirements has remained
relatively constant over succeeding generations of IC devices, and the Company
believes that these and many other non-critical etch processes currently
required to produce state of the art ICs will remain non-critical for the
foreseeable future.
Over time, the disparity in relative prices for etch systems capable of
etching at non-critical versus critical dimensions has grown significantly. The
Company believes that in 1993, the cost of an eight inch wafer-capable system
ranged from approximately $500,000 to $700,000. Given the relatively modest
price differential among etchers, manufacturers of ICs and similar devices
tended to purchase one system, the one they believed provided the most
technologically advanced solution for their particular etch requirements, to
perform all their etching. In contrast, the cost today of an eight inch capable
etch system ranges from approximately $475,000, for reliable, non-critical
etchers, to more than $2.5 million, for advanced, state of the art etchers.
Consequently, the company believes it is no longer cost effective to use state
of the art etchers to perform both critical and non-critical etching.
As a result, the Company believes that semiconductor manufacturers will
increasingly implement a "mix and match" purchasing philosophy to minimize their
capital equipment expenditures by purchasing expensive, state of the art etch
systems for their critical etch process requirements and less expensive, though
reliable, etch systems for their non-critical etch requirements. When critical
etching is required in the production process, the Company believes that the
leading purchasing factor for a semiconductor manufacturer will continue to be,
ultimately, the product's etch performance. When non-critical etching is
required in the production process, the Company believes
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the leading system purchasing factor for a semiconductor manufacturer
implementing a "mix and match" purchasing philosophy will be the overall product
cost, with particular emphasis on the system's sale price. In either case,
however, the semiconductor manufacturer is driven to make a value-oriented
purchasing decision which minimizes the overall etch system costs, while meeting
the required etch process performance. The Company believes that a
well-implemented "mix and match" purchasing philosophy already adopted by a
significant number of semiconductor manufacturers to minimize their expenditures
for photolithography equipment, could allow a semiconductor manufacturer to
realize significant etch system savings.
BUSINESS STRATEGY
Tegal believes it currently has one of the largest installed bases of
etch equipment in the industry and that over the years it has earned a
reputation as a supplier of reliable, value-oriented etch systems. The Company's
systems are sold throughout the world to both domestic and international
customers. In fiscal 1996, approximately 63% of the Company's revenues resulted
from international sales. To support its systems sales, the Company maintains
local service and support in every major geographic market in which it has an
installed base, backed up by a spares logistics system designed to provide
delivery within 24 hours anywhere in the world.
The Company's objective is to build on its technical knowledge,
experience and reputation in the etch industry, as well as its established
sales, marketing and customer service infrastructure, to be a leading supplier
of etch systems for both the critical and non-critical segments of the etch
market. To meet this objective, the Company is implementing a business strategy
incorporating the following elements:
- Use the performance capabilities and value positioning of the
Company's 6500 series systems to penetrate the critical etch
market for polysilicon, metal and emerging film etch
applications;
- Use the Company's existing installed base and established
customer relationships to increase sales of both non-critical
and critical etch systems to its existing customers;
- Lever the Company's reputation as a supplier of
value-oriented, non-critical etch systems to sell such systems
to new customers implementing a "mix and match" purchasing
philosophy, and follow such sales by aggressively marketing
critical etch systems to these customers; and
- Continue to focus research and development efforts on
identifying and designing critical etch system solutions to
address new or unsatisfied etch process requirements,
particularly selected etch applications where the Company
believes its process technologies and development experience
provide it with a competitive advantage.
6
TEGAL'S CRITICAL ETCH SOLUTION
The Company believes a value-oriented critical etch system must be
designed to (i) provide high performance critical etching, (ii) deliver a high
average wafer throughput, (iii) minimize up-front investment costs, (iv)
minimize operating costs and (v) provide a solution for the production of
multiple generations of ICs. In 1991, the Company began developing a new
generation of technology and systems in order to provide a value-oriented system
solution for future critical etch needs, especially in the polysilicon and metal
segments of the etch market. In July 1994, the Company introduced its 6510
system, designed for polysilicon etch applications at the sub 0.5 micron level.
In July 1995, the Company introduced its 6520 system, designed for metal etch
applications, and its 6540 system, designed for new, emerging film etch
applications.
Provide for High Performance Critical Etch.
A high performance critical etch system must etch features with
anisotropic profiles (i.e. straight, vertical sidewalls) while etching
selectively, to minimize damage to the underlayer or other wafer materials, and
etching uniformly over a non-uniform area. These performance requirements become
increasingly difficult to achieve at critical etch line geometries, especially
the 0.5 micron and smaller line geometries required by current, state of the art
ICs. The Company believes that its High-density Reflected electron ("HRe-")
process chamber, incorporating a low pressure, high density, low energy plasma
source and its patented tri-electrode energy source, produces the straight,
vertical etching and high selectivity required to provide superior etch
performance at these critical line geometries. In addition, the Company's 6520
metal etch system incorporates a patent-pending etch-rinse-strip-rinse process
sequence which, the Company believes, provides a system solution for many of the
corrosion problems common to metal etch applications.
Deliver a High Average Throughput.
Throughput is a measure of the number of wafers a particular system can
etch in a given period of time. The industry has usually measured a system's
throughput in terms of the number of wafers processed per hour. A system with a
high hourly throughput, however, may have a significantly lower average
throughput over the long term depending upon system design and durability. As a
result, the Company believes that a value-oriented system must deliver not only
a high hourly throughput but also, and perhaps more importantly, a high average
system throughput over the long term. Due to the corrosive nature of the etch
process, etching produces a large amount of contaminants and erodes process
chamber parts (consumables). Therefore, in order to deliver the precision and
repeatability necessary for superior etch results, etch systems require periodic
cleaning and maintenance. The 6500 series system architecture is designed so
that only six of the Company's HRe- process chamber parts are exposed to the
corrosive etch plasma. These six parts are designed to be easily removable and
replaceable in order to allow for off-line cleaning and to minimize disruption
to the etch process. In addition, the Company's HRe- process chamber
incorporates a high speed vacuum pump located above and close to the wafer
surface in order to remove contaminants from the chamber more effectively,
resulting in a cleaner etch process and relatively fewer scheduled cleanings.
Finally, the Company's 6500 series system is designed to maximize reliability in
order to minimize unscheduled maintenance down-time.
Minimize Up-front Investment Costs.
While performance remains crucial to purchasing decision in the
critical etch segment, cost containment pressures are causing semiconductor
manufacturers to demand critical etch performance with lower up-front investment
cost.
7
Consequently, a value-oriented critical etch system must sell for an attractive
price, relative to comparable etch systems. A value-oriented system should also
be designed to minimize installation costs, which can be substantial, and should
have a small "footprint" (the production area occupied by the system) to
maximize the efficient use of limited, expensive fab production space. The
Company believes the design of its 6500 series systems allows the Company to
sell these systems at prices which are generally significantly below the prices
of comparable systems offered by the Company's competitors. The Company has also
designed its 6500 series systems to minimize the time and expense required for
system installation. In addition, with a footprint of only 32 square feet, the
6500 series system occupies substantially less production space than any
comparable critical etch system currently offered in the market.
Minimize Operating Costs.
Given the complexity of the critical etch process, the costs of
operating a critical etch system can be substantial. A significant portion of
overall operating costs relates to the cost of servicing and replacing
consumables, or process chamber parts destroyed in the corrosive etch production
process. A value-oriented system, therefore, must be designed to minimize
consumables. In the Company's HRe- process chamber only six process chamber
parts are exposed to the corrosive plasma. In addition, the Company believes a
magnetic field designed to concentrate the plasma over the wafer also has the
effect of protecting process chamber parts from the corrosive plasma. As a
result of its process chamber design, the Company believes its 6500 series
systems have significantly lower consumables costs than its competitors' current
systems.
Provide Solutions for Multiple Generations of Device Production
Requirements.
The Company also believes that a value-oriented critical etch system
should be responsive not only to the manufacturers' current etch requirements,
but also should be capable of delivering the etch performance required for the
production of multiple generations of ICs in order to maximize the useful life
of the system. As ICs continue to become increasingly complex, production
requirement will demand 0.25 micron and smaller processing technology. Systems
that have not been designed to meet these demands will eventually need to be
replaced at a significant expense. The Company's 6510 system has demonstrated
the ability to etch polysilicon at 0.18 micron and the Company's 6520 system has
demonstrated the ability to etch metal at 0.25 micron. As a result, the Company
believes its 6500 series systems will continue to provide solutions for future
polysilicon and metal etch requirements.
TEGAL'S NON-CRITICAL ETCH SOLUTION
The Company believes that its 900 and 980 systems provide a
value-oriented non-critical etch solution for etch applications on polysilicon,
metal and oxide films. The Company introduced its 900 series etch system in 1984
and since that time has sold more than 1,200 of these systems worldwide. The
Company believes that the durability and performance of its 900 series systems
have earned the Company a reputation as a leading non-critical etch system
supplier. The 900 series as originally designed, however, was capable of etching
only six inch and smaller wafers and, therefore, did not address the needs of
the eight inch wafer market. As a result, the Company expanded its non-critical
product offerings in July 1994 with the introduction of its eight inch wafer
capable 980 system. The Company introduced an enhanced 980 system in July 1995
which has a smaller footprint and provides higher throughput and improved yields
as compared to the prior 980 system design. The Company's 900 and 980
8
systems sell for a typical price of $350,000 and $490,000, respectively. The
Company believes that these systems provide some of the best values currently
available on the market for the large number of non-critical etch steps required
to produce today's state of the art ICs. The Company intends to market its 900
and 980 systems aggressively as value-oriented solutions for the developing
non-critical market segment. The Company will also seek to lever its large
installed base of non-critical etch systems with its existing customers in order
to sell them not only additional non-critical etch systems, but also critical
etch systems.
TECHNOLOGY
In 1991, the Company began developing a new generation of technology
for leading edge etch requirements, especially in the polysilicon and metal
segments of the market. The Company's product development efforts culminated in
the Company's HRe- process chamber and its etch-rinse-strip-rinse ("E-R-S-R")
process sequence, incorporated into the Company's 6520 systems for metal etch
applications and offered as an option on its 6540 systems for emerging film etch
applications.
HRe- PROCESS CHAMBER
The HRe- process chamber, formally introduced in April 1993,
incorporates advances in five interrelated areas: (i) the plasma source, (ii)
control of electrical energy flow, (iii) gas flow technology, (iv) process
chamber design, and (v) gas chemistries and recipes.
HRe- Plasma Source.
The Company's HRe- plasma source includes a magnetic field which
contains the plasma at a low pressure, high density and low energy. For sub 0.5
micron devices, the plasma source must operate at a low pressure with a high
density of activated gases at the wafer and a low energy in order to deliver
superior etch results. A low pressure plasma improves the overall quality of the
etch by minimizing the undercutting of wafer features as well as the effects of
microloading (etching concentrated features more rapidly than less concentrated
features), both of which adversely affect overall yield. Low pressure, however,
requires a high density plasma at the wafer to increase the number of plasma
particles reacting with the film being etched in order to maintain a fast etch
rate. A fast etch rate is one factor leading to a higher average throughput. Low
ion energy leads to improved etch selectivity and minimizes wafer damage, both
of which improve overall yield.
Tri-electrode Control System.
The Company's patented tri-electrode control system is designed to
direct most of the electrical energy flow through the side wall of the etch
chamber instead of the wafer. As a result, only four to eight watts of energy
generally flow through wafers processed in the Company's HRe- chamber, as
compared to 200 to 500 watts in most major competitors' systems. High energy
levels flowing through the wafer can result in uncontrolled wafer overheating,
which can lead to wafer damage. As a result, many of the Company's competitors
are forced to include process technology designed to cool their wafers to avoid
such damage. In contrast, the Company's tri-electrode control system controls
energy flows through the wafer to such an extent that the process chamber
actually heats the wafer by non-electrical means to help evaporate the solids
and eliminate particles and residues on the wafer surface. The Company believes
that less energy flowing through the wafer allows the HRe- process chamber to be
used for a large variety of films. In addition, lower wafer
9
temperatures allow the use of traditional masking materials instead of requiring
newly developed hard masking materials. Hard masking materials require
additional process steps to remove.
Gas Flow Technology.
In order to maintain high etch rates, it is essential to maintain a
fresh supply of activated gases. Similarly, consumed gases and evaporated
materials must be removed from the etch chamber as quickly as possible to
minimize condensation on the wafer and chamber surfaces. To maximize the removal
of consumed gases and evaporated materials, the HRe- process chamber
incorporates a high-speed pump located close to, and directly above, the wafer
surface. The company believes that its process chamber has one of the highest
gas flow rates in the industry. The Company designed the HRe- etch chamber to be
small in volume with a high gas flow rate in order to allow the evaporated
materials less time to condense on the surface of the wafer and chamber,
resulting in a cleaner etch process. A cleaner etch process requires less
frequent chamber cleaning and maintenance, thereby maximizing processing time
and average throughput.
Process Chamber Design.
Given the corrosive nature of the high density etch process,
consumables (i.e. chamber parts eroded by the etch process) have historically
resulted in significant repair and down-time costs for semiconductor
manufacturers. The HRe- process chamber was designed so that only six chamber
parts, as compared to many more in most competitors' current systems, contact
the chamber's corrosive environment. All six chamber parts have been designed to
be easily removed and replaced to allow for off-line cleaning and minimal
disruption of processing time.
Chemistries and Recipes.
Each different film being etched requires a different etch chemistry or
"recipe" which generally consists of two or three of the following gases:
Chlorine, bromine, fluorine and argon. Development of the optimal etch recipe
for a given film is an experimental science in which the Company has a large
degree of experience due to its large installed base of applications and
experienced applications engineers.
"E-R-S-R" PROCESS SEQUENCE
Corrosion of metal etch wafers within a 48 to 72 hour period following
completion of the etch process has been a chronic problem for semiconductor
manufacturers performing metal etch applications, regardless of the line
geometries involved. In order to address this corrosion problem, the Company's
6520 system for critical metal applications has been designed to incorporate an
etch-rinse-strip-rinse ("E-R-S-R") process sequence for which the Company has
filed a patent application. The Company believes that rinsing the wafer prior to
the strip process significantly reduces corrosion by removing the chlorinated
metal contaminants from the wafer surface before they can react with the air to
form the acids which corrode the metal lines. In addition, removal of reaction
byproducts before the strip process prevents the chlorinated metals from
oxidizing to form metal residues which become water insoluble as a byproduct of
the stripping process. The Company believes that additional time consuming
processing steps are required to remove these post metal etch-strip residues,
thereby adding to total production cycle time and capital equipment cost. The
Company believes that no other system on the market today is capable of
providing this on-line process sequence. Most other competitive critical etch
systems are designed to provide only an etch-strip-rinse process sequence, if
they provide a rinse process at all. As a result, the Company believes that its
6520 HRe- metal etch system, with its
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E-R-S-R process sequence, greatly reduces residue contamination and increases
wafer throughput, while reducing capital costs and clean room floorspace
requirements. The Company believes that this E-R-S-R process sequence may also
prove beneficial to certain emerging film applications and, therefore, intends
to provide this process sequence as an option on its 6540 systems for emerging
films and on its 6510 systems for polysilicon side wall veil removal.
PRODUCTS
Critical Etch Products.
The following table sets forth certain features and performance
characteristics of the Company's 6500 series critical etch products:
CRITICAL ETCH SYSTEMS
FEATURES 6510 6520 6540
Applications POLYSILICON METALS EMERGING FILMS
- Isolation Trench - Aluminum/Copper - Lead Zirconium Titinate
- Silicides - 5 Layer Composite - Platinum
- Selective Nitride Films with Aluminum - Iridium
- Aluminum/Silicon/Titanium - Y1
Platform 2 chamber 2 chamber 2 chamber
4"-8" wafer 4"-8" wafer 4"-8" wafer
Footprint 32 sq. ft. 32 sq. ft. 32 sq. ft
Typical Sales
Price $1.3-1.5 million $1.5-1.8 million $1.5-2.0 million
Date of
Introduction July 1994 July 1995 July 1995
The Company's 6500 series systems have been engineered to provide
process flexibility and competitive throughput for wafers up to eight inches,
while minimizing cost and space requirements. A dual chamber platform design
allows for either parallel or integrated etch processes. The Company seeks to
maximize the 6500 series systems' average throughput by incorporating a process
chamber technology and system architecture designed to minimize processing
down-time required for cleaning and maintenance. Each 6500 series system has a
central wafer handling system with full cassette (25-wafer) vacuum loadlocks,
noncontact optical wafer alignment and a vacuum transport system. Individual
process module servicing is possible without shutting down the system or other
chambers. Contamination control features in the 6500 series systems include pick
and place wafer handling with no moving parts above the wafer, four-level vacuum
isolation from the atmosphere to the etch chamber, and individual
high-throughput, turbo-pumped vacuum systems for the cassettes, wafer handling
platform and each process module. These and other features of the 6500 series
are designed to enable a semiconductor manufacturer to reduce wafer particle
contamination to a level which the Company believes exceeds industry standards
and to improve etch results and process flexibility.
In addition, the Company's 6500 series systems incorporate a software
system which is designed to be robust and 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 touchscreen menus for ease of use. In
addition, the software provides a quick-response interface which allows the
semiconductor manufacturer access to all necessary system information for
factory automation. The system includes data archiving and remote, real time
diagnostics.
Non-Critical Etch Products.
The following table sets forth certain features and performance
characteristics of the Company's 900 and 980 series non-critical etch products:
NON-CRITICAL ETCH SYSTEMS
FEATURES 900 980
Applications Backside Backside
Nitride Nitride
Pad Pad
Planarization Planarization
Zero Layer Zero Layer
Flat Panel
Platform 1 chamber 1 chamber
3"-6" wafer 5"-8" wafer
Footprint 10 sq. ft. 14. sq. ft
Typical Sales $350,000 $490,000
Price
Date of May 1984 July 1994
Introduction
The 900 and 980 series systems incorporate a single diode process
chamber on a non-loadlocked modular platform for reliability and ease of
maintenance, which the Company believes results in higher average throughput and
lower operating costs. Continued improvements in both reliability and
performance have enabled the Company to offer the 900
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and 980 series systems as a solution for non-critical applications involving
linewidths of 0.8 micron and greater.
CUSTOMERS
The Company sells its systems to semiconductor manufacturers throughout
the world. Major customers over the last three fiscal years have included the
following:
AT&T Rohm
Austria Mikro Systeme International SGS-Thomson Microelectronics
Bosch Samsung
Cray Research Seiko
EMM SEL
Hewlett-Packard Shanghai Belling
Holtek Siemens
Integrated Device Technology Sony
International Rectifier - Hex Fet America Taiwan Semiconductor Manufacturing Co.
Linear Technology Telcom Semiconductor
Macronix United Microelectronics Corporation
Motorola VLSI Technology
Newport Wafer Fab Winbond
All of these customers except Cray Research, Macronix, Siemens and
Taiwan Semiconductor Manufacturing Company ordered one or more systems from the
Company in fiscal 1996. The composition of the Company's top five customers has
changed from year to year, but net system sales to the Company's top five
customers in each of fiscal 1996, 1995 and 1994 accounted for 48.6%, 54.3% and
48.5%, respectively, of the Company's total net system sales. Sony and Motorola
represented 16.3% and 14.9%, respectively, of the Company's net system sales in
fiscal 1996. Motorola and SGS-Thomson Microelectronics represented 18.5% and
17.2%, respectively, of the Company's net system sales in fiscal 1995. Sony
represented 11.9% of the Company's net system sales in fiscal 1994. Other than
the above customers, no single customer represented more than 10% of the
Company's net system sales in fiscal 1996, 1995 or 1994. Although the
composition of the group comprising the Company's largest customers may vary
from year to year, the loss of a significant customer or any reduction in orders
by any significant customer, including reductions due to market, economic or
competitive conditions in the semiconductor manufacturing industry, may have a
material adverse effect on the Company's business, financial condition and
results of operations.
BACKLOG
The Company schedules production of its systems based upon order
backlog and customer commitments. The Company includes in its backlog only
orders for which written authorizations have been accepted and shipment dates
within the next 12 months have been assigned. As of March 31, 1996 and 1995 the
Company's order backlog was approximately $16.5 million and $11.4 million,
respectively. Systems orders are subject to cancellation by the customer, but
with substantial penalties other than in the case of orders for evaluation
systems or for systems which have not yet incurred production costs. Orders may
be subject to rescheduling
12
with limited or no penalty. Some orders are received for systems to be shipped
in the same quarter as the order is received. Because of the factors just
mentioned, the Company's backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period.
MARKETING, SALES AND SERVICE
The Company sells its systems worldwide through a network of 15 direct
sales representatives and 16 independent sales representatives in 17 sales
offices located throughout the world. In the United States, the Company markets
its systems through direct sales personnel located in its Petaluma, California
headquarters, two regional sales offices and through two independent sales
representatives. In addition, the company provides field service and
applications engineers out of three regional offices and its Petaluma
headquarters in order to ensure dedicated technical and field process support
throughout the United States on short notice.
The Company maintains sales, service, and process support capabilities
in Japan, Taiwan, France and Germany and service/support operations in Austria,
China, Italy, Singapore and the United Kingdom. In addition to its international
direct sales and support organizations, the company markets its systems through
independent sales representatives in China, India, Israel, Italy, Korea, Taiwan
and the United Kingdom.
International sales, which consist of export sales from the United
States either directly to the end user or to one of the Company's foreign
subsidiaries, accounted for 63.2%, 62.7% and 67.6% of total revenue for fiscal
1996, 1995 and 1994, respectively. The Company generally sells its systems on
30-to-60 day credit terms to its domestic and European customers. Customers in
Pacific Rim countries, other than Japan, are generally required to deliver a
letter of credit payable in U.S. dollars upon system shipment. Sales to other
international customers, including Japan, are either billed in local currency or
U.S. dollars. The Company anticipates that international sales will continue to
account for a significant portion of revenue in the foreseeable future.
International sales are subject to certain risks, including the imposition of
government controls, fluctuations in the U.S. dollar (which could increase the
sales price in local currencies of the Company's systems in foreign markets),
changes in export license and other regulatory requirements, tariffs and other
market barriers, political and economic instability, potential hostilities,
restrictions on the export or import of technology, difficulties in accounts
receivable collection, difficulties in managing distributors or representatives,
difficulties in staffing and managing international operations and potentially
adverse tax consequences. There can be no assurance that any of these factors
will not have a material adverse effect on the company's business, financial
condition and results of operations.
The Company generally warrants its new systems for 12 months and its
refurbished systems for six months from shipment. Installation is included in
the price of the system. The Company's field process engineers provide customers
with call-out repair and maintenance services for a fee. Customers may also
enter into repair and maintenance service contracts covering the Company's
systems. The Company trains customers' service engineers to perform routine
service for a fee and provides telephone consultation services generally free of
charge.
13
The sales cycles for the company's systems vary depending upon whether
the system is an initial design-in, reorder or used equipment. Initial design-in
sales cycles are typically 12 to 18 months, particularly for 6500 series
systems. In contrast, reorder sales cycles are typically four to six months, and
used system sales cycles are generally one to three months. The initial
design-in sales cycle begins with the generation of a sales lead, which is
followed by qualification of the lead, an analysis of the customer's particular
applications needs and problems, one or more presentations to the customer,
frequently including extensive participation by the Company's senior management,
two to three wafer sample demonstrations, followed by customer testing of the
results and extensive negotiations regarding the equipment's process and
reliability specifications. Initial design-in sales cycles are monitored by
senior management for correct strategy approach and prioritization. The Company
may need to provide the customer with an evaluation critical etch system for
three to six months prior to the receipt of a firm purchase order.
RESEARCH AND DEVELOPMENT
The market for semiconductor capital equipment is characterized by
rapid technological change. The Company believes that continued and timely
development of new systems and enhancements to existing systems is necessary for
it to maintain its competitive position. Accordingly, the Company devotes a
significant portion of its personnel and financial resources to research and
development programs and seeks to maintain close relationships with its
customers in order to be responsive to their system needs.
The Company's research and development encompasses the following areas:
plasma technology, process characterization and development, material sciences
applicable to the etch environment, system design and architecture,
electro-mechanical design and software engineering. Management emphasizes
advanced plasma and reactor chamber modeling capabilities in order to accelerate
bringing advanced chamber designs to market. The company employs
multi-discipline teams to facilitate short engineering cycle times and rapid
product development. There can be no assurance that the Company will be able to
develop, introduce or sell new and enhanced systems. In particular, if the 6500
series does not achieve significant sales or volume production due to a lack of
customer acceptance, inability to correct technical, manufacturing or other
difficulties which may develop with this series, or for any other reason, the
Company's business, financial condition and results of operations would be
materially adversely affected.
As of March 31, 1996, the Company had 74 full-time employees dedicated
to equipment design engineering, process support and research and development.
Research and development expenses for fiscal 1996, 1995 and 1994 were $10.0
million, $8.1 million and $7.4 million, respectively, and represented 16.1%,
18.1% and 19.3% of total revenue, respectively. Such expenditures were used for
the development of new systems and the continued enhancement and customization
of existing systems. The Company expects that research and development expenses
will continue to increase through fiscal 1997.
