| TEGAL CORP /DE/ Item 1A Risk Factors We wish to caution you that there are risks and uncertainties that could affect our business |
| These risks and uncertainties include, but are not limited to, the risks described below and elsewhere in this report, particularly in “Forward-Looking Statements |
| ” The following is not intended to be a complete discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors |
| We have incurred operating losses and may not be profitable in the future; Our plans to maintain and increase liquidity may not be successful |
| We incurred net losses of dlra8dtta9 million, dlra15dtta4 million and dlra12dtta6 million for the years ended March 31, 2006, 2005 and 2004, respectively, and generated negative cash flows from operations of dlra11dtta7 million, dlra7dtta5 million and dlra3dtta2 million in these respective years |
| We have raised approximately dