Quarterly report pursuant to Section 13 or 15(d)

Asset Acquisitions and Sales

Asset Acquisitions and Sales

6 Months Ended

Sep. 30, 2011

Asset Acquisitions and Sales [Abstract]

6. Asset Acquisitions and Sales:

On September 16, 2008, the Company acquired certain assets from AMMS and Alcatel Lucent (together, the “Sellers”). With this acquisition, we entered the DRIE market. DRIE is a highly anisotropic etch process used to create deep, steep-sided holes and trenches in wafers, with aspect ratios of 20:1 or more. DRIE was developed for micro-electro-mechanical systems (“MEMS”), which require these features, but is also used to excavate trenches for high-density capacitors for DRAM and more recently for creating TSVs in advanced 3-D wafer level packaging technology. The acquisition was designed to enable us to pursue the high-growth markets in MEMS and certain segments of integrated semiconductor device manufacturing and packaging. Current end-markets include production of a variety of MEMS and power devices, memory stacking (flash and DRAM), logic, RF-SiP, and CMOS image sensors. The Company paid $1,000 in cash and $4,000 in shares of the Company's common stock. The 208,877 shares of common stock issued by the Company was calculated by obtaining the quotient of (a) $4,000 divided by (b) the average of the closing sales prices of the Common Stock as reported on the Nasdaq Capital Market on the five (5) consecutive trading days immediately prior to (but excluding) the closing date.

In connection with this acquisition, the Company and Alcatel Lucent entered into an intellectual property agreement providing for the transfer of specified intellectual property rights to the Company, a trademark license agreement allowing for the limited use of the AMMS trademark by the Company, and a preferred supplier agreement pursuant to which the Company will purchase certain equipment from an affiliate of the Sellers. AMMS designated Mr. Gilbert Bellini to serve as a member of the Company's board of directors. AMMS' designation right terminates upon the later of (a) the termination or expiration of certain customer services related agreements, and (b) when AMMS beneficially owns less than 5% of the number of shares of Common Stock issued and outstanding (including the shares to be issued to the Sellers). AMMS' right to designate a member of the Company's board of directors terminated upon the absorption of AMMS into its parent, Adixen Vacuum Technology, and its subsequent sale to Pfeiffer Vacuum GmbH on December 31, 2010.

The purchase price was allocated as follows (in thousands):

Assets acquired:
Trademarks	$	428
Patents		2,648
Total Intangible Assets		3,076

Fixed Assets		24
Inventory		1,900
Total Tangible Assets		1,924

Total Acquired Assets	$	5,000

Beginning in the fiscal third quarter of 2009, following the acquisition of the DRIE product lines from AMMS, the Company experienced a sharp decline in revenues related to its legacy Etch and PVD products, a result of the overall collapse of the semiconductor capital equipment market and the global financial crisis. The management and the Board of Directors of the Company considered several alternatives for dealing with this decline in revenues, including the sale of assets which the Company could no longer support. On March 19, 2010, the Company and its wholly owned subsidiary, SFI, sold inventory, equipment, intellectual property and other assets related to the Company's legacy Etch and PVD products to OEM Group Inc. (“OEM Group”), a company based in Phoenix, Arizona that specializes in “life cycle management” of legacy product lines for several semiconductor equipment companies. The sale included the product lines and associated spare parts and service business of the Company's 900 and 6500 series plasma etch systems, along with the Endeavor and AMS PVD systems from SFI. In connection with the sale of the assets, OEM Group assumed the Company's warranty liability for recently sold legacy Etch and PVD systems.