The Company has recently completed a contract with SEMATECH, a United
States semiconductor industry consortium, to measure the reliability and process
performance of the Company's 6510 series system at 0.35 and 0.25 micron line
geometries on polycilicides. More
14
than 30,000 wafers were cycled through the 6500 system with full process in
a series of three IRONMAN (Improving Reliability of New Machines At Night)
tests. The Company met or exceeded each of the reliability and process
result objectives of that contract.
MANUFACTURING
The Company's etch systems are produced at its headquarters in
Petaluma, California. The Company's manufacturing activities consist of
assembling and testing components and sub-assemblies which are then integrated
into finished systems. The Company has structured its production facility to be
driven either by orders or by forecasts and has adopted a modular system
architecture to increase assembly efficiency and design flexibility. The Company
has also implemented "just-in-time" manufacturing techniques in its assembly
processes. The Company believes that improvements in manufacturing processes
have allowed the Company to reduce significantly its non-critical system
manufacturing cycle times. Non-critical system manufacturing cycle times, which
typically took nearly three months in 1990, now take approximately 14 days. The
Company's cycle times for its critical etch products are currently two to three
months. The Company seeks to improve these cycle times as the Company continues
to manufacture 6500 systems.
The Company procures certain components and sub-assemblies included in
its systems from a limited group of suppliers, and occasionally from a single
source supplier. In particular, the Company is dependent upon MECS, a robotic
equipment supplier, as the sole source for the robotic arm used in all of its
6500 series systems. The Company currently has no existing supply contract with
MECS, and the Company currently purchases all robotic assemblies from MECS on a
purchase order basis. Disruption or termination of certain of these sources,
including its robotic sub-assembly source, could have an adverse effect on the
Company's operations. While the Company believes that alternative sources could
be obtained and qualified to supply these components or sub-assemblies, a
prolonged inability to obtain such components or sub-assemblies, receipt of
defective components or sub-assemblies, as well as difficulties or delays in
shifting to alternative sources could have a material adverse effect on the
Company's operating results and could damage customer relationships.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of governmental regulations related
to the use, storage, handling, discharge or disposal of toxic, volatile or
otherwise hazardous chemicals used in the manufacturing process. The Company
believes that it is currently in compliance in all material respects with these
regulations and that it has obtained all necessary environmental permits to
conduct its business, which permits generally relate to the discharge of
hazardous wastes. Nevertheless, the failure to comply with present or future
regulations could result in fines being imposed on the Company, suspension of
production, alteration of the Company's manufacturing processes, or cessation of
operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur other expense to comply with environmental
regulations. Any failure by the Company to control the use, disposal or storage
of, or adequately restrict the discharge of, hazardous substances could subject
the Company to future liabilities.
15
COMPETITION
The semiconductor capital equipment industry is highly competitive. The
Company believes that the principal competitive factor in the critical segment
of the etch industry is technical performance of the system, followed closely by
the existence of customer relationships, the overall system price, the ability
to provide service and technical support on a global basis and other related
cost factors. The Company believes that the principal competitive factor in the
non-critical segment of the etch industry is system price, followed closely by
the technical performance of the system, the existence of established customer
relationships, the ability to provide service and technical support on a global
basis and other related cost factors.
The Company believes that to be competitive, it will require
significant financial resources in order to offer a broad range of systems, to
maintain customer service and support centers worldwide and to invest in
research and development. Many of the Company's existing and potential
competitors, including, among others, Applied Materials, Inc., Lam Research
Corporation, Hitachi Ltd. and Tokyo Electron Limited, have substantially greater
financial resources, more extensive engineering, manufacturing, marketing and
customer service and support capabilities, larger installed bases of current
generation etch and other production equipment and broader process equipment
offerings as well as greater name recognition than the Company. The Company
expects its competitors to continue to improve the design and performance of
their current systems and processes and to introduce new systems and processes
with improved price and performance characteristics. No assurance can be given
that the Company will be able to compete successfully in the United States or
worldwide.
A substantial investment is required to install and integrate capital
equipment into a semiconductor production line. The Company believes that once a
device manufacturer has selected a particular vendor's capital equipment, that
manufacturer generally relies upon that vendor's equipment for the specific
production line application and, to the extent possible, subsequent generations
of similar systems. Accordingly, it may be extremely difficult to achieve
significant sales to a particular customer once another vendor's capital
equipment has been selected by that customer unless there are compelling reasons
to do so, such as significant performance or cost advantages. Certain of the
Company's competitors have entered into strategic relationships or alliances
with leading semiconductor manufacturers, particularly with respect to the
current generation of devices at 1.0 to 0.5 micron line geometries for which the
Company did not offer competitive systems at the time buying decisions were
made. If such relationships or alliances cover etch equipment similar to those
sold by the Company, the Company's ability to sell its 6500 series systems would
be adversely affected. In addition, certain of the Company's competitors may
seek to sell, as an attractively priced package, etch equipment together with
other process equipment, such as deposition equipment. Furthermore, some
semiconductor manufacturers may have already made initial buying decisions for
the next generation of sub-0.5 micron etch requirements. Any failure to gain
access and achieve sales to new customers will adversely affect the successful
commercial introduction of the Company's 6500 series systems and would have a
material adverse effect on the Company's business, financial condition and
results of operations.
16
INTELLECTUAL PROPERTY
The Company holds an exclusive license to 26 United States patents,
including its tri-electrode control system, and 21 corresponding foreign patents
covering various aspects of its systems. The Company does not currently hold any
patents directly, although it has applied for two patents, including one for its
E-R-S-R process sequence. The Company believes that the duration of such patents
generally exceed the life cycles of the technologies disclosed and claimed
therein. The Company believes that although the patents it has exclusively
licensed will be of value, they will not determine the Company's success, which
depends principally upon its engineering, marketing, service and manufacturing
skills. However, in the absence of patent protection, the Company may be
vulnerable to competitors who attempt to imitate the Company's systems or
processes and manufacturing techniques and processes. In addition, other
companies and inventors may receive patents that contain claims applicable to
the Company's systems and processes. The sale of the Company's systems covered
by such patents could require licenses that may not be available on acceptable
terms, if at all. The Company also relies on trade secrets and proprietary
technology that it seeks to protect, at least in part, through confidentiality
agreements with employees, vendors, consultants and other parties. There can be
no assurance that these agreements will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by others.
The original version of the system software for the Company's 6500
series systems was jointly developed by the Company and Realtime Performance,
Inc., a third party software vendor. Tegal holds a perpetual, non-exclusive,
non-royalty bearing license to use and enhance this software. The enhanced
version of the software currently used on the Company's 6500 series systems is
the fourth release of the original software, and such enhancements were
developed exclusively by the Company. Neither the software vendor nor any other
party has any right to use the Company's current release of the system software.
Although the Company attempts to protect its intellectual property
rights through patents, copyrights, trade secrets and other measures, there can
be no assurance that the Company will be able to protect its technology
adequately or that competitors will not be able to develop similar technology
independently. There can be no assurance that any patent applications that the
Company may file will be issued or that foreign intellectual property laws will
protect the Company's intellectual property rights. There can be no assurance
that any patent licensed by or issued to the Company will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
competitive advantages to the Company. Furthermore, there can be no assurance
that others will not independently develop similar systems, duplicate the
Company's systems or design around the patents licensed by or issued to the
Company.
As is typical in the semiconductor industry, the Company has received
notices from time to time from third parties alleging infringement claims. In
July 1991, the Company was advised by General Signal Corporation ("GSC") that
the Company may need a license under certain U.S. patents owned by GSC relating
to "cluster tool" equipment. The Company's 6500 series systems are generally
configured with multiple process chambers and, therefore, may be deemed "cluster
tool" equipment. A number of companies which were contacted by GSC with regard
to licensing
17
these patents formed an ad-hoc committee to investigate the
validity of the GSC patents. As a result of such investigation, in November 1992
the committee members, including the Company, jointly notified GSC that they
believe the subject patents are invalid and that, accordingly, no license is
necessary. In the Fall of 1994, GSC filed suit against Applied Materials, a
non-member of the ad-hoc investigative committee, alleging infringement of such
patents. To date, GSC has taken no action against the Company in connection with
the licensing of these patents. There can be no assurance that GSC will not take
any such action in the future or, if any such action is taken, as to the outcome
of such action.
Although there are currently no pending claims or lawsuits against the
Company regarding possible infringement claims, there can be no assurance that
infringement claims by third parties, or claims for indemnification resulting
from infringement claims, will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. In the
future, litigation may be necessary to enforce patents issued or exclusively
licensed to the Company, to protect trade secrets or know-how exclusively
licensed to or owned by the Company or to defend the Company against claimed
infringement of the rights of others and to determine the scope and validity of
the proprietary rights of others. Any such litigation could result in
substantial cost and diversion of effort by the Company, which by itself could
have a material adverse effect on the Company's financial condition and
operation results. Further, adverse determinations in such litigation could
result in the Company's loss of proprietary rights, subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties or prevent the Company from manufacturing or selling its
systems, any of which could have a material adverse effect on the Company's
financial condition and results of operations. In addition, there can be no
assurance that a license under a third party's intellectual property rights will
be available on reasonable terms, if at all.
EMPLOYEES
As of March 31, 1996, the Company had a total of 309 employees
consisting of 268 full-time permanent employees and 41 temporary or contract
personnel, including 74 in engineering, research and development, 86 in
manufacturing, 115 in marketing, sales and customer service and support and 34
in executive and administrative activities. Many of the Company's employees are
highly skilled, and the Company's success will depend in part upon its ability
to attract, retain and develop such employees. Skilled employees, especially
employees with extensive technological backgrounds, are currently in great
demand. There can be no assurance that the Company will be able to attract or
retain the skilled employees which may be necessary to continue its research and
development, manufacturing or marketing programs. The loss of any such persons,
as well as the failure to recruit additional key personnel in a timely manner,
could have a material adverse effect on the Company's business, financial
condition and operating results.
None of the Company's employees are represented by a labor union or
covered by a collective bargaining agreement. The Company considers its employee
relations to be good.
18
ADDITIONAL RISK FACTORS
DEPENDENCE ON RECENTLY INTRODUCED SYSTEMS FOR CRITICAL ETCH MARKETS
The Company's 6500 series systems, its new generation of critical etch
systems, have been designed initially for sub-0.5 micron critical etch
applications in polysilicon, metal and emerging films, which the Company
believes to be the leading edge of critical etch applications. The Company's
6500 series systems which have been installed are currently being used primarily
for research and development activities or in pilot production. For the 6500
series systems to achieve market acceptance, the Company's customers must
utilize these systems for volume production. Achieving market acceptance of the
Company's 6500 series systems is very important to the Company's future
financial results.
Because new product development commitments must be made well in
advance of sales, new product decisions must anticipate both the future
requirements for etch processes needed by semiconductor manufacturers and the
equipment required to address such applications. There can be no assurance that
the market for critical etch polysilicon, metal or emerging film etch systems
will develop as quickly or to the degree the Company expects. There can be no
assurance whether or when the 6500 series systems will achieve market
acceptance. In addition, the selling cycles of these new systems are typically
lengthy.
The 6500 series has had only limited production life. Therefore,
unforeseen technical or manufacturing difficulties may arise which may hinder
market acceptance or volume production. The Company may be required to incur
substantial, unanticipated costs to ensure the functionality and reliability of
the 6500 series systems, which may materially and adversely affect the business,
financial condition and results of operation of the Company. Such costs may
include substantial expenditures to upgrade or re-engineer installed equipment
that fails to perform to customer specifications. If the Company is unable to
re-engineer 6500 series non-performing systems under evaluation to customer
satisfaction and a number of 6500 series systems are returned to the Company,
the Company's ability to sell 6500 series systems in the future may be adversely
affected. In addition, in connection with the development and production of the
6500 series, the Company is investing in increased levels of inventory and
increasing its operating expenses. The failure to complete the commercial
introduction of this new generation of systems in a timely manner could result
in, among other things, inventory obsolescence and an increase in operating
expenses without corresponding sales, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
If the 6500 series does not achieve significant sales or volume
production due to a lack of customer acceptance, inability to correct technical,
manufacturing or other difficulties which may develop with this series, or for
any other reason, the Company's business, financial condition and results of
operations would be materially adversely affected.
