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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
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(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-26824
TEGAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0370244
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2201 SOUTH MCDOWELL BLVD.
PETALUMA, CALIFORNIA 94954
(Address of Principal Executive Offices)
TELEPHONE NUMBER (707) 763-5600
(Registrant's Telephone Number, Including Area Code)
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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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange List. Yes |_| No |X|
As of June 24, 2004, there were 44,261,309 shares of our common stock
outstanding.
EXPLANATORY NOTE
This amendment is being filed to amend Part I, Items 1 and 2 of the registrant's
Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2003
to correct interest expense, net loss, and net loss per share, reflected on the
registrant's unaudited condensed consolidated statements of operations for the
three and nine-month periods ended December 31, 2003 and other current assets,
additional paid-in capital and accumulated deficit as of December 31, 2003.
Restated unaudited condensed consolidated financial statements for the three and
nine-month periods ending December 31, 2003 reflecting these corrections appear
in Part I, Item 1 of this amendment. Interest expense, net did not accurately
reflect the impact of the acceleration of the amortization of the beneficial
conversion feature and the appropriate accounting for debt issuance costs
relating to the portion of our 2% convertible debentures converted into common
stock during the quarter ended December 31, 2003. The corrections impact
previously reported interest expense, net loss, and net loss per share, current
assets, additional paid-in capital and accumulated deficit, but do not impact
previously reported revenue, operating expenses or operating loss during the
three and nine-month periods ended December 31, 2003. This amendment is also
being filed to amend Exhibit No. 31 and Exhibit No. 32 to reflect the changes
resulting from this restatement and to file required certifications regarding
this amendment.
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1
TEGAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2003 (as restated) and March 31, 2003................. 4
Condensed Consolidated Statements of Operations-- for the three and nine-months ended December 31, 2003 (as 5
restated) and 2002.............................................................................................
Condensed Consolidated Statements of Cash Flows-- for the nine-months ended December 31, 2003 (as restated) and 6
2002...........................................................................................................
Notes to Condensed Consolidated Financial Statements (unaudited)............................................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.................................................................................................. 16
PART II. OTHER INFORMATION
ITEM 4. CONTROLS AND PROCEDURES........................................................................................ 19
SIGNATURES................................................................................................................. 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................................... 22
2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
DECEMBER 31,
2003 MARCH 31,
AS RESTATED 2003
------------ ------------
Current assets:
Cash and cash equivalents .............................. $ 5,089 $ 912
Trade receivables, net ................................. 2,985 2,681
Inventories ............................................ 4,914 7,032
Prepaid expenses and other current assets .............. 1,703 465
------------ ------------
Total current assets ............................... 14,691 11,090
Property and equipment, net .............................. 4,093 4,916
Intangible assets, net ................................... 1,251 959
Other assets ............................................. 267 244
------------ ------------
Total assets ....................................... $ 20,302 $ 17,209
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable .......................................... $ 166 $ 389
2% convertible debentures, net ......................... 66 --
Accounts payable ....................................... 1,494 1,923
Accrued product warranty ............................... 286 734
Customer deposits ...................................... 1,142 --
Accrued expenses and other current liabilities ......... 2,997 2,679
Deferred revenue ...................................... 331 324
------------ ------------
Total current liabilities .......................... 6,482 6,049
Other long-term obligations .............................. 111 --
Long-term portion of capital lease obligation ............ 54 37
------------ ------------
Total liabilities .................................. 6,647 6,086
------------ ------------
Stockholders' equity:
Common stock ........................................... 300 161
Additional paid-in capital ............................. 82,452 68,806
Accumulated other comprehensive income ................. 254 465
Accumulated deficit .................................... (69,351) (58,309)
------------ ------------
Total stockholders' equity ......................... 13,655 11,123
------------ ------------
$ 20,302 $ 17,209
============ ============
See accompanying notes.
3
ITEM 2. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2003 2003
AS RESTATED 2002 AS RESTATED 2002
------------- ----------- ------------ ------------
Revenue ................................................. $ 3,276 $ 3,701 $ 10,371 $ 10,098
Cost of revenue ......................................... 3,331 3,613 8,397 11,439
------------- ----------- ------------- -----------
Gross profit (loss) .................................. (55) 88 1,974 (1,341)
------------- ----------- ------------- -----------
Operating expenses:
Research and development ............................. 951 1,102 2,490 3,397
Sales and marketing .................................. 592 855 1,760 2,260
General and administrative ........................... 812 1,452 2,764 3,776
In-process research and development ................... 2,202 -- 2,202 --
------------- ----------- ------------- -----------
Total operating expenses .......................... 4,557 3,409 9,216 9,433
------------- ----------- ------------- -----------
Operating loss .................................... (4,612) (3,321) (7,242) (10,774)
Other income (expense), net
Interest expense, net ................................. (3,513) (54) (3,866) (360)
Other income , net .................................... 6 66 204 113
------------- ----------- ------------- -----------
Total other income (expense), net .................. (3,507) 59 (3,800) (156)
------------- ----------- ------------- -----------
Net loss ....................................... $ (8,119) $ (3,262) $ (11,042) $ (10,930)
============= =========== ============= ===========
Net loss per share, basic and diluted ................... $ (0.35) $ (0.20) $ (0.59) $ (0.73)
============= =========== ============= ===========
Shares used in per share computation:
Basic ................................................ 23,234 16,002 18,588 15,048
Diluted .............................................. 23,234 16,002 18,588 15,048
See accompanying notes.