The Company and OEM Group entered into related agreements for the transfer and licensing of patents, trademarks and other intellectual property associated with the legacy Etch and PVD products. These included a Trademark Assignment Agreement for certain trademarks used in the legacy Etch and PVD Products, a royalty-free Trademark License Agreement allowing for the limited use of the Tegal trademark by the purchaser solely in connection with future sales of legacy Etch and PVD products and solely in combination with the trademarks transferred to purchaser, a Patent Assignment Agreement for the transfer of certain patents related to the Etch and PVD products, and a perpetual, irrevocable, non-exclusive, worldwide, fully-paid, royalty-free, Intellectual Property Cross License Agreement, pursuant to which the Company granted OEM Group a license to certain intellectual property owned by the Company for use in OEM Group's manufacture and sale of the legacy Etch and PVD products, and OEM Group licensed back to the Company certain intellectual property for the Company's continued use.

The consideration paid by OEM Group consisted of the following (in thousands):

Cash in the amount of $250 paid at closing, which occurred on March 19, 2010;

An aggregate of $1,750 cash payable to the Company by four installment payments of $250, $500, $500 and $500 on July 1, 2010, October 1, 2010, January 1, 2011 and April 1, 2011, respectively; and

A contingent payment in cash of up to $1,000 payable to the Company by April 15, 2011 based on the following percentage of applicable bookings of Etch and PVD products in excess of $6,000 received by the Company or OEM Group during the period beginning March 19, 2010 through March 31, 2011:

if applicable bookings are greater than or equal to $6,000 but less than $8,000, the contingent payment will be 5% of the applicable bookings in excess of $6,000;

if applicable bookings are greater than or equal to $8,000 but less than $10,000, the contingent payment will be $100 plus 10% of the applicable bookings in excess of $8,000;

if applicable bookings are greater than or equal to $10,000 but less than $12,000, the contingent payment will be $300 plus 15% of the applicable bookings in excess of $10,000; and

if applicable bookings are greater than or equal to $12,000, the contingent payment will be $600 plus 20% of the applicable bookings in excess of $12,000.

In no case will the contingent payment exceed $1,000.

On June 21, 2011, the Sellers, OEM Group and Purchaser entered into an amendment (the “Amendment”) to the Purchase Agreement which, among other things, revises the payment schedule of the Contingent Payment such that $300 of the Contingent Payment shall be due July 1, 2011 and the remaining $140 shall be due October 1, 2011. The $300 due on July 1, 2011 was paid on July 5, 2011. The $140 due on October 1, 2011 was paid on October 7, 2011. Unpaid portions of the Contingent Payment accrued interest from April 15, 2011 at a variable rate of the Wall Street Journal Prime Rate (currently 3.25%) plus 1%. The description of the Amendment provided above is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as Exhibit 10.1 to the Form 8-K report filed on June 23, 2011.

The Company retained the DRIE products which it had acquired from AMMS, along with the Compact™ cluster platform and the NLD technology that it had developed over the past several years. The DRIE markets were seriously impacted by the downturn in the semiconductor markets, and as those markets recover the Company is not in a position to make the needed investments to improve its competitive position. In addition, it was not clear that even with additional investment and significant reductions in operating expenses DRIE sales alone would be enough to support the Company. As a result, the Company evaluated various other alternative strategies, including sale of its DRIE products, Compact™ platform and NLD technology, the transition to a new business model, a sale of all or substantially all of our assets, or the liquidation or dissolution of the Company, including through a bankruptcy proceeding. On February 9, 2011, the Company sold its DRIE and Compact related assets to SPTS, but retained its NLD technology. See “The SPTS Transaction” below.

The Sequel Power Transaction

On January 14, 2011, Tegal, se2quel Partners LLC, a California limited liability company, and Sequel Power LLC, a newly formed Delaware limited liability company (“Sequel Power”), entered into a Formation and Contribution Agreement. Sequel Power is focused on the promotion of solar power plant development projects worldwide, the development of self-sustaining businesses from such projects, including but not limited to activities relating to and supporting, developing, building and operating solar photovoltaic fabrication facilities and solar farms, and the consideration of other non-photovoltaic renewable energy projects. se2quel Partners is owned by Ferdinand Seemann, who previously served as an independent member of the Company's Board of Directors. Pursuant to the Formation and Contribution Agreement, Tegal contributed $2 million in cash to Sequel Power in exchange for an approximate 25% ownership interest in Sequel Power. In addition, Tegal issued warrants (“Warrants”) to se2quel Partners and se2quel Management GmbH, a German limited liability company, to purchase an aggregate of 185,777 shares of the Company's common stock at an exercise price of $3.15 per share. The Warrants are exercisable for a period of four years.