19
IMPEDIMENTS TO CUSTOMER ACCEPTANCE
A substantial investment is required to install and integrate capital
equipment into a semiconductor production line. The Company believes that once a
device manufacturer has selected a particular vendor's capital equipment, that
manufacturer generally relies upon that vendor's equipment for that specific
production line application and, to the extent possible, subsequent generations
of that vendor's systems. Accordingly, it may be extremely difficult to achieve
significant sales to a particular customer once another vendor's capital
equipment has been selected by that customer unless there are compelling reasons
to do so, such as significant performance or cost advantages. Certain of the
Company's competitors have entered into strategic relationships or alliances
with leading semiconductor manufacturers, particularly with respect to the
current generation of devices at 1.0 to 0.5 micron line geometries for which the
Company did not offer competitive systems at the time such buying decisions were
made. If such relationships or alliances cover etch equipment similar to those
sold by the Company, the Company's ability to sell its 6500 series systems would
be adversely affected. In addition, certain of the Company's competitors may
seek to sell, as an attractively priced package, etch equipment together with
other process equipment, such as deposition equipment. Furthermore, some
semiconductor manufacturers may have already made initial buying decisions for
the next generation of sub-0.5 micron etch requirements. Any failure to gain
access and achieve sales to new customers will adversely affect the successful
commercial introduction of the Company's 6500 series systems and would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition, the Company believes that its future long term success
also depends on its ability to increase sales of its etch systems, particularly
its new generation 6500 series, to Japanese semiconductor manufacturers. The
Japanese semiconductor market represents a substantial percentage of the
worldwide market and may pose additional challenges to penetrate successfully.
The Company believes that it must invest substantial resources in order to
increase its penetration of the Japanese semiconductor market and that, even
with such investments, there can be no assurance that it will be successful in
increasing its penetration of this market.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenue and operating results have fluctuated and are
likely to continue to fluctuate significantly from quarter to quarter, and there
can be no assurance as to future profitability.
The Company's 900 and 980 non-critical etch systems typically sell for
prices ranging between $300,000 and $500,000, while prices of the Company's 6500
series critical etch systems typically range between $1.5 million and $2.0
million. To the extent the Company is successful in selling 6500 series systems,
the sale of a small number of these systems will probably account for an
increasingly substantial portion of revenue in future quarters, and a
transaction for a single system could have a substantial impact on revenue and
gross margin for a given quarter.
The Company's backlog at the beginning of each quarter does not
normally include all systems sales needed to achieve planned revenue for the
quarter. Consequently, the Company depends on obtaining orders for shipment
within a particular quarter to achieve its revenue
20
objectives for that period. Because the Company builds a portion of its systems
according to forecast, the absence of significant backlog for an extended period
of time could hinder the Company's ability to plan expense, production and
inventory levels, which could materially adversely affect its operating results.
Furthermore, a substantial portion of the Company's net revenue has historically
been realized near the end of the quarter. Accordingly, the failure to receive
anticipated orders or delays in shipments near the end of a quarter, due, for
example, to unanticipated customer delays, cancellations or manufacturing
difficulties, may cause quarterly net revenue to fall significantly short of the
Company's objectives, which could materially adversely affect the Company's
operating results.
The timing of new systems and technology announcement and releases by
the Company and others may also contribute to fluctuations in quarterly
operating results, including cases in which new systems or technology offerings
cause customers to defer ordering systems from the Company's existing product
lines. The Company's revenue and operating results may also fluctuate due to the
timing and mix of systems sold, the volume of service provided and spare parts
delivered in a particular quarter and changes in pricing by the Company, its
competitors or suppliers. The impact of these and other factors on the Company's
revenue and operating results in any future periods are, and will continue to
be, difficult for the Company to forecast.
The need for continued investment in research and development, for
capital equipment requirements and for extensive ongoing customer service and
support capability worldwide result in significant fixed costs which will be
difficult to reduce in the event that the Company does not meet its sales
objectives. The Company's expense levels are based, in part, on expectations of
future revenue. If revenue in a particular quarter does not meet expectations,
fixed operating expenses will adversely affect results of operations. A variety
of factors influence the level of revenue in a particular quarter. Those factors
include the timing and mix of systems sales, the introduction or announcement of
new systems by the Company or the Company's competitors, management decisions to
commence or discontinue product lines, the Company's ability to design,
introduce and manufacture new systems on a timely basis, the timing of research
and development expenditures and expenses attendant to the further development
of marketing, process support and service capabilities, specific economic
conditions in the semiconductor industry or major global semiconductor markets,
general economic conditions and exchange rate fluctuations. The impact of these
and other factors on the Company's revenue and operating results in any future
periods are, and will continue to be, difficult for the Company to forecast.
CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY
The Company's business depends upon the capital expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and systems utilizing integrated circuits.
The semiconductor industry is highly cyclical and historically has experienced
periodic downturns, which often have had a material adverse effect on the
semiconductor industry's demand for semiconductor capital equipment, including
etch systems manufactured by the Company. The semiconductor industry is
currently experiencing such a slowdown. Prior semiconductor industry downturns
have adversely affected the Company's revenue, gross margins and results of
operations. In addition, the need for continued investment in research and
development, substantial capital equipment requirements, and extensive ongoing
customer service and support requirements worldwide will limit the
21
Company's ability to reduce expenses in response to any such downturn or
slowdown. The Company's revenue, gross margin and results of operations may be
materially adversely affected by the current slowdown or by future downturns or
slowdowns in the rate of capital investment in the semiconductor industry.
Moreover, although the semiconductor industry may experience growth that causes
significant growth in the semiconductor capital equipment industry, there can be
no assurance that such growth can be sustained or that the Company will be
positioned to benefit from such growth.
IMPORTANCE OF "MIX AND MATCH" PURCHASING PHILOSOPHY TO NON-CRITICAL SYSTEM SALES
A principal element of the Company's strategy is to sell its
non-critical etch systems to semiconductor manufacturers who have adopted a "mix
and match" purchasing philosophy to meet their non-critical etch process
requirements. This strategy depends, in significant part, upon the recognition
by IC manufacturers that costs can be minimized by purchasing more expensive,
state of the art etch systems for their critical etch process requirements and
less expensive, but reliable, etch systems for their non-critical etch process
requirements, and the willingness of such manufacturers to implement such a
purchasing philosophy to lower manufacturing costs. Many semiconductor
manufacturers have limited or no experience with integrating etch systems in the
manner necessary for full implementation and acceptance of a "mix and match"
purchasing philosophy, and there can be no assurance that semiconductor
manufacturers will adopt such a strategy. Also, there can be no assurance that
certain of the Company's competitors will not offer competitive non-critical
etch systems to respond to semiconductor manufacturers' non-critical etch needs.
Any of these developments could have a material adverse effect on the Company's
business, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION
The semiconductor manufacturing industry is subject to rapid
technological change and new system introductions and enhancements. The Company
believes that its future success depends on its ability to continue to enhance
its existing systems and their process capabilities,
22
and to develop and manufacture in a timely manner new systems with improved
process capabilities. The industry also is subject to fundamental changes in
equipment requirements, such as the recent shift from six inch wafer equipment
to eight inch wafer equipment and the anticipated shift from eight inch wafer
equipment to twelve inch wafer equipment.
The Company must manage system transitions successfully, as
introductions of new systems could adversely affect sales of existing systems,
including its recently introduced 6500 series. There can be no assurance that
the Company will be successful in the introduction and volume manufacture of new
systems or that the Company will be able to develop and introduce, in a timely
manner, new systems or enhancements to its existing systems and processes which
satisfy customer needs or achieve market acceptance. In this regard, the Company
did not offer a competitive etch product for the most recent generation of
devices with 1.0 to 0.5 micron line geometries. The failure of the Company to
accomplish any of the above would adversely affect the Company's business,
financial condition and results of operations. In addition, the Company may
incur substantial unanticipated costs to ensure product functionality and
reliability early in its products' life cycles. If new products have quality or
reliability problems, the Company could experience reduced orders, delays in
collecting accounts receivable, higher manufacturing costs, and additional
service and warranty expenses, any of which could have a material adverse effect
on the Company's business, financial condition and operating results.
LENGTHY SALES CYCLE
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to add new manufacturing capacity or to
expand existing manufacturing capacity, both of which typically involve a
significant capital commitment. The Company often experiences delays in
finalizing system sales following initial system qualification while the
customer evaluates and receives approvals for the purchase of the Company's
systems and completes a new or expanded facility. Due to these and other
factors, the Company's systems typically have a lengthy sales cycle (often 12 to
18 months in the case of critical etch systems) during which the Company may
expend substantial funds and management effort. Lengthy sales cycles subject the
Company to a number of significant risks, including inventory obsolescence and
fluctuations in operating results over which the Company has little or no
control.
FUTURE CAPITAL NEEDS
The development, manufacture and marketing of etch systems are highly
capital intensive. In order to be competitive, the Company must continue to make
significant expenditures for, among other things, capital equipment and the
manufacture of evaluation and demonstration unit inventory for its new 6500
series etch systems. The Company expects that its existing cash balances,
anticipated cash flow from operations and funds available under its existing
lines of credit will satisfy its financing requirements for the next twelve
months. To the extent that such financial resources are insufficient to fund the
Company's activities, additional funds will be required. There can be no
assurance that additional financing will be available on reasonable terms or at
all. To the extent that additional capital is raised through the sale of
additional equity or convertible debt securities, the issuance of such
securities could result in additional dilution to the Company's stockholders.
23
DEPENDENCE ON KEY EMPLOYEES
The future success of the Company is dependent, in part, on its ability
to retain certain key personnel, including Robert V. Hery, President and Chief
Executive Officer, and Stephen P. DeOrnellas, Vice President, Corporate
Development and Chief Technology Officer. Many of these key personnel would be
difficult to replace. The Company also needs to attract additional skilled
personnel in all areas of its business to grow. The competition for these
personnel is intense, and the loss of any such persons, as well as the failure
to recruit additional key personnel in a timely manner, could have a material
adverse effect on the Company's business, financial condition and operating
results. There can be no assurance that the Company will be able to retain its
existing personnel or attract additional qualified employees in the future.
CUSTOMER CONCENTRATION
Although the composition of the group comprising the Company's largest
customers may vary from year to year, the loss of a significant customer or any
reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the semiconductor manufacturing
industry, may have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's ability to increase
its sales in the future will depend, in part, upon its ability to obtain orders
from new customers as well as the financial condition and success of its
existing customers and the general economy of which there can be no assurance.
ADDITIONAL RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
Sales of the Company's systems in certain countries are billed in local
currency, and the Company has two lines of credit denominated in Japanese Yen.
The Company generally attempts to offset a portion of its U.S. dollar
denominated balance sheet exposures subject to foreign exchange rate
remeasurement each period held by its foreign subsidiaries whose books are
denominated in currencies other than U.S. dollars by purchasing currency options
for future delivery. There can be no assurance that the Company's future results
of operations will not be adversely affected by foreign currency fluctuations.
In addition, the laws of certain countries in which the Company's products are
sold may not provide the Company's products and intellectual property rights
with the same degree of protection as the laws of the United States.
CONTROL BY EXISTING STOCKHOLDERS
The Company's principal stockholders and the Company's executive
officers and directors beneficially owned approximately 63.4% of the Company's
outstanding shares of Common Stock as of March 31, 1996. Accordingly, these
stockholders are able to elect all of the Company's directors and to determine
the outcome of corporate actions requiring stockholder approval, such as mergers
and acquisitions, regardless of how other stockholders of the company may vote.
Such a high level of ownership by such persons or entities may have a
significant effect in delaying, deferring or preventing a change in control of
the Company and may adversely affect the voting and other rights of holders of
Common Stock.
24
ITEM 2. PROPERTIES
The Company maintains its headquarters, encompassing its executive
office, manufacturing, engineering, research and development operations, in one
leased 120,000 square foot facility in Petaluma, California. The Company
currently occupies 82,500 square feet of this building, with the remaining
portion sublet or being offered for sublet. The lease expires in January 1998.
Other than certain large pieces of capital equipment leased by the Company, the
Company owns substantially all of the machinery and equipment used in its
facilities. The Company believes that its existing facilities are adequate to
meet its requirements for several years.