4
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
2003
AS RESTATED 2002
----------- -----------
Cash flows from operating activities:
Net loss ........................................................................... $ (11,042) $ (10,930)
Adjustments to reconcile net loss to cash used in operating activities:
Non cash in-process research & development charge ................................. 2,202 --
Depreciation and amortization ..................................................... 987 743
Non cash interest expense - accretion of debt discount and amortization of debt
issuance costs ............................................................... 3,804 --
Fair value of warrants and options issued for services rendered ................. 159 121
Provision for doubtful accounts and sales returns allowances .................... 90 (116)
Excess and obsolete inventory provision ........................................... 967 1,922
Changes in operating assets and liabilities:
Receivables .................................................................. (444) 1,822
Inventories .................................................................. 1,114 2,538
Prepaid expenses and other assets ............................................ (487) 753
Accounts payable ............................................................. (474) 465
Accrued expenses and other liabilities ....................................... 88 (653)
Accrued product warranty ........................................................ (540) (166)
Customer deposits ............................................................... 1,142 574
Deferred revenue ............................................................. 6 (864)
----------- -----------
Net cash used in operating activities ..................................... (2,428) (3,791)
----------- -----------
Cash flows used in investing activities:
Purchases of property and equipment ............................................. (19) (323)
----------- -----------
Cash flows from financing activities:
Gross proceeds from the issuance of 2% convertible debentures ...................... 7,165 --
2% convertible debentures issuance costs ........................................... (982) --
Net proceeds from issuance of common stock ......................................... 609 27
Borrowings under notes payable ..................................................... 183 5,467
Repayment of borrowings under notes payable ........................................ (416) (6,209)
Capitallease financing ............................................................. 28 (5)
----------- -----------
Net cash provided by (used in) financing activities .............................. 6,587 (720)
----------- -----------
Effect of exchange rates on cash and cash equivalents ................................. 37 98
----------- -----------
Net increase (decrease) in cash and cash equivalents .................................. 4,177 (4,736)
Cash and cash equivalents at beginning of period ...................................... 912 8,100
----------- -----------
Cash and cash equivalents at end of period ............................................ $ 5,089 $ 3,364
=========== ===========
See accompanying notes.
5
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES (IN THOUSANDS):
On November 11, 2003, the Company purchased certain assets and assumed
certain liabilities of Simplus Systems. Consideration totaled $2,522 and
consisted of 1,499,994 shares of the Company's common stock valued at $2,310,
fully vested Tegal employee stock options to purchase 58,863 shares of the
Company's common stock at an exercise price of $3.09 per share, valued at $32
and transaction costs of $180. The purchase price was allocated as follows:
Assets acquired:
Fixed assets .......................................... 48
Identifiable intangible assets ........................ 389
In-process research and development ................... 2,202
---------
Total assets ............................................. 2,639
Liabilities assumed:
Current liabilities ................................... (117)
---------
Net assets acquired ...................................... $ 2,522
=========
See accompanying notes.
6
TEGAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
1. BASIS OF PRESENTATION:
In the opinion of management, the unaudited condensed consolidated interim
financial statements have been prepared on the same basis as the March 31, 2003
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary to fairly state the
information set forth herein. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (the "SEC"), but
omit certain information and footnote disclosures necessary to present the
statements in accordance with generally accepted accounting principles. These
interim financial statements should be read in conjunction with the consolidated
financial statements and footnotes included in the Annual Report on Form 10-K of
Tegal Corporation (the "Company") for the fiscal year ended March 31, 2003. The
results of operations for the three and nine months ended December 31, 2003 are
not necessarily indicative of results to be expected for the entire year.
The unaudited condensed consolidated financial statements contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company incurred net losses of $11,042 (as restated-see Note 2)
and $10,930 for the nine months ended December 31, 2003 and 2002, respectively.
The Company generated negative cash flows from operations of $2,428 (as
restated-see Note 2) and $3,791 for the periods ended December 31, 2003 and
2002, respectively. To finance its operations, the Company raised approximately
$6,183 in net proceeds from the sale of 2% convertible debentures and the
issuance of common stock as a result of the exercise of warrants during the
nine-month period ended December 31, 2003 (see Note 10). Management believes
that these proceeds, combined with the effects of its cost compression program,
will be adequate to fund operations through fiscal year 2005. However, projected
sales may not materialize and unforeseen costs may be incurred. Additionally,
the 2% convertible debentures agreement includes a material adverse change
clause which allows the debenture holders to demand the immediate payment of all
outstanding balances upon the debenture holders' determination of the occurrence
of deemed material adverse changes to the Company's financial condition,
business or operations as determined by the debenture holders based on required
financial reporting and other criteria. These issues raise substantial doubt
about the Company's ability to continue as a going concern. Our independent
accountants have included a going concern uncertainty explanatory paragraph in
their latest auditors' report dated June 10, 2003 which is included in our 10-K
for the year ended March 31, 2003.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. Substantially all of the Company's cash equivalents are
invested in highly liquid money market accounts. The Company's accounts
receivables are derived from sales to customers located in the U.S., Europe, and
Asia. The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company maintains allowances for potential
credit losses. Write-offs during the periods presented have been insignificant.
As of December 31, 2003 and March 31, 2003, three customers accounted for
approximately 57% and one customer accounted for approximately 38% respectively,
of the accounts receivable balance.
During the three months ended December 31, 2003, two customers accounted for
38% of total revenues. During the nine months ended December 31, 2003 and
December 31, 2002, two customers accounted for 29% and one customer accounted
for 14% of total revenues, respectively.
2. RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS:
The Company's unaudited condensed consolidated financial statements for the
third quarter of fiscal 2004 have been restated to correct interest expense, net
loss, net loss per share, other current assets, additional paid-in capital and
accumulated deficit as of December 31, 2003. The restatement corrects the
accounts listed above by accurately reflecting the acceleration of the
amortization of the beneficial conversion feature and the appropriate accounting
for debt issuance costs associated with debentures converted during the quarter
ended December 31, 2003. The net impact of these corrections on the Company's
7
unaudited condensed consolidated balance sheet as of December 31, 2003 and
statements of operations for the three and nine months ended December 31, 2003
is presented in the following tables:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 2003 (AS RESTATED) DECEMBER 31, 2003 (AS RESTATED)
------------------------------------------- ---------------------------------------
As
As Originally As Originally
Reported Adjustments As Restated Reported Adjustments As Restated
------------- ----------- ----------- ----------- ----------- -----------
Operating loss: .................... $ (4,612) -- $ (4,612) $ (7,242) -- $ (7,242)
Other income (expense), net
Interest expense, net ............ (2,055) (1,458) (3,513) (2,408) (1,458) (3,866)
Other income, net ................ 6 -- 6 66 -- 66
------------- ----------- ----------- ----------- ----------- -----------
Total other expense, net ...... (2,049) (1,458) (3,507) (2,342) (1,458) (3,800)
Net loss ................. $ (6,661) $ (1,458) $ (8,119) $ (9,584) $ (1,458) $ (11,042)
============= =========== =========== =========== =========== ===========
Net loss per share basic and diluted $ (0.29) $ (0.06) $ (0.35) $ (0.52) $ (0.07) $ (0.59)
============= =========== =========== =========== =========== ===========
Shares used in per share computation
Basic ........................... 23,234 23,234 23,234 18,588 18,588 18,588
Diluted ......................... 23,234 23,234 23,234 18,588 18,588 18,588
AS OF DECEMBER 31, 2003 (AS RESTATED)
As Originally
Reported Adjustments As Restated
------------- ----------- -----------
Other current assets ................................... $ 2,983 $ (1,280) $ 1,703
Additional paid-in capital ............................. 82,268 184 82,452
Accumulated deficit .................................... $ (67,893) $ (1,458) $ (69,351)
3. STOCK-BASED COMPENSATION:
The Company accounts for stock-based employee compensation under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, (APB No. 25) and related
interpretations. Under APB No. 25, compensation cost is equal to the difference,
if any, on the date of grant between the fair value of the Company's stock and
the amount an employee must pay to acquire the stock. SFAS No. 123, Accounting
for Stock-based Compensation, established accounting and disclosure requirements
using a fair value based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123 and related
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure.
The following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based compensation (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
2003 2003
AS RESTATED 2002 AS RESTATED 2002
------------ ------------ ------------ ------------
Net loss as restated ........................................... $ (8,119) $ (3,262) $ (11,042) $ (10,930)
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards .......... (32) (91) $ (121) $ (357)
------------ ------------ ------------ ------------
Proforma net loss .............................................. $ (8,151) $ (3,353) $ (11,163) $ (11,287)
============ ============ ============ ============
Basic net loss per share:
As reported .................................................... $ (.35) $ (.21) $ (.59) $ (.75)
============ ============ ============ ============
Proforma ....................................................... $ (.35) $ (.21) $ (.60) $ (.75)
============ ============ ============ ============
The Company accounts for stock-based employee compensation arrangements in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, (APB No. 25) and related interpretations, and complies with
the disclosure provisions of SFAS No. 123, Accounting for Stock-based
Compensation and SFAS No. 148 Accounting for Stock-Based Compensation -
Transition and Disclosure. The disclosure provisions of SFAS No. 123 and SFAS
No. 148 require judgments by management as to the estimated lives of the
outstanding options. Management has based the estimated life of the options on
historical option exercise patterns. If the estimated life of the options
increases, the valuation of the options will increase as well.
8
On October 28, 2003, the Board of Directors granted options to purchase
3,410,000 shares of the Company's common stock at an exercise price of $1.03 per
share, which was the closing price of the Company's common stock on October 28,
2003, to certain employees and directors of the Company. On December 18, 2003,
the Company granted options to purchase 500,000 shares of the Company's common
stock at an exercise price of $2.14 per share to certain employees, which was
the closing price of the Company's common stock on December 18, 2003.
4. INVENTORIES:
DECEMBER 31, MARCH 31,
2003 2003
----------- -----------
Raw materials ............................. $ 1,777 $ 3,218
Work in progress .......................... 1,887 1,937
Finished goods and spares ................. 1,250 1,877
----------- -----------
$ 4,914 $ 7,032
=========== ===========
The Company recorded a $967 provision for excess and obsolete raw materials
and spare parts inventory during the quarter ended December 31, 2003 as a result
of reduced revenue projections which reflect the continued slow-down of the
semiconductor sector. Additionally, the spares requested by customers do not
necessarily match those parts that are in inventory, which has created an excess
of spare parts.
5. PRODUCT WARRANTY:
The Company provides for estimated product warranty costs on all system
sales based on the estimated cost of product warranties at the time revenue is
recognized. The warranty obligation is affected by product failure rates,
material usage rates, and the efficiency by which the product failure is
corrected. Should actual product failure rates, material usage rates and labor
efficiencies differ from estimates, revisions to the estimated warranty
liability may be required.
Warranty activity for the three-month and nine-month periods ended December
31, 2003 and 2002 was:
WARRANTY ACTIVITY FOR THE WARRANTY ACTIVITY FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Balance at the beginning of the period................. $ 386 $ 1,064 $ 734 $ 1,205
Additional warranty accruals for warranties issued
during the period...................................... 43 92 188 303
Accruals related to pre-existing warranties........... - - (227) -
Less settlements made during the period............... (143) (117) (409) (469)
------------ ------------ ------------ ------------
Balance at the end of the period...................... $ 286 $ 1,039 $ 286 $ 1,039
============ ============ ============ ============
Certain sales contracts of the Company include provisions under which
customers would be indemnified by the Company in the event of, among other
things, a third-party claim against the customer for intellectual property
rights infringement related to the Company's products. There are no limitations
on the maximum potential future payments under these guarantees. The Company has
accrued no amounts in relation to these provisions as no such claims have been
made and the Company believes it has valid, enforceable rights to the
intellectual property embedded in its products.
9
6. NET LOSS PER COMMON SHARE:
Basic Net Loss Per Share ("EPS") is calculated by dividing net loss for the
period by the weighted average common shares outstanding for that period.
Diluted EPS takes into account the number of additional common shares that would
have been outstanding if the dilutive potential common shares ("common stock
equivalents") had been issued.
Common stock equivalents for the three months ended December 31, 2003 and
December 31, 2002, and the nine months ended December 31, 2003 and December 31,
2002 were 19,477,218 and 220,513, and 18,766,218 and 408,873, respectively, and
have been excluded from shares used in calculating diluted loss per share
because their effect would be antidilutive. The antidilutive securities excluded
from shares used in calculating diluted loss per share are as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Antidilutive common equivalent shares:
Options and warrants ........................................... 9,917 220 9,206 409
Shares issuable upon conversion of convertible debentures ...... 9,560 -- 9,560 --
----------- ----------- ----------- -----------
Total antidilutive shares ...................................... 19,477 220 18,766 409
=========== =========== =========== ===========
10
7. NOTES PAYABLE AND BANK LINES OF CREDIT:
On June 30, 2003, the Company entered into an Amended Letter Agreement and
Subordination Agreement with Silicon Valley Bank, which subordinated the bank's
interest in Tegal's intellectual property to the investors in the Convertible
Debt Financing (See Note 10). The Company agreed not to request, until such time
as the investors' security interest in the intellectual property was terminated,
any loan, letter of credit, foreign exchange forward contract, cash management
service or credit accommodation under the Company's current line of credit with
Silicon Valley Bank. As of December 31, 2003, the Company had no amounts
outstanding under this domestic line of credit, which had been collateralized by
substantially all of the Company's domestic assets and which was further limited
by the amounts of accounts receivable and inventories on the Company's balance
sheet. The facility had a maximum borrowing capacity of $10.0 million, and bore
interest at prime plus 1.0 %, or 5.25 % as of December 31, 2003. On January 19,
2004, the Company entered into a new line of credit with Silicon Valley Bank
that will be available until January 19, 2005. The new line of credit has a
maximum borrowing capacity of $3.5 million, bears interest of prime plus 1.0%
and is collateralized by substantially all of the Company's domestic and
Japanese assets.
As of December 31, 2003, the Company's Japanese subsidiary had $6
outstanding under its bank line of credit which is collateralized by Japanese
customer promissory notes held by such subsidiary in advance of payment on
customers' accounts receivable. The Japanese bank line bears interest at
Japanese prime (1.375 % as of December 31, 2003) plus 1.0%, and has a total
capacity of 150 million yen (approximately $1,401 at exchange rates prevailing
on December 31, 2003). As of March 31, 2003, the Company's Japanese subsidiary
had approximately $70 outstanding under its bank line of credit which was
collateralized by Japanese customer promissory notes held by such subsidiary in
advance of payment on customers' accounts receivable.
Notes payable as of December 31, 2003 consisted primarily of one
outstanding note, to the California Trade and Commerce Agency for $139. The
unsecured note from the California Trade and Commerce Agency carries an annual
interest rate of 5.75% with monthly interest only payments of approximately $4.2
per month. Although the payment deadlines are being met, the note is currently
in technical default due to the merger of Sputtered Films and Tegal Corporation.
The default could result in the California Trade and Commerce Agency
calling the note, therefore the notes payable is classified as a current
liability.
8. COMPREHENSIVE LOSS:
The components of comprehensive loss for the three and nine-month periods
ended December 31, 2003 (as restated) and 2002 are as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
2003 2003
AS RESTATED 2002 AS RESTATED 2002
----------- ----------- ----------- -----------
Net loss ....................................... (8,119) $ (3,262) $ (11,042) $ (10,930)
Foreign currency translation adjustment ........ 111 (33) 211 (27)
----------- ----------- ----------- -----------
$ (8,008) $ (3,295) $ (10,831) $ (10,957)
=========== =========== =========== ===========
9. ACQUISITIONS:
Simplus Systems Corporation:
On November 11, 2003, the Company acquired substantially all of the assets
and certain liabilities of Simplus Systems Corporation, ("Simplus"), a
development stage company, pursuant to an asset purchase agreement. Simplus had
developed a deposition cluster tool and certain processes for barrier, copper
seed and high-K dielectric applications. The purchase consideration of $2,522
includes 1,499,994 shares of the Company's common stock valued at $2,310; 58,863
fully vested employee stock options to purchase Tegal common stock at an
exercise price of $3.09 per share valued at $32, and acquisition costs of $180.
This transaction was accounted for as a purchase of assets in accordance with
EITF Issue No. 98-3, "Determining Whether a Nonmonetary Transaction Involves
Receipt of Productive Assets or of a Business".
11
During the three months ended December 31, 2003, the Company completed the
preliminary allocation of the purchase price of Simplus. The following table
represents the preliminary allocation of the purchase price for Simplus. In
estimating the fair value of the assets acquired and liabilities assumed,
management considered various factors, including an independent appraisal.
Fair value fixed assets acquired.................. $ 48
Work Force........................................ 50
Patents........................................... 339
In-process research and development............... 2,202
Assumed liabilities............................... (117)
---------
$ 2,522
=========
The assets will be amortized over a period of years shown on the following
table:
Fixed assets acquired............................. 1 year
Work Force........................................ 2 years
Patents........................................... 5 years
The fair value underlying the $2.2 million assigned to acquired in-process
research and development ("IPR&D") in the Simplus acquisition was charged to the
Company's results of operations during the quarter ended December 31, 2003 and
was determined by identifying research projects in areas for which technological
feasibility had not been established and for which there was no alternative
future use. Projects in the IPR&D category are certain design change
improvements on the existing 150 mm and 200 mm systems and the development of a
300 mm system. The design change improvements on the existing systems is
estimated to cost approximately $500,000 to $1 million, is approximately 90%
complete and will be completed by December 31, 2004. The development of a 300 mm
system is estimated to be approximately 10% complete, and to cost between $2 and
$4 million over the next two to four years, as market demand materializes.
The IPR&D value of $2.2 million was determined by an income approach where
fair value is the present value of projected free cash flows that will be
generated by the products incorporating the acquired technologies under
development, assuming they are successfully completed. The estimated net free
cash flows generated by the products over a seven-year period were discounted at
a rate of 32% in relation to the stage of completion and the technical risks
associated with achieving technological feasibility. The net cash flows for such
projects were based on management's estimates of revenue, expenses and asset
requirements. Any delays or failures in the completion of these projects could
impact expected return on investment and future results of operations. In
addition, the Company's financial condition would be adversely affected if the
value of other intangible assets acquired became impaired.
All of these projects have completion risks related to functionality,
architecture performance, process technology availability, continued
availability of key technical personnel, product reliability and availability of
software support. To the extent that estimated completion dates are not met, the
risk of competitors' product introductions is greater and revenue opportunity
may be permanently lost.
Sputtered Films, Inc:
On August 30, 2002, the Company acquired Sputtered Films, Inc., a
California corporation ("Sputtered Films") pursuant to an Agreement and Plan of
Merger Agreement dated August 13, 2002. The following unaudited proforma
financial results of Tegal Corporation and Sputtered Films for the three and
nine months ended December 31, 2002 give effect to the acquisition of Sputtered
Films as if the acquisition had occurred on April 1, 2002 and includes
adjustments such as amortization of intangible assets directly attributable to
the acquisition, and expected to have a continuing impact on the combined
Company.
These unaudited proforma financial results are provided for comparative
purposes only and are not necessarily indicative of what the Company's actual
results would have been had the forgoing transaction been consummated on April
1, 2002, nor does it give effect to the synergies, cost savings and other
charges expected to result from the acquisition. Accordingly, the proforma
financial results do not purport to be indicative of the Company's results of
operations as of the date hereof or for any period ended on the date hereof or
for any other future date or period.
12
Unaudited actual and proforma financial Information (in thousands, except share
and per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- -----------------------
2003 2002 2003 2002
---------- --------- ---------- -----------
Revenue $ 3,276 $ 3,701 $ 10,371 $ 11,763
Net loss $ (8,119) $ (3,262) $ (11,042) $ (11,473)
Net loss per share, basic and diluted................ $ (0.35) $ (0.20) $ (0.59) $ (0.72)
Shares used in per share computations:
Basic.............................................. 23,233 16,002 18,588 15,881
Diluted............................................ 23,233 16,002 18,588 15,881
10. 2% CONVERTIBLE DEBENTURES: (AS RESTATED)
On June 30, 2003, the Company signed definitive agreements with investors
to raise up to $7,165 in a private placement of convertible debt financing to be
completed in two tranches. The first tranche, which closed on June 30, 2003,
involved the sale of debentures in the principal amount of $929. The Company
received $424 in cash on June 30, 2003 and the remaining balance of $505 on July
1, 2003, which was recorded as an other receivable as of June 30, 2003. The
closing of the second tranche, which occurred on September 9, 2003 following
shareholder approval on September 8, 2003, resulted in the receipt of
approximately $6,236 in cash on September 10, 2003.
The debentures agreement includes a Material Adverse Change ("MAC") clause
which allows the debenture holders to demand the immediate payment of all
outstanding balances upon the debenture holders' determination of the occurrence
of deemed material adverse changes to the Company's financial condition,
business or operations as determined by the debenture holders. Potential
material adverse changes that may cause the Company to default on the debentures
include any significant adverse effect on the Company's financial condition
arising from an event not previously disclosed in the Company's filings with the
Securities and Exchange Commission ("SEC"), such as a significant litigation
judgment against the Company, bankruptcy, or termination of the majority of the
Company's customer relationships. The MAC clause is effective until the
conversion of all outstanding debentures. As a result of the MAC clause, the
debentures are classified as current liabilities.
The Company was required to pay a cash fee of up to 6.65% of the gross
proceeds of the debentures to certain financial advisors upon the closing of the
second tranche. A fee of $448 has been recorded as a debt issuance cost and was
paid in September 2003. The financial advisors also were granted warrants to
purchase 1,756,127 shares of the Company's common stock at an exercise price of
$0.35 per share. These warrants were valued at $1,387 using the Black-Scholes
option pricing model with the following variables: stock fair value of $0.93,
term of five years, volatility of 95% and risk-free interest rate of 2.5%.
During the three-month period ended December 31, 2003, the financial advisors
exercised warrants for 763,870 shares, leaving advisor warrants for 992,257
shares unexercised at the end of the quarter.
The debentures accrue interest at the rate of 2% per annum. Both the
principal of, and the accrued interest on, the debentures are convertible at the
rate of $0.35 per share. The principal of the debentures is convertible into
20,471,428 shares of the Company's common stock. The closing prices of the
Company's common stock on June 30, 2003 and September 9, 2003, the closing dates
for the first and second tranches, respectively, were $0.55 and $1.49.
Therefore, a beneficial conversion feature exists which needs to be accounted
for under the provisions of EITF 00-27, Application of Issue 98-5 to Certain
Convertible Instruments. A beneficial feature also exists in connection with the
conversion of the interest on the debentures into shares of common stock.
As of December 31, 2003, several debenture holders converted debentures in
the principal amount of $3,759 into 10,740,534 shares of the Company's common
stock. In addition, 46,197 shares were issued which represented interest payable
to the debenture holders at the time of the conversions. As of December 31,
2003, there remained convertible debentures in the principal amount of $3,406
convertible into 9,730,894 shares of the Company's common stock.
In addition, the debenture holders were granted warrants to purchase
4,094,209 shares of the Company's common stock at an exercise price of $0.50.
The warrants expire after eight years. The warrants were valued using the
Black-Scholes model with the following variables: fair value of common stock of
$0.35 for the first tranche debentures and $0.93 for the second tranche
debentures, volatility of 37% and risk-free interest rate of 2.5%. As of
December 31, 2003, the debenture holders had exercised warrants to purchase
437,133 (1,770 of these shares were remitted as payment) shares of the Company's
common stock. As of December 31, 2003, there remained unexercised warrants held
by the debenture holders for 3,657,076 of the Company's common stock.
13
The relative fair value of the warrants has been classified as equity with
the beneficial conversion feature because it meets all the equity classification
criteria of EITF 00-19, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock.
The following table presents the amounts originally allocated to the
beneficial conversion feature and warrants and the outstanding balance of debt
at December 31, 2003 (as restated) after accounting for these two equity
instruments and conversions (in thousands):
FIRST SECOND
TRANCHE TRANCHE TOTAL
----------- ----------- -----------
2% convertible debentures - principal amount ................... $ 929 $ 6,236 $ 7,165
Beneficial conversion feature (included in equity) ............. (605) (4,585) (5,190)
Warrants (included in equity) .................................. (73) (1,651) (1,724)
Conversions to common stock .................................... (627) (1,890) (2,517)
Accretion of debt discount ..................................... 425 1,907 2,332
----------- ----------- -----------
Net amount of 2% convertible debentures ........................ $ 49 $ 17 $ 66
=========== =========== ===========
The value of the beneficial conversion feature, warrants and debt issuance
costs are being amortized as interest expense over the life of the debt using
the effective interest method. Related interest expense for the nine month
period ended December 31, 2003 amounted to $3,804. This amount is comprised of
nominal interest, amortization of beneficial conversion feature and amortization
of debt issuance costs.
The debt issuance costs associated with the debentures amounted to $2,369
and are comprised of $982 in cash issuance costs and $1,387 associated with
warrants issued to financial advisors. Approximately $603 of these costs were
allocable to the warrants and were therefore offset into equity. The remaining
balance of $1,766 has been recorded as an asset to be amortized over the life of
the debt. As of December 31, 2003, $697 is remaining in current assets.
Amortization accelerates if the Company repays the debt early, upon
conversion, if the material adverse change clause is invoked, or if it is deemed
that such invocation is probable given the presence of negative factors or if
the debt is converted into common stock. The Company will assess the probability
of the occurrence of the material adverse change clause on a quarterly basis.
11. SUBSEQUENT EVENT:
Convertible Debenture Financing
As of June 15, 2004, all of the outstanding debentures associated with the
Convertible Debenture Financing as described in Note 7 above had been converted
into the Company's common stock. The principal and interest amount of the
debentures converted between April 1, 2004 and June 15, 2004 was $1,688, which
was converted into 4,825,118 shares of the Company's common stock.
Acquisition of First Derivative Systems, Inc.
On May 28, 2004, Tegal purchased substantially all of the assets of First
Derivative Systems, Inc. ("FDSI") for 1,410,622 shares of common stock and
approximately $200,000 in assumed liabilities, pursuant to a purchase agreement
dated April 29, 2004. All of the shares of common stock are subject to a
registration rights agreement in which the Company has agreed to register the
shares with the Securities and Exchange Commission for resale. In addition, the
Company entered into employment agreements with key FDSI personnel. FDSI, a
privately held development stage company based in Goleta, CA, was founded in
1999 as a spin-off of Sputtered Films, Inc., which itself was acquired by Tegal
in August 2002. FDSI had developed a high-throughput, low cost-of-ownership
physical vapor deposition ("PVD") system with highly differentiated technology
for leading edge memory and logic device production on 300 millimeter wafers.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information 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
14
variations thereon or comparable terminology or which constitute projected
financial information. The forward-looking statements relate to the near-term
semiconductor capital equipment industry outlook, demand for our products, our
quarterly revenue and earnings prospects for the near-term future and other
matters contained herein. Such statements are based on current expectations and
beliefs and involve a number of uncertainties and risks that could cause the
actual results to differ materially from those projected. Such uncertainties and
risks include, but are not limited to, the cyclicality of the semiconductor
industry, impediments to customer acceptance, fluctuations in quarterly
operating results, competitive pricing pressures, the introduction of competitor
products having technological and/or pricing advantages, product volume and mix
and other risks detailed from time to time in our SEC reports. For further
information, refer to the business description and risk factors sections
included in our Form 10-K for the year ended March 31, 2003 and the risk factors
section included in this Form 10-Q (Part II, Item 5) as filed with the SEC.
RESULTS OF OPERATIONS
Tegal designs, manufactures, markets and services plasma etch systems used
in the fabrication of integrated circuits, memory devices, read-write heads for
the disk drive industry, printer heads, telecommunications equipment, small flat
panel displays, device-level packaging, mask/reticle formation and MEMS. With
the acquisition of Sputtered Films on August 30, 2002, and the acquisition of
Simplus on November 11, 2003, the Company now also provides deposition
capabilities. The acquisition of Sputtered Films and Simplus secured a source
for a complementary deposition technology for our new materials strategy. The
continuation of Moore's Law is dependent on the adoption of a variety of new
materials that, because of their composition, are extremely difficult to deposit
an etch uniformly. Since the mid-1990's Tegal has focused on developing and
implementing process solutions for the new materials being adopted by the makers
of advanced semiconductor and nanotechnology devices.
The following table sets forth certain financial items as a percentage of
revenue for the three and nine-month periods ended December 31, 2003 (as
restated) and 2002:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ----------------------------
2003 2003
AS RESTATED 2002 AS RESTATED 2002
--------------- ----------- -------------- ----------
Revenue ............................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ......................................... 101.7 97.6 81.0 113.4
--------------- ----------- -------------- ----------
Gross profit (loss)................................. (1.7) 2.4 19.0 (13.4)
Operating expenses:
Research and development............................ 29.0 29.8 24.0 33.6
Sales and marketing................................. 18.1 23.1 17.0 22.4
General and administrative.......................... 24.8 39.2 26.6 37.4
In-process research and development................. 67.2 -- 21.2 --
--------------- ----------- -------------- ----------
Total operating expenses......................... 139.1 92.1 88.9 93.4
--------------- ----------- -------------- ----------
Operating loss................................ (140.8) (89.7) (69.8) (106.8)
Other income, net
Interest expense, net............................... (107.2) (1.5) (37.3) (3.6)
Other income (expense), net......................... 0.2 3.1 0.6 2.1
--------------- ----------- -------------- ----------
Other income (expense), net............................ (107.0) 1.6 (36.7) (1.5)
--------------- ----------- -------------- ----------
Net loss............................................ (247.8%) (88.1%) (106.5%) (108.3%)
=============== =========== ============== ==========
Revenue. System revenue for the three and nine-months ended December 31,
2003 was $3,276 and $10,371 respectively, a decrease for the three-months and an
increase for the nine-months of $425 and $273, respectively, over the comparable
periods in 2002. The decrease for the three months ended December 31, 2003 was
principally due to the sale of a 6500 series system upgrade as compared to the
sale of one full 6500 series systems for the same period in the prior year. The
increase for the nine months ended December 31, 2003 was principally due to the
systems sales product mix as compared to the same period in the prior year. As
of December 31, 2003 and 2002, our backlog was $5,189 and $2,774, respectively.