The descriptions of the Formation and Contribution Agreement and the Warrants are qualified in their entirety by reference to the full text of such documents, copies of which were filed as exhibits to the Form 8-K report filed on January 21, 2011.

The SPTS Transaction

On February 9, 2011, Tegal and SPP Process Technology Systems Limited, (“SPTS”), a company incorporated and registered in England and Wales, entered into an Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which the Company sold to SPTS all of the shares of Tegal France, SAS, the Company's wholly-owned subsidiary, and product lines and certain equipment, intellectual property and other assets relating to the Company's DRIE systems and certain related technology SPTS also assumed existing customer contracts, including all installation and warranty obligations of existing customers, and other liabilities arising after the closing of the transaction (the “Assumed Liabilities”).

In connection with the sale, the Company and SPTS entered into related agreements for the transfer and licensing of patents, trademarks and other intellectual property associated with the business, including a royalty-free Trademark License Agreement allowing for the limited use of the Tegal trademark by SPTS solely in connection with future sales related to the business and solely in combination with the trademarks transferred to SPTS, as well as written assignments to SPTS of all rights in the patents and trademarks that are part of the sale.

The transaction closed immediately after execution of the Purchase Agreement. The consideration paid by SPTS totaled approximately $2,100, comprised of approximately $500 of Assumed Liabilities and $1,600 in cash, of which $200 in cash will be held in escrow for one year after the closing of the transaction to satisfy any indemnification obligations of the Company under the Purchase Agreement.

The descriptions of the Purchase Agreement and the Trademark License Agreement provided above are qualified in their entirety by reference to the full text of such agreements, copies of which have been filed as Exhibits 10.1 and 10.2, respectively, to the Company's 8-K filed on February 15, 2011 and are incorporated herein by reference.

Discontinued Operations

The assets and liabilities of discontinued operations are presented separately under the captions “Assets of discontinued operations,” “Assets held for sale -- discontinued operations,” “Long term assets of discontinued operations”, and “Liabilities of discontinued operations,” respectively, in the accompanying condensed consolidated balance sheets at September 30, 2011 and March 31, 2011 and consist of the following:

	September 30, 2011		March 31, 2011

Assets of Discontinued Operations:
Accounts receivable and other receivables, net of allowances for sales returns and doubtful accounts of $0 and $71 at September 30, 2011 and March 31, 2011, respectively	$	19	$	591
Notes receivable		28		528
Prepaid expenses and other current assets		409		10
Total assets of discontinued operations	$	456	$	1,129

Liabilities of Discontinued Operations:
Accounts payable	$	-	$	522
Deferred revenue		--		130
Accrued expenses and other current liabilities		758		758
Total liabilities of discontinued operations	$	758	$	1,410

In the six months ended September 30, 2011, the Company recognized deferred revenue of $130, offset by related commission expense, as well as revenue of $89 from the finalization of the sale of the DRIE assets which occurred in the fourth quarter of the prior fiscal year. In the same period, the Company received $300 from OEM as one of the installment payments related to the sale of legacy assets, and recognized $29 in foreign currency transactions. These amounts are recognized in discontinued operations. Total revenue from discontinued operations was $3,183 and $3,502 for the three and six months ended September 30, 2010. The total loss from discontinued operations for the six months ended September 30, 2010 was $1,481 and included the reclassification of operating expenses related to the manufacture, design, marketing and servicing of the DRIE operations including foreign exchange adjustments and income tax expense (benefit).