The Company leases sales, service and process support space in Phoenix,
Arizona; Sunnyvale, California; Austin, Texas; Paris, France; Munich, Germany;
Kawasaki, Japan; Catania, Italy; Singapore and Hsin Chu City, Taiwan. The
Company also leases space for administrative offices in Hoofddorp, The
Netherlands.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter ended March 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive officers of
the Company as of June 14, 1996:
Name Age Position
- ---------------------- --- -----------------------------------------
Robert V. Hery 54 Chairman of the Board, President and
Chief Executive Officer
David Curtis 42 Vice President, Finance and
Administration, Chief Financial Officer,
Secretary and Treasurer
Stephen P. DeOrnellas 41 Vice President, Corporate Development
and Chief Technology Officer
Charles Desmond 51 Vice President, Worldwide Sales
Haresh C. Patanik 53 Vice President, Engineering
Robert Redstone 56 Vice President, Customer Support
Michael Taylor 38 Vice President, Marketing
25
Robert V. Hery has been a Director of the Company since 1990 and
assumed the additional roles of President and Chief Executive Officer in January
1991 and Chairman of the Board in March 1995. From 1987 to 1990, Mr. Hery was
President and Chief Executive Officer of AMOT Controls Corporation, an
international manufacturer of machinery control components used in explosive and
hazardous areas. From 1985 to 1987, Mr. Hery served as Vice President and
General Manager of KLA Instruments Corporation ("KLA"), a manufacturer of
semiconductor capital equipment, where he started the Wafer Inspection Systems
Division. Prior to 1985, Mr. Hery held numerous posts as a marketing
troubleshooter, marketing and new business development, manufacturing and
product development executive positions, principally in the computer industry.
David Curtis joined the Company in August 1991 as Vice President of
Finance and Administration and Chief Financial Officer and from May 1995 until
June 1996, he assumed the additional role of Vice President of Operations. Prior
to joining the Company, Mr. Curtis served as Chief Financial Officer of AMOT
Controls Corporation from 1988 until 1991. Prior to 1991, he held consulting
positions with Pittiglio Rabin Todd and McGrath, an operations consulting firm
specializing in implementing planning and control processes in rapidly growing
technology companies and with Arthur Andersen & Co.'s systems consulting
division.
Stephen P. DeOrnellas joined the Company in July 1990 as Vice President
of Marketing and Technology, served as Vice President of Process Technology from
April 1995 until June 1996, at which time he was appointed Vice President,
Corporate Development and Chief Technology Officer. From 1989 to 1990 he was
Vice President of Marketing for the Wafer Inspection Systems Division of KLA.
From 1981 to 1989 he held a variety of product development and marketing
management positions, including Vice President Marketing from 1987 to 1989, Vice
President of Process Engineering from 1983 to 1987, and Senior Process Engineer
from 1981 to 1983, with Lam Research Corporation where he had responsibility for
the development and introduction of the Lam Autoetch and Rainbow product lines.
Charles Desmond joined the Company in July 1991 as Vice President of
Sales and Service and has been Vice President of Worldwide Sales since May 1995.
From 1979 to 1991, he held various sales management positions with SVG, a
manufacturer of semiconductor capital equipment, most recently as Vice President
of Sales and Service for SVG Lithography Systems after it had acquired the
optical operations unit of Perkin-Elmer in May 1990. Prior to his experience
with SVG, Mr. Desmond spent eight years in sales management with Micro Air
Corporation, and previously held engineering positions with Fairchild
Semiconductor Corporation and Motorola, Inc.
Haresh Patnaik joined the Company in November 1991 as Vice President of
Engineering. Prior to joining the Company, from 1988 to 1991, Mr. Patnaik was
Program Director at Teradata Corporation, where he was responsible for building
and leading a cross-functional team which developed a second-generation
relational database computer using massively parallel processing architecture.
From 1986 to 1988, he was Vice President of Engineering for Kennedy Company, a
manufacturer of data storage devices. Earlier, he spent 19 years at NCR
Corporation in product development, project management and engineering positions
where he concluded as Director of Engineering. His work at NCR included a
six-year period where he assumed general management assignments outside of the
engineering function.
26
Robert Redstone joined the Company in May 1995 as Vice President,
Customer Support. Mr. Redstone held positions of Vice President of Sales and
Service and Chief Executive Officer at Metrologix, Inc. ("Metrologix"), a
manufacturer of metrology equipment, from November 1992 until December 1994,
when Metrologix was sold to KLA. Prior to joining Metrologix, Mr. Redstone was a
marketing consultant to high-tech start-ups from 1989 to 1992. From 1984 to
1989, Mr. Redstone was the founder and Chief Executive Officer of Flexible
Manufacturing Systems, a high-tech factory automation company serving the
semiconductor industry. From 1982 to 1984, he was a Vice President and Chief
Executive Officer of Lam Research Corporation.
Michael Taylor joined the Company in July 1992 as Director of New
Product Marketing. In April 1995, he was appointed Vice President, Marketing.
Prior to joining the Company, from 1984 to 1992, he held a variety of marketing
and technical management positions with Therma-Wave, Inc., a manufacturer of
semiconductor inspection equipment. From 1980 to 1984, he held engineering
positions in the Advanced Laser and Fusion Experiments Groups at Lawrence
Livermore National Laboratory.
27
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Since October 19, 1995, Tegal's Common Stock has been traded on the
Nasdaq National Market System under the symbol TGAL. The following table sets
forth the range of high and low closing sale prices for the Company's Common
Stock for the periods indicated since the Company's initial public offering on
October 19, 1995.
High Low
---- ---
October 19 - December 31, 1995 13 7/8 9 1/4
January 1 - March 31, 1996 10 1/2 6 7/8
The approximate number of record holders of the Company's Common Stock
as of March 31, 1996 was 133. Tegal has not paid any cash dividends since its
inception and does not anticipate paying cash dividends in the foreseeable
future. Further, the Company's domestic lines of credit restrict the declaration
and payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
Year Ended March 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----- ---- ---- ---- ----
Consolidated Statements of Operations Data:
Revenue $ 62,046 $ 44,645 $ 38,022 $ 42,777 $ 42,158
Gross margin 28,577 20,583 16,508 19,458 23,786
Operating income (loss) 6,572 1,376 (1,072) 2,705 1,315
Income (loss) before income taxes 6,186 949 (1,501) 1,792 156
Net income (loss) 5,566 828 (1,501) 1,526 (73)
Net income per share $ .63 $ .11
Shares used in per share computation 8,899 7,373
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 23,283 $ 2,351 $ 3,462 $ 7,396 $ 4,481
Working capital 42,957 11,432 11,297 11,690 7,763
Total assets 63,772 33,744 27,468 24,008 24,035
Short-term notes payable to banks and others 915 8,462 4,086 167 674
Long-term obligations 1,587 4,150 3,665 3,236 10,858
Redeemable preferred stock 0 21,695 22,382 22,207 12,801
Stockholders' equity (deficit) 47,626 (11,633) (12,018) (10,196) (11,824)
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the years indicated
as a percentage of revenue:
March 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Revenue 100.0% 100.0% 100.0%
Cost of sales 53.9 53.9 56.6
----- ----- -----
Gross margin 46.1 46.1 43.4
Operating expenses:
Research and development 16.1 18.1 19.3
Sales and marketing 10.7 14.3 15.0
General and administrative 8.7 10.7 11.9
----- ----- -----
Total operating expenses 35.5 43.1 46.2
----- ----- -----
Operating income (expense) 10.6 3.0 (2.8)
Other income (expense), net (0.6) (1.0) (1.1)
----- ----- -----
Income before income taxes 10.0 2.0 (3.9)
Income tax expense 1.0 0.3 0.0
----- ----- -----
Net income 9.0% 1.7% (3.9)%
===== ===== =====
Years ended March 31, 1996, 1995 and 1994
Revenue
The Company's revenue is derived from sales of new and refurbished systems,
spare parts and non-warranty service. Revenue increased 17.4 percent from $38.0
million in fiscal 1994 to $44.6 million in fiscal 1995, and increased 39.0
percent to $62.0 million in fiscal 1996. The revenue growth in fiscal 1995 as
compared to fiscal 1994 was attributable to the sale of a substantially greater
number of non-critical etch systems as the Company's customers equipped new or
expanded facilities. Revenues from the sale of spare parts, upgrades and
service also increased due to growth in the Company's installed base of systems
and the Company's active pursuit of refurbished systems opportunities, which
the Company believes reduced chances for third party maintenance competitors to
sell spare parts. Revenue growth in fiscal 1996 as compared to fiscal 1995
occurred principally due to increased customer acceptance of the Company's new
critical etchers and new eight inch wafer capable non-critical etchers. Spare
parts sales continued to grow substantially in fiscal 1996 due to the Company
shifting its sales from a distributor arrangement to direct sales of spare
parts in Taiwan and a continued expansion in the Company's installed base of
systems. International sales accounted for approximately 63 percent of total
revenue in fiscal 1996 and 1995, and 68 percent in 1994. In fiscal 1996,
international revenue was split roughly evenly among Japan, Europe and the
Pacific Rim (principally Taiwan and Korea). The Company expects that
international sales will continue to account for a significant portion of its
revenue.
29
Gross Margin
The Company's gross margin as a percentage of revenue increased from 43.4
percent in fiscal 1994 to 46.1 percent in fiscal 1995 and 1996. The increase in
gross margin as a percentage of revenue from fiscal 1994 to fiscal 1995 was
primarily the result of spreading substantially fixed manufacturing overhead
over a larger revenue base of new systems sales, higher overhead absorption due
to significantly higher refurbished systems sales, and the sale of more spare
parts, which carry higher gross margins. The gross margin percentage in fiscal
1996 was virtually unchanged from that of fiscal 1995 due to start-up
inefficiencies on the new 6500 series critical etcher, which were offset, in
part, by improved manufacturing efficiencies associated with spreading
substantially fixed manufacturing overhead over a larger revenue volume. The
Company also had a more favorable product mix, due principally to an increase in
sales of the Company's mature four- to six-inch wafer capable 900 series etchers
and spare parts, which carry higher gross margins.
The Company's gross margin as a percentage of revenue has been, and will
continue to be, affected by a variety of factors, including the mix and average
selling prices of systems sold and the costs to manufacture, service and support
new product introductions and enhancements. Gross margins for the Company's new
systems are typically lower than those of mature products due to the
inefficiencies associated with the startup of manufacturing operations and
increased service installation and warranty support. As a result of such factors
and an anticipated product mix change toward the lower margin 6500 series
etchers, the Company does not expect that its gross margin for fiscal 1997 is
likely to improve over the fiscal 1996 level.
Research and Development
Research and development expenses consist primarily of salaries, prototype
material, consultant fees and other costs associated with the Company's
research and product development efforts. Research and development expenses as
a percentage of revenue decreased from 19.3 percent in fiscal 1994 to 18.1
percent in fiscal 1995 and to 16.1 percent in fiscal 1996. In absolute dollars,
research and development expenses increased from $7.4 million in fiscal 1994 to
$8.1 million in fiscal 1995 and to $10.0 million in fiscal 1996. The absolute
dollar increase in fiscal 1995 and 1996 expenses compared to fiscal 1994 is
primarily attributable to increased prototype material spending in fiscal 1995
associated with the development of the Company's 6500 series system. The
absolute dollar increase in fiscal 1996 expenses compared to fiscal 1995 is
primarily attributable to the hiring of additional personnel to staff ongoing
and new product development, product enhancement and applications engineering
support, particularly for recently introduced products and for increased
prototype material spending. The Company anticipates that research and
development expenses will continue to increase significantly in absolute dollars
in fiscal 1997 to support several product enhancement programs and to provide
additional applications engineering support to its customers at their
facilities, particularly for new product applications.
Sales and Marketing
Sales and marketing expenses primarily consist of salaries, commission, trade
show promotion and advertising expenses. As a percentage of revenue, sales and
marketing expenses declined from 15.0 percent in fiscal 1994 to 14.3 percent in
fiscal 1995 and 10.7 percent in fiscal 1996. In absolute dollars, sales and
marketing expenses increased from $5.7 million in fiscal 1994 to $6.4 million
in fiscal 1995 and to $6.6 million in fiscal 1996. The increase in absolute
dollars from fiscal 1994 to fiscal 1995 was primarily attributable to increased
commission expense due to an expansion in overall systems revenues and a
revenue mix shift toward sales derived by third party representatives, which
command higher commission rates. In addition, fiscal 1995 included a $0.3
million non-recurring provision for sales office relocation expenses. The
increase in fiscal 1996 sales and marketing expenses in absolute dollars was
30
attributable principally to the growth in revenue offset, in part, by a
reduction in third party representative commissions as the Company shifted to a
direct sales organization in Taiwan and as the systems sales mix shifted toward
customers and regions where the Company sells via direct sales engineers. The
Company expects to increase its absolute dollar spending on sales and marketing
in fiscal 1997 to fund additional advertising activities and to hire several
additional sales and marketing persons.
General and Administrative
General and administrative expenses consist of salaries, legal, accounting and
related administrative services and expenses associated with general management,
finance, management information systems and human resources activities. General
and administrative expenses in absolute dollars increased from $4.5 million in
fiscal 1994 to $4.8 million in fiscal 1995 and to $5.4 million in fiscal 1996.
As a percentage of revenues, general and administrative expenses decreased from
11.9 percent in fiscal 1994 to 10.7 percent in fiscal 1995 and to 8.7 percent in
fiscal 1996. The increase in general and administrative expenses in fiscal 1995
as compared to fiscal 1994 was attributable to fees incurred in connection with
financing activities that year and to legal fees in defense of two successfully
settled lawsuits. The increased general and administrative expenses in fiscal
1996 as compared to fiscal 1995 were attributable to increased legal, auditing
and insurance expenses associated with the additional, ongoing expenses incurred
as a public company, which commenced in the Company's third quarter of fiscal
1996, and to outside consulting and training expenses incurred to upgrade the
Company's business systems in the second half of fiscal 1996. The Company
anticipates that general and administrative expenses will increase in absolute
dollars in fiscal 1997 as it incurs a full year of expenses associated with
operating a publicly traded company that only partially impacted fiscal year
1996. In addition, the Company expects to incur approximately $0.2 million in
the first quarter of fiscal 1997 to complete the business system upgrade begun
in late fiscal 1996.
Other Income (Expense), Net
Other income (expense), net, consists principally of interest expense, interest
income, gains and losses on foreign exchange, and gains and losses on the
disposition of fixed assets. The Company recorded a net non-operating expense
in absolute dollars of $0.4 million in each of fiscal 1994, 1995 and 1996. In
fiscal 1994, such expenses were primarily attributable to interest expense on
its line of credit with its domestic bank, customer promissory note borrowing
in Japan and interest accretion on a term loan held by Motorola as a
consequence of the sale of Tegal by Motorola in 1989. In fiscal 1995, such
expenses were from the same source as in fiscal 1994, with additional interest
expense due to greater levels of borrowing being offset in part by foreign
exchange gains. Other expense in fiscal 1996 was composed of less interest
expense incurred due to repayment of all domestic bank debt and a restructuring
and repayment of the Motorola term loan following the Company's IPO in October
1995 and interest income on the net unused portion of the proceeds from that
offering offset, in part, by foreign exchange losses.
Income Taxes
The Company's effective tax rate was 0.0 percent, 12.8 percent and 10.0 percent
in fiscal 1994, 1995 and 1996, respectively. The effective tax rates for these
three years have been materially lower than the statutory rate due to
extensive net operating loss carryforwards generated in fiscal 1994 and prior
years. The Company expects its effective tax rate for fiscal 1997 will be
approximately 25.0 percent and will increase to approximately 35.0 percent in
subsequent years. If beneficial, the Company intends to employ a foreign sales
corporation to contain its future tax liabilities and effective tax rates.
31
Liquidity and Capital Resources
For the year ended March 31, 1996, the Company financed its operations through
bank borrowings and net proceeds from its IPO.
Operating activities generated approximately $0.2 million in cash flow for
fiscal 1996. Approximately $5.4 million of net cash was generated from net
income plus non-cash depreciation, senior term loan accretion, purchase credit
redemptions and accounts receivable reserve accruals, which was almost entirely
offset by increases in accounts receivable and inventories less increases in
accounts payable and accrued expenses, all such increases being due to the
Company's increased sales volume.
Net cash used in investing activities for fiscal 1996 was $2.1 million for
capital expenditures including the acquisition of equipment used in research
and development and manufacturing, leasehold improvements and computer
equipment.
Net cash generated by financing activities totaled $23.2 million in fiscal
1996. In October 1995, the Company completed an IPO raising a net $34.2 million
from the sale of 3,179,300 shares of the Company's common stock. $10.5 million
from the proceeds of the offering were used to repay all its domestic bank debt
and $3.0 million were used to repay a term loan due to Motorola.
As of March 31, 1996, the Company had approximately $23.3 million of cash and
cash equivalents. In addition to cash and cash equivalents, the Company's other
principal sources of liquidity consisted of the unused portions of several bank
borrowing facilities. During fiscal 1996, the Company renewed and substantially
amended its existing facilities with a new maximum of $10.0 million on one
revolving line of credit and a maximum of $3.0 million on its other revolving
line of credit. Both facilities are available until August 15, 1997 and at
March 31, 1996, both domestic credit lines were unused, providing $13.0 million
of unused availability. In addition to the foregoing facilities, as of March
31, 1996, the Company's Japanese subsidiary had available 574 million Yen
(approximately $5.4 million at exchange rates prevailing at March 31, 1996)
unused under two lines of credit for a maximum of 600 million Yen
(approximately $5.6 million at exchange rates prevailing on March 31, 1996)
with two Japanese banks, secured by customer promissory notes held by such
subsidiary in advance, of payment on customers' accounts receivable.
The Company believes that anticipated cash flow from operations, funds
available under its lines of credit and existing cash and cash equivalent
balances will be sufficient to meet the Company's cash requirements for at
least the next 12 months.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto appear on this Form
10-K according to the following Index of Consolidated Financial Statements:
Page
----
Consolidated Balance Sheets as of March 31, 1996 and 1995 37
Consolidated Statements of Operations for the years ended
March 31, 1996, 1995 and 1994 38
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended March 31, 1996, 1995 and 1994 39
Consolidated Statements of Cash Flows for the years ended
March 31, 1996, 1995 and 1994 40
Notes to Consolidated Financial Statements 41
Independent Auditors' Report 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this
Item is incorporated by reference to the Company's Proxy Statement under the
caption "Election of Directors."
The information required by this Item relating to the Company's
executive officers is included under the caption "Executive Officers of the
Registrant" in Part I, Item 4, of this Form 10-K Report.
The information regarding compliance with Section 16(a) of the
Securities and Exchange Act of 1934 in the Proxy Statement under the caption
"Compliance with Section 16(a) of the Exchange Act" is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's Proxy Statement under the caption "Certain Transactions."
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K Report:
(1) Financial Statements
See Index to Consolidated Financial Statements at page 33 of this
Report.
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included
herein:
PAGE
----
Schedule II - Valuation and Qualifying Accounts S-1
Independent Auditors' Report on Schedule S-2
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.
* 4.2 Information and Registration Rights Agreement between the
Registrant and the investors listed on Schedule A thereto dated
December 19, 1989, as amended to date.
* 4.3 Imperial Bank Warrant issued by the Registrant, dated as of March
14, 1995.
* 10.1 Amended and Restated Equity Incentive Plan.
* 10.2 1990 Stock Option Plan.
* 10.4 Employee Qualified Stock Purchase Plan.
* 10.5 Stock Option Plan for Outside Directors.
35
* 10.6 Amended and Restated Agreement of Purchase and Sale between
the Registrant, Nazem & Company III, L.P. and Motorola, Inc.
dated December 18, 1989.
* 10.7 Restructuring Agreement between the Registrant and Motorola,
Inc. Dated October 31, 1991.
* 10.8 Conversion Agreement between the Registrant and Motorola, Inc.
dated August 31, 1994 and amendment thereto dated August 8,
1995.
* 10.10 Employment Letter Agreement between the Registrant and
Stephen P. DeOrnellas dated April 30, 1990.
* 10.11 Lease dated August 15, 1986, as amended, between the Registrant
and South McDowell Investments.
* 10.12 Technology License Agreement between the Registrant and
Motorola, Inc. dated December 19, 1989.
* 10.14 Security and Loan Agreement between the Registrant and Imperial
Bank dated as of August 15, 1995.
* 10.15 Supplemental Source Code License Agreement with the Registrant
and Realtime Performance, Inc. dated as of November 1, 1991.
* 10.16 Incentive Stock Option Agreement between the Registrant and
Robert V. Hery dated as of September 28, 1993.
11 Statement of Computation of Net Income Per Share.
* 21 List of Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors
24.1 Power of Attorney (included on page 52 of this Report).
27.1 Financial Data Schedule.
- -------------------
* Incorporated by reference to identically numbered exhibits included in
Registrant's Registration Statement on Form S-1 (File No. 33-84702)
declared effective by the Securities and Exchange Commission on October
18, 1995.
(b) Reports on Form 8-K.
None.
36
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, 1996 1995
- -----------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $23,283 $ 2,351
Receivables, less allowances of $453 in
1996 and $475 in 1995 16,191 14,629
Inventories 16,947 12,668
Prepaid expenses and other current assets 1,095 1,316
------- --------
Total current assets 57,516 30,964
Property and equipment, net 6,027 2,565
Other assets, net 229 215
------- --------
$63,772 $ 33,744
------- --------
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 915 $ 8,462
Accounts payable 4,700 3,963
Accrued expenses and other current
liabilities 6,358 5,952
Product warranty 2,586 1,155
------- --------
Total current liabilities 14,559 19,532
Motorola credit liability 1,587 --
Long-term debt -- 4,150
------- --------
Total liabilities 16,146 23,682
------- --------
Commitments and contingencies
Redeemable preferred stock; $0.01 par value;
5,000,000 and 6,500,000 shares authorized in
1996 and 1995, respectively; 0 and 5,876,669
shares issued and outstanding in 1996 and
1995, respectively; aggregate liquidation
preference of $0 and $22,667 in 1996 and
1995, respectively -- 21,695
------- --------
Stockholders' equity (deficit):
Common stock; $0.01 par value; 35,000,000
and 13,500,000 shares authorized in 1996
and 1995, respectively; 10,064,404 and
650,780 shares issued and outstanding in
1996 and 1995, respectively 101 7
Additional paid-in capital 54,455 123
Cumulative translation adjustment 615 939
Accumulated deficit (7,545) (12,702)
------- --------
Total stockholders' equity (deficit) 47,626 (11,633)
------- --------
$63,772 $ 33,744
------- --------
See accompanying notes to consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year ended March 31, 1996 1995 1994
- -----------------------------------------------------------------------------
Revenue $62,046 $44,645 $38,022
Cost of sales 33,469 24,062 21,514
------- ------- -------
Gross margin 28,577 20,583 16,508
------- ------- -------
Operating expenses:
Research and development 10,000 8,065 7,354
Marketing and selling 6,622 6,366 5,691
General and administrative 5,383 4,776 4,535
------- ------- -------
Total operating expenses 22,005 19,207 17,580
------- ------- -------
Operating income (loss) 6,572 1,376 (1,072)
Other expenses, net (386) (427) (429)
------- ------- -------
Income (loss) before income taxes 6,186 949 (1,501)
Income taxes 620 121 --
_______ _______ _______
Net income (loss) $ 5,566 $ 828 $(1,501)
======= ======= =======
Net income per share $ .63 $ .11
======= =======
Shares used in per share computation 8,899 7,373
======= =======
See accompanying notes to consolidated financial statements.
38
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Common Stock Treasury Stock Additional Cumulative Total
------------------ ----------------- paid-in translation Accumulated stockholders'
Shares Amount Shares Amount capital adjustment deficit equity (deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1993 332,143 $ 4 (9,452) $ (3) $ 76 $ 381 $(10,654) $(10,196)
Treasury stock reissued -- -- 9,452 3 -- -- -- 3
Common stock issued 124,954 1 -- -- 30 -- -- 31
Translation adjustment -- -- -- -- -- 167 -- 167
Accretion of Series B
preferred stock -- -- -- -- -- -- (522) (522)
Net loss -- -- -- -- -- -- (1,501) (1,501)
---------- ---- ------ ---- ------- ----- -------- --------
Balances, March 31, 1994 457,097 5 -- -- 106 548 (12,677) (12,018)
Common stock issued 39,398 -- -- -- 17 -- -- 17
Exercise of common
stock warrants 154,285 2 -- -- -- -- -- 2
Translation adjustment -- -- -- -- -- 391 -- 391
Accretion of Series B
preferred stock -- -- -- -- -- -- (853) (853)
Net income -- -- -- -- -- -- 828 828
---------- ---- ------ ---- ------- ----- -------- --------
Balances, March 31, 1995 650,780 7 -- -- 123 939 (12,702) (11,633)
Common stock issued
under option and
executive plans 358,245 3 -- -- 124 -- -- 127
Net proceeds from IPO 3,179,300 32 -- -- 34,153 -- -- 34,185
Contribution of paid-in
capital through
conversion of Motorola
preferred stock -- -- -- -- 891 -- -- 891
Conversion of redeemable
preferred stock to
common stock at IPO 5,876,079 59 -- -- 19,164 -- -- 19,223
Translation adjustment -- -- -- -- -- (324) -- (324)
Accretion of Series B
preferred stock -- -- -- -- -- -- (409) (409)
Net income -- -- -- -- -- -- 5,566 5,566
---------- ---- ------ ---- ------- ----- -------- --------
Balances, March 31, 1996 10,064,404 $101 -- $ -- $54,455 $ 615 $ (7,545) $ 47,626
========== ==== ====== ==== ======= ===== ======== ========
See accompanying notes to consolidated financial statements.