Revenue from spare parts and service sales for the three months ended
December 31, 2003 and December 31, 2002 were $1,930 and $1,860, respectively.
The increase of spare parts and service revenue during the three months ended
December 31, 2003 was primarily due to increased sales of spare parts as
compared to the same period in the prior year. For the nine months ended
December 31, 2003, service and spare parts revenue was $5,701, down from $5,809
15
for the nine-month period ended December 31, 2002. The decrease of spare parts
and service revenue in the nine months ended December 31, 2003 was as a result
of slow service and spare parts sales at the beginning of the current fiscal
year, that is partially offset by an increase in the three months ended December
31, 2003, which the Company believes is due to increased usage of systems in the
customers' facilities during the last three-month period.
International sales as a percentage of the Company's revenue for the three
and nine months ended December 31, 2003 were approximately 79.1% and 81.0%,
respectively, and for the three and nine months ended December 31, 2002 were
83.2% and 77.2%, respectively. We believe that international sales will continue
to represent a significant portion of our revenue.
Gross profit (loss). Gross profit (loss) as a percentage of revenue (gross
margin) was (1.7)% and 2.4% for the three-months ended December 31, 2003 and
2002, respectively, and 19.0% and (13.4)% for the nine-months ended December 31,
2003 and 2002, respectively. The decrease in gross margin for the three-months
ended December 31, 2003 compared to the same period in the prior year was
principally attributable to a $967 excess and obsolete inventory provision based
on reduced revenue projections and recent changes in product mix of spare parts
creating an excess of the spare parts currently in inventory. The increase in
gross margin for the nine months ended December 31, 2003 compared to the same
period in the prior year was principally attributable to a $1,922 excess and
obsolete inventory provision based on reduced revenue projections during the
prior year, which reflected the slow-down of the semiconductor sector.
Research and development. Research and development expenses consist
primarily of salaries, prototype material and other costs associated with our
ongoing systems and process technology development, applications and field
process support efforts. Research and development expenses were $951 and $1,102
for the three months and $2,490 and $3,397 for the nine months ended December
31, 2003 and 2002, respectively, representing 29.0% and 29.8% of revenue for the
three-months and 24.0% and 33.6% of revenue for the nine months ended December
31, 2003 and 2002, respectively. The decrease in research and development
spending is primarily due to the completion and implementation of specific
projects and the Company's continued cost reduction efforts.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions, trade show promotion and travel and living expenses
associated with those functions. Sales and marketing expenses were $592 and $855
for the three months and $1,760 and $2,260 for the nine months ended December
31, 2003 and 2002, respectively, representing 18.1% and 23.1% of revenue for the
three months and 17.0% and 22.4% of revenue for the nine months ended December
31, 2003 and 2002, respectively. The decrease in sales and marketing spending is
due to the Company's continued cost reduction efforts.
General and administrative. General and administrative expenses consist
primarily of compensation for general management, accounting and finance, human
resources, information systems and investor relations functions and for legal,
consulting and accounting fees of the Company. General and administrative
expenses were $812 and $1,452 for the three months and $2,764 and $3,776 for the
nine months ended December 31, 2003 and 2002, respectively, representing 24.8%
and 39.2% of revenue for the three months and 26.7% and 37.4% of revenue for the
nine months ended December 31, 2003 and 2002, respectively. The decrease in
general and administrative spending for the three-month period ended December
31, 2003, compared to the same periods in the prior year, was primarily
attributable to the operating expenses that are incurred by Sputtered Films in
the prior year. The decrease in general and administrative spending for the nine
month period ended December 31, 2003, compared to the same periods in the prior
year, was primarily attributable to Company's continued cost reduction efforts.
In-process research & development. In-process research & development
("IPR&D") consists of those products obtained through acquisition that are not
yet proven to be technologically feasible but have been developed to a point
where there is value associated with them in relation to potential future
revenue. Because technological feasibility was not yet proven and no alternative
future uses are believed to exist for the in-process technologies, the assigned
value of $2,202 was expensed immediately upon the date of the acquisition.
The fair value underlying the $2.2 million assigned to IPR&D in the Simplus
acquisition was determined by identifying research projects in areas for which
technological feasibility had not been established and for which there was no
alternative future use. Projects in the IPR&D category are certain design change
improvements on the existing 150 mm and 200 mm systems and the development of a
300 mm system. The design change improvements on the existing systems is
estimated to cost approximately $500,000 to $1 million, is approximately 90%
complete and will be completed by December 31, 2004. The development of a 300 mm
system is estimated to be approximately 10% complete, and to cost between $2 and
$4 million over the next two to four years, as market demand materializes.
16
The IPR&D value of $2.2 million was determined by an income approach where
fair value is the present value of projected free cash flows that will be
generated by the products incorporating the acquired technologies under
development, assuming they are successfully completed. The estimated net free
cash flows generated by the products over a seven-year period were discounted at
a rate of 32% percent in relation to the stage of completion and the technical
risks associated with achieving technological feasibility. The net cash flows
for such projects were based on management's estimates of revenue, expenses and
asset requirements. Any delays or failures in the completion of these projects
could impact expected return on investment and future results of operations. In
addition, the Company's financial condition would be adversely affected if the
value of other intangible assets acquired became impaired.
All of these projects have completion risks related to functionality,
architecture performance, process technology availability, continued
availability of key technical personnel, product reliability and availability of
software support. To the extent that estimated completion dates are not met, the
risk of competitors' product introductions is greater and revenue opportunity
may be permanently lost.
Interest expense, net. Interest expense consists primarily of interest
expense on the debenture financing and the domestic line of credit offset in
part by interest income on outstanding cash balances.
Other income (expense), net. Other income (expense), net consists primarily
of gains and losses on foreign exchange.
LIQUIDITY AND CAPITAL RESOURCES
For the nine-month period ended December 31, 2003, we financed our
operations through the use of outstanding cash balances, the sale of convertible
debentures, and borrowings against our promissory note borrowing facilities in
Japan, as well as our domestic line of credit.