39
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended March 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 5,566 $ 828 $(1,501)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,435 1,050 887
Accretion of senior term loan 303 485 429
Purchase credit for preferred stock redemptions (1,857) (1,540) (347)
Allowance for doubtful accounts and sales return allowances (22) 261 (293)
Changes in operating assets and liabilities:
Receivables (1,540) (3,647) (5,256)
Inventories (6,509) (3,681) (2,781)
Prepaid expenses and other current assets 221 (272) 111
Other assets (14) 219 400
Income taxes payable 829 109 (10)
Other current liabilities 1,745 1,608 769
------- ------- -------
Net cash provided by (used in) operating activities 157 (4,580) (7,592)
------- ------- -------
Cash flows used in investing activities -- purchases of property
and equipment (2,067) (1,307) (381)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 34,312 19 34
Borrowings under (repayment of) notes payable (8,146) 4,096 3,838
Repayment of long-term debt (3,000) -- --
------- ------- -------
Net cash provided by financing activities 23,166 4,115 3,872
------- ------- -------
Effect of exchange rates on cash and cash equivalents (324) 391 167
------- ------- -------
Net increase (decrease) in cash and cash equivalents 20,932 (1,111) (3,934)
Cash and cash equivalents at beginning of year 2,351 3,462 7,396
------- ------- -------
Cash and cash equivalents at end of year $23,283 $ 2,351 $ 3,462
======= ======= =======
Supplemental disclosures of cash paid during the year:
Interest $ 605 $ 348 $ 98
======= ======= =======
Income taxes $ 45 $ 90 $ 38
======= ======= =======
Supplemental disclosure of noncash investing and financing activities:
Accretion of Series B preferred stock $ 409 $ 853 $ 522
======= ======= =======
Transfer of demo lab equipment from inventory to fixed assets $ 2,330 $ -- $ --
======= ======= =======
Conversion of redeemable preferred stock to common stock
at IPO $19,223 $ -- $ --
======= ======= =======
Contribution of paid-in capital through conversion of Motorola
preferred stock $ 891 $ -- $ --
======= ======= =======
Acquisition of equipment under capital lease obligations $ 599 $ 280 $ 81
======= ======= =======
See accompanying notes to consolidated financial statements.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996, 1995 and 1994
(All amounts in thousands, except share data)
NOTE 1, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Tegal Corporation Limited (TCL) was incorporated in Bermuda in December 1989,
as a holding company upon the purchase of the net assets of Tegal Corporation,
a division of Motorola, Inc. (Motorola), by management and an investment group.
On September 1, 1995, the Board of Directors approved the domestication of TCL
in the state of Delaware as Tegal Corporation (the Company). In connection with
the domestication, a 1-for-7 reverse stock split of the Company's common and
Series A, C, and D redeemable preferred stock was effected. The accompanying
consolidated financial statements have been retroactively adjusted to reflect
the domestication and the stock split. The Company designs, manufactures,
markets, and services plasma etch systems used in the fabrication of integrated
circuits.
On October 24, 1995, the Company closed an initial public offering (IPO) of its
common stock. Under the terms of the IPO, all of the then outstanding Series A,
C, and D mandatorily redeemable preferred stock was converted into 5,876,079
shares of common stock. In addition, in accordance with a Conversion Agreement
between the Company and Motorola dated August 31, 1994, as amended August 8,
1995, all of the then outstanding Series B redeemable preferred stock was
converted into an obligation to Motorola in the form of a credit liability
(payable in cash and through the issuance of purchase credits on sales of
products or services to Motorola), and the noninterest-bearing senior term loan
payable to Motorola with a carrying value of $4,453 as of October 24, 1995, was
converted into a new promissory note in the principal amount of $3,000, which
was repaid in full out of the proceeds of the IPO.
Principles of Consolidation.
The accompanying consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform with the 1996 consolidated financial statement
presentation.
Cash and Cash Equivalents
All highly liquid investments with a maturity of less than 90 days when
purchased are considered to be cash equivalents, and those with maturities
greater than 90 days are considered short-term investments.
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities and,
accordingly, classifies investment securities as either "held-to-maturity,"
"trading," or "available-for-sale." As of March 31, 1996, the Company did not
hold any short-term investments.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, including accounts
receivable, approximates fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash, cash equivalents, and
trade receivables. Substantially all of the Company's cash and cash equivalents
are invested in money market funds. The Company performs ongoing credit
evaluations of its customers and generally
41
requires no collateral. The Company maintains reserves for potential credit
losses; historically, such losses have been minor and within management's
expectations. As of March 31, 1996, two customers accounted for 32 percent of
the accounts receivable balance (see note 12).
Inventories
Inventories are stated at standard cost, which approximates the lower of
first-in, first-out actual cost or market.
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.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Foreign Currency
Foreign currency transactions and financial statements are translated into U.S.
dollars at current rates, except that revenue, costs, and expenses are
translated at average rates during each reporting period. Gains and losses
resulting from foreign currency transactions and intercompany balances expected
to be paid in the foreseeable future are included in results of operations.
Gains and losses resulting from translation of financial statements are
excluded from results of operations and are reflected as a translation
adjustment in a separate component of stockholders' equity.
The Company enters into foreign exchange options and forward contracts to hedge
partially net accounts receivable or payable U.S. dollar positions on the books
of its subsidiaries, which are subject to periodic remeasurement. Foreign
exchange options permit, but do not require, the Company to exchange currencies
at a future date with another party at a contracted exchange rate. The expense
of the premiums paid for such options is amortized on a straight-line basis
over the term of each option (generally two to three months in duration) as a
foreign currency expense. Gains on the options that offset any losses on the
underlying balance sheet exposures are recognized as a foreign exchange gain
over the term of the options. To date, foreign currency gains on foreign
exchange options have been immaterial, and the only expenses incurred have been
the premium cost of the options.
Revenue Recognition
Revenue is recognized generally upon shipment, except in Japan, where revenue
is generally recognized upon delivery. Revenue related to units shipped on
evaluation is recognized upon customer acceptance. Maintenance revenue is
recognized on a monthly basis as billed, unless services are paid for in
advance according to service contracts, in which case revenue is deferred and
recognized over the service period using the straight-line method.
42
Product Warranty
The Company provides for estimated installation and warranty costs when revenue
on the related product is recognized. Warranty obligations are for a one-year
period for new systems, and for a six-month period for refurbished systems
beginning upon final customer acceptance. Warranty expense was $3,634, $2,608,
and $1,574 for the years ended March 31, 1996, 1995, and 1994, respectively.
Net Income Per Share
Net income per share is based on the weighted average number of shares of common
stock, common equivalent shares from convertible preferred stock using the "as
if converted" method, and dilutive common equivalent shares from options and
warrants outstanding during the period using the treasury stock method.
Pursuant to certain SEC Staff Accounting Bulletins, common stock issued for
consideration below the assumed IPO price and stock options granted with
exercise prices below the assumed IPO price during the 12-month period
preceding the date of the Company's October 1995 IPO, even when antidilutive,
have been included in the calculation of net income per share, using the
treasury stock method based on the assumed IPO price, as if they were
outstanding for all periods presented prior to their issuance or grant.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123 will be effective for
fiscal years beginning after December 15, 1995, and will require that the
Company either recognize in its consolidated financial statements costs related
to its employee stock-based compensation plans, such as stock option and stock
purchase plans, or make pro forma disclosures of such costs in a footnote to
the consolidated financial statements.
The Company expects to continue to use the intrinsic value-based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its consolidated financial statements for 1997, the Company will make the
required pro forma disclosures in a footnote to the consolidated financial
statements. SFAS No. 123 is not expected to have a material effect on the
Company's consolidated results of operations or financial position.
Management Estimates and Assumptions
The Company's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
NOTE 2. INVENTORIES
Inventories consisted of:
March 31, 1996 1995
- -------------------------------------------------------------------------------
Raw materials $ 4,036 $ 3,123
Work in process 3,173 1,372
Finished goods and spares 9,738 8,173
------- -------
$16,947 $12,668
------- -------
43
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of:
March 31, 1996 1995
- -------------------------------------------------------------------------------
Machinery and equipment $ 6,670 $5,025
Demo lab equipment 2,670 --
Leasehold improvements 2,279 1,979
------- ------
11,179 7,004
Less accumulated depreciation and amortization 5,152 4,439
------- ------
$ 6,027 $2,565
======= ======
NOTE 4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
A summary of accrued expenses and other current liabilities follows:
March 31, 1996 1995
- ------------------------------------------------------------------------------
Payroll-related $ 1,532 $1,526
Deferred rent 402 560
Income taxes payable 944 115
Other 3,480 3,751
------- ------
$ 6,358 $5,952
======= ======
NOTE 5. NOTES PAYABLE TO BANKS AND OTHERS
The Company has two lines of credit totaling $13,000 with a U.S. bank. Both
lines bear interest at prime (8.25 percent as of March 31, 1996), are secured
by a blanket security in all of the Company's assets, and are available until
August 15, 1997. The outstanding balances on the lines of credit as of March
31, 1996 and 1995, were $0 and $3,900 respectively. The lines of credit
restrict the declaration and payment of cash dividends and include, among other
terms and conditions, requirements that the Company maintain certain financial
ratios and covenants. The Company was in compliance with such covenants as of
March 31, 1996 and 1995.
The Company's Japanese subsidiary has two lines of credit available for 300,000
yen each (approximately $5,593 at exchange rates prevailing as of March 31,
1996), bearing interest at 0.125 percent and 0.5 percent, respectively, in
excess of Japanese prime (1.750 percent and 2.125 percent, respectively, as of
March 31, 1996). Both lines of credit are available until November 1996, 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,
1996 and 1995, were $243 and $1,149, respectively.
NOTE 6. LONG-TERM DEBT
Long-term debt in 1995 consisted of a noninterest-bearing senior term loan
payable to Motorola.
Under the terms of a Conversion Agreement with Motorola dated August 31, 1994,
as amended August 8, 1995, upon the closing of the IPO of the Company's stock,
the senior term loan was converted into a new promissory note in the principal
amount of $3,000, which was repaid in full out of the proceeds of the IPO.
44
NOTE 7. OTHER EXPENSES, NET
Other expenses, net, consisted of the following:
Year ended March 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Interest income $ 526 $ 72 $ 100
Interest expense (870) (802) (665)
Foreign currency exchange gain (loss), net (383) 92 (87)
Other 341 211 223
------ ----- ------
$ (386) $(427) $ (429)
====== ===== ======
NOTE 8. INCOME TAXES
Income tax expense consisted of:
Year ended March 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Current:
U.S. federal $1,100 $ 9 $ --
State and local 200 7 --
Foreign 220 105 --
------ ----- ------
1,520 121 --
====== ===== ======
Deferred:
U.S. federal (900) -- --
State and local -- -- --
Foreign -- -- --
------ ----- ------
(900) -- --
------ ----- ------
Total $ 620 $ 121 $ --
====== ===== ======
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income as a result of the
following:
Year ended March 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Expected tax expense (benefit) $ 2,103 $ 323 $ (510)
State taxes net of federal benefit 132 -- --
Foreign losses not utilized -- 32 1,290
Reduction in valuation allowance (1,700) (250) (789)
Other 85 16 9
------- ----- ------
Income tax expense $ 620 $ 121 $ --
====== ===== ======
45
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities are presented below:
March 31, 1996 1995
- ------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 50 $ 50
Inventories 2,050 1,900
Compensated absences 150 150
Warranty reserves 800 400
Property and equipment 300 50
Capitalized research and development 150 --
State taxes 50 --
Other accruals 500 150
Net operating loss carryforwards 150 2,300
------ ------
Total gross deferred tax assets 4,200 5,000
Less valuation allowance 3,300 5,000
------ ------
Net deferred tax assets $ 900 $ --
====== ======
The Company has operating loss carryforwards in foreign jurisdictions amounting
to approximately $400, which will begin to expire on March 31, 1997.
Due to the IPO, the Company experienced an "ownership change" as defined by
section 382 of the Internal Revenue Code. Due to the valuation of the Company,
utilization of federal and state net operating losses was not affected.
NOTE 9. LEASE COMMITMENTS
The Company has several noncancelable operating leases and capital leases,
primarily for general office, production, and warehouse facilities, that expire
over the next six years. Future minimum lease payments under these leases are
as follows:
Year ended March 31, Capital leases Operating leases
- ------------------------------------------------------------------------------
1997 $738 $2,528
1998 -- 1,854
1999 -- 175
2000 -- 19
2001 -- 7
Thereafter -- 4
---- ------
Total minimum lease payments $738 $4,587
Less amount representing interest (66) ======
----
$672
====
46
The above schedule of minimum payments excludes minimum annual sublease rentals
payable to the Company totaling $444 through July 31, 1999, under operating
subleases. In addition, most leases provide for the Company to pay real estate
taxes and other maintenance expenses. Rent expense for operating leases was
$2,613, $2,441, and $2,573, during the years ended March 31, 1996, 1995, and
1994, respectively.
The gross amount of equipment under capital leases was $1,006 and $406 as of
March 31, 1996 and 1995, respectively, with accumulated amortization of $314
and $91, respectively.
NOTE 10. REDEEMABLE PREFERRED STOCK
The redeemable preferred stock issued and outstanding as of March 31, 1995,
comprised the series designated as follows:
COMMON
STOCK CARRYING
SHARES RESERVED FOR ISSUED AND VALUE
SERIES AUTHORIZED CONVERSION OUTSTANDING (IN THOUSANDS)
- ------ ---------- ------------ ----------- --------------
A 4,352,274 4,123,699 4,123,699 $10,023
B 1,000 - 590 2,472
C 876,190 876,190 876,190 4,600
D 886,627 876,190 876,190 4,600
--------- --------- --------- -------
6,116,091 5,876,079 5,876,669 $21,695
========= ========= ========= =======
On October 31, 1991, 1,000 shares of Series B preferred stock were issued to
Motorola as part of the restructuring agreement relating to the Company's
obligations to Motorola (the Agreement). This stock was redeemable at the
Company's option at any time up to October 31, 1997. The Company was obligated
to redeem all shares outstanding on that date at a price of $5,840 per share.
In addition, shares could be redeemed through the issuance of purchase credits
on sales of products to Motorola (as defined by the Agreement).
Under the terms of the Conversion Agreement with Motorola dated August 31,
1994, as amended August 8, 1995, upon the closing of the Company's IPO, the
unredeemed shares of Series B preferred stock outstanding were converted into
an obligation to Motorola in the form of a credit liability. The credit
liability can be reduced through credits issued by the Company against a
portion of the invoice price of equipment, parts, and contract services
purchased by Motorola over a five-year period. The value of any unused credits
at the end of such five-year period will be paid in cash. As of March 31, 1996,
the credit liability, valued at its redemption value as of that date, was
$1,587.
Pursuant to agreements with all holders of outstanding Series A, C, and D
redeemable convertible preferred stock, such stockholders converted all such
outstanding shares into common stock on a one-for-one basis upon the closing of
the Company's IPO. The Company issued 5,876,079 shares of common stock upon
conversion of the redeemable convertible preferred stock.
On March 31, 1993, the Company issued a warrant to a bank for services
rendered, granting the right to purchase 10,436 shares of Series D preferred
stock at a price of $5.25 per share. On September 28, 1993, the Company issued
a warrant to the bank to provide antidilution protection to purchase 629 shares
of common Stock for $1.00. Both warrants were exercisable at any time before
February 15, 1998.
47
On March 14, 1995, the Company agreed to replace both warrants with a new
warrant to acquire 15,000 shares of common stock at a price of $3.15 per share,
with all other terms remaining the same as those of the replaced warrants.
NOTE 11. EMPLOYEE BENEFIT PLANS
Equity Incentive Plan
The Company has issued stock options and stock purchase rights to employees and
stock grants to consultants of the Company under the terms of the Amended and
Restated Equity Incentive Plan (Equity Incentive Plan). The exercise price of
options and the purchase price of stock purchase rights generally is the fair
value of the Company's common stock on the date of grant. Stock acquired
pursuant to the exercise of options or stock purchase rights may be subject to
repurchase by the Company upon termination of employment or consulting at the
original exercise price for up to four years from the date the options were
granted, with the buy-back rights partially expiring over that period of time.
The options are exercisable for up to 15 years from the grant date of the
option.
A summary of Equity Incentive Plan activity follows:
Outstanding options
--------------------------------
Number Exercise price
of shares per share
- ------------------------------------------------------------------------------
Options outstanding as of March 31, 1993 489,695 $.24
Granted 579,769 $.53
Exercised (131,769) $.53
Expired due to termination (21,429) $.24-$.53
-------- --------------
Options outstanding as of March 31, 1994 916,266 $.24-$.53
Expired due to termination (19,600) $.24-$.53
-------- --------------
Options outstanding as of March 31, 1995 896,666 $.24-$.53
Granted 312,143 $.53-$12.00
Exercised (331,720) $.24-$.53
Expired due to termination (62,855) $.53
-------- --------------
Options outstanding as of March 31, 1996 814,234 $.24-$12.00
======== ==============
Under the Equity Incentive Plan, the Company is authorized to grant options to
purchase up to an additional 92,131 shares of common stock. During the years
ended March 31, 1996, 1995, and 1994, the Company granted 0, 5,714, and 26,329
shares, respectively, of common stock to employees and consultants. As of March
31, 1996, 808,545 shares of common stock were issued and outstanding under the
Equity Incentive Plan.
1990 Stock Option Plan
The Company's 1990 Stock Option Plan (Option Plan) allows employees of the
Company or its affiliates to receive options to purchase common stock of the
Company. The options are exercisable for a period of up to 10 years from the
date of grant of the option. Shares purchased pursuant to the Option Plan can
be repurchased by the Company at the original exercise price upon termination
of employment for up to four years from the date the options vest, with the
Company's buy-back rights expiring over that period of time.
48
A summary of Option Plan activity follows:
Outstanding options
--------------------------------
Number Exercise price
of shares per share
--------- --------------
Options outstanding as of March 31, 1993 84,202 $.24
Granted 12,214 $.24-$ .53
Exercised (6,980) $.24
Expired due to termination (8,946) $.24-$ .53
------- --------------
Options outstanding as of March 31, 1994 80,490 $.24-$ .53
Granted 32,214 $.24
Exercised (7,397) $.24-$ .53
Expired due to termination (8,307) $.24
------- --------------
Options outstanding as of March 31, 1995 99,000 $.24-$ .53
Granted 188,663 $.53-$12.00
Exercised (26,525) $.24-$ .53
Expired due to termination (2,270) $.24-$12.00
------- --------------
Options outstanding as of March 31, 1996 258,868 $.24-$12.00
------- --------------
Under the Option Plan, the Company is authorized to grant options to purchase
up to an additional 102,093 shares of common stock. As of March 31, 1996,
46,195 shares of common stock were issued and outstanding under the Option Plan.
Directors Stock Option Plan
The Company has established a Stock Option Plan for Outside Directors (the
Directors Plan). Under the Directors Plan, the Company is authorized to grant
options to purchase up to 300,000 shares of common stock. As of March 31, 1996,
no shares of common stock were issued and outstanding under the Directors Plan.
Stock Purchase Plan
The Company has established an Employee Qualified Stock Purchase Plan (the
Employee Plan). Under the Employee Plan, the Company is authorized to grant
options to purchase up to 250,000 shares of common stock. As of March 31, 1996,
no shares of common stock were issued and outstanding under the Employee Plan.
Savings and Investment Plan
The Company has established a defined contribution plan that covers
substantially all U.S. employees who are regularly scheduled to work 20 or more
hours per week. Employee contributions of up to 4 percent of each covered
employee's compensation will be matched by the Company based upon a percentage
to be determined annually by the Board of Directors. Employees may contribute
up to 15 percent of their compensation, not to exceed a prescribed maximum
amount. The Company made contributions to the plan of $27, $21, and $19 in the
years ended March 31, 1996, 1995, and 1994, respectively.
NOTE 12. CUSTOMERS AND FOREIGN OPERATIONS
The Company's sales are primarily to domestic and international semiconductor
manufacturers. The top five customers accounted for approximately 42 percent,
42 percent, and 34 percent of the Company's total net sales for the years ended
March 31, 1996, 1995, and 1994, respectively. Two customers accounted for
approximately 14 percent, and 13 percent,
49
respectively, of net sales for the year ended March 31, 1996; two customers
accounted for approximately 15 percent and 14 percent, respectively, of net
sales for the year ended March 31, 1995; and no customers accounted for more
than 10 percent of the Company's net sales for the year ended March 31, 1994.
The Company's operations by geographical region were as follows:
Year ended March 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Revenues:
Sales to unaffiliated customers:
United States:
Customers in United States $ 22,816 $ 16,644 $12,301
Customers in Asia 10,928 10,070 10,803
Europe 13,769 13,465 9,163
Japan 14,533 4,466 5,755
-------- -------- -------
Total external sales $ 62,046 $ 44,645 $38,022
======== ======== =======
Intercompany sales among geographic
areas:
From United States $ 19,401 $ 8,474 $ 9,466
From Europe 562 739 122
Consolidation eliminations (19,963) (9,213) (9,588)
-------- -------- -------
Net intercompany sales $ -- $ -- $ --
======== ======== =======
Intercompany sales among the Company's geographic areas are recorded on the
basis of intercompany prices established by the Company.
Year ended March 31, 1996 1995 1994
- ------------------------------------------------------------------------------
Operating income (loss):
United States $ 4,465 $ 2,502 $ 1,872
Europe 594 (158) (1,807)
Japan 1,513 (968) (1,137)
------- ------- -------
Operating income (loss) $ 6,572 $ 1,376 $(1,072)
======= ======= =======
Year ended March 31, 1996 1995
- ----------------------------------------------------------------
Identifiable assets at year-end:
United States $ 67,208 $ 32,169
Europe 11,842 12,758
Japan 9,684 4,978
Consolidation eliminations (24,962) (16,161)
-------- --------
Total identifiable assets $ 63,772 $ 33,744
======== ========
NOTE 13. RELATED PARTY TRANSACTIONS
During 1994, the Company forgave a promissory note owed by an officer in the
amount of $176.
During 1996, 1995, and 1994, the Company had sales to Motorola in the amount of
$8,428, $6,442, and $1,536, respectively, with related accounts receivable of
$789, $1,561, and $176 as of March 31, 1996, 1995, and 1994, respectively.
50
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tegal Corporation:
We have audited the accompanying consolidated balance sheets of Tegal
Corporation and subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended March 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tegal Corporation
and subsidiaries as of March 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Palo Alto, California
April 23, 1996
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: June 24, 1996
TEGAL CORPORATION
By: /s/ Robert V. Hery
-------------------------------------------
Robert V. Hery
Chairman, President & Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert V. Hery and David Curtis, jointly and
severally, his attorneys-in-fact, each with the powers of substitution, for him
in any and all capacities, to sign any amendments to this Report of Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ----------------------------- ----------------------------- ----
/s/ Robert V. Hery Chairman, President, Chief June 24, 1996
- ----------------------------- Executive Officer and Director
Robert V. Hery (Principal Executive Officer)
/s/ David Curtis Chief Financial Officer June 24, 1996
- ----------------------------- (Principal Financial Officer)
David Curtis
/s/ William F. O'Shea Corporate Controller June 24, 1996
- ----------------------------- (Principal Accounting Officer)
William F. O'Shea
/s/ Fred Nazem Director June 24, 1996
- -----------------------------
Fred Nazem
/s/ Jeffrey Krauss Director June 24, 1996
- -----------------------------
Jeffrey Krauss
/s/ Thomas Mika Director June 24, 1996
- -----------------------------
Thomas Mika
/s/ Robert Anderson Director June 24, 1996
- -----------------------------
Robert Anderson
52
Schedule II
TEGAL CORPORATION
Valuation and Qualifying Accounts
Years ended March 31, 1994, 1995, 1996
(In thousands)
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Descriptions of Year Expenses Accounts Deductions of Year
- ----------------------------------- ------- -------- -------- ---------- -------
Year ended March 31, 1994:
Product warranty $ 2,337 $ 1,574 $ 13 $(2,138) $ 1,786
Doubtful accounts 253 -- (168) (70) 15
Sales returns and allowances 236 117 1 (177) 177
Cash discounts 18 4 -- -- 22
Year ended March 31, 1995:
Product warranty 1,786 2,608 (239) (3,000) 1,155
Doubtful accounts 15 253 -- (7) 261
Sales returns and allowances 177 -- 389 (381) 185
Cash discounts 22 84 -- (77) 29
Year ended March 31, 1996:
Product warranty 1,155 3,634 (4) (2,199) 2,586
Doubtful accounts 261 262 (94) (68) 361
Sales returns and allowances 185 298 (171) (229) 83
Cash discounts 29 87 (78) (29) 9
S-1
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
11 Statement Regarding Computation of Net Income Per Share.
23.1 Consent of Independent Auditors.
24.1 Powers of Attorney (included on page 52.)
27.1 Financial Data Schedule.