Net cash used in operations was $2,428 during the nine months ended December
31, 2003, due principally to a net loss of $11,042 (as restated) offset by non
cash expense from depreciation and amortization, warrants issued for services
rendered, and non cash amortization of debt discount, and a non cash charge for
acquired IPR&D related to the Simplus acquisition. Additionally, the net loss is
offset by a net decrease in inventory and an increase in accounts receivable
offset by a net decrease in accounts payable and accrued liabilities, offset by
an increase in prepaid expenses and other assets. We expect to incur additional
costs in connection with the completion of certain projects as a result of the
acquisition of Simplus. Net cash used in operations was $3,791 during the nine
months ended December 31, 2002, due principally to a net loss of $10,930 offset
by non cash expense for depreciation and amortization, a non cash related
provision for inventory and warrants issued for services rendered. Additionally,
the net loss was offset by a decrease in accounts receivable and inventory
offset, in part, by a decrease in deferred revenue and increase in prepaid
expenses and other assets, and a decrease in accounts payable and other accrued
liabilities.
There were minimal capital expenditures for the nine months ended December
31, 2003. Capital expenditures totaled approximately $19 and $323 for the nine
months ended December 31, 2003 and December 31, 2002, respectively. Capital
expenditures in 2002 were incurred principally for leasehold improvements and to
acquire design tools, analytical equipment and computers.
Cash proceeds from financing activities totaled $6,587 for the nine months
ended December 31, 2003 and were primarily from the sale of 2% convertible
debentures and the subsequent exercise of common stock warrants by service
providers and debenture holders, partially offset by the repayment of the
Japanese line of credit. Net cash used in financing activities totaled $720 for
the nine months ended December 31, 2002 primarily related to the repayment of
the domestic and Japanese lines of credit.
On June 30, 2003, the Company entered into an Amended Letter Agreement and
Subordination Agreement with Silicon Valley Bank, which subordinated the bank's
interest in Tegal's intellectual property to the investors in the Convertible
Debt Financing (See Note 10). The Company agreed not to request, until such time
as the investors' security interest in the intellectual property was terminated,
any loan, letter of credit, foreign exchange forward contract, cash management
service or credit accommodation under the Company's current line of credit with
Silicon Valley Bank. As of December 31, 2003, the Company had no amounts
outstanding under this domestic line of credit, which had been collateralized by
substantially all of the Company's domestic assets and which was further limited
by the amounts of accounts receivable and inventories on the Company's balance
sheet. The facility had a maximum borrowing capacity of $10.0 million, and bore
interest at prime plus 1.0 %, or 5.25 % as of December 31, 2003. On January 19,
2004, the Company entered into a new line of credit with Silicon Valley Bank
that will be available until January 19, 2005. The new line of credit has a
18
maximum borrowing capacity of $3.5 million, bears interest of prime plus 1.0%
and is collateralized by substantially all of the Company's domestic and
Japanese assets.
As of December 31, 2003, the Company's Japanese subsidiary had $6
outstanding under its bank line of credit which is collateralized by Japanese
customer promissory notes held by such subsidiary in advance of payment on
customers' accounts receivable. The Japanese bank line bears interest at
Japanese prime (1.375% as of December 31, 2003) plus 1.0%, and has a total
capacity of 150 million yen (approximately $1,401 at exchange rates prevailing
on December 31, 2003).
Notes payable as of December 31, 2003 consisted primarily of one
outstanding note to the California Trade and Commerce Agency for $139. The
unsecured note from the California Trade and Commerce Agency carries an annual
interest rate of 5.75% with monthly interest only payments of approximately $4.2
per month. Although the payment deadlines are being met, the note is currently
in technical default due to the merger of Sputtered Films and Tegal Corporation.
The Company also entered into a convertible debenture financing, which is
described in Note 10 to the financial statements.
The unaudited condensed consolidated financial statements contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company incurred net losses of $11,042 (as restated) and
$10,930 for the nine months ended December 31, 2003 and 2002, respectively. The
Company generated negative cash flows from operations of $2,428 and $3,791 for
the periods ended December 31, 2003 and 2002, respectively. To finance its
operations, the Company raised approximately $6,183 in net proceeds from the
sale of 2% convertible debentures and exercise of warrants during the nine-month
period ended December 31, 2003 (see Note 10). Management believes that these
proceeds, combined with the effects of its cost compression program, will be
adequate to fund operations through fiscal year 2005. However, projected sales
may not materialize and unforeseen costs may be incurred. Additionally, the
convertible debentures agreement includes a material adverse change clause which
allows the debenture holders to demand the immediate payment of all outstanding
balances upon the debenture holders' determination of the occurrence of deemed
material adverse changes to the Company's financial condition, business or
operations as determined by the debenture holders based on required financial
reporting and other criteria. These issues raise substantial doubt about the
Company's ability to continue as a going concern.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and, in reaching reasonable level of assurance
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under
the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the quarter
covered by this report. The evaluation also took into account a written
confirmation of a reportable condition recently provided by our independent
accountants stating that they noted certain matters involving the accounting of
our convertible debentures and related debt issuance costs. The reportable
condition arose from the accounting for our convertible debentures with warrants
and related measurement and recognition of beneficial conversion and warrant
discounts and issuance costs. As a result of the above, the Company restated its
unaudited condensed consolidated financial statements for the three and
nine-month periods ended December 31, 2003, included here in.
The letter acknowledges the accounting for convertible debentures with
warrants and related measurement and recognition of beneficial conversion and
warrant discounts and issuance costs requires a deep understanding of complex
evolving areas of generally accepted accounting principles that are subject to
interpretations and where applications of such principles requires judgment.
The reportable condition letter recommends the Company expand and enhance
its accounting function to include sufficient knowledge of accounting for
complex financing transactions including the convertible debenture financing
referred above.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer conclude that our controls and procedures over financial reporting as of
the end of the period covered by this report were effective, except with respect
to the reportable condition, refer to above.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEGAL CORPORATION
(Registrant)
/s/ THOMAS R. MIKA
------------------------
Thomas R. Mika
Chief Financial Officer
Dated: June 25, 2004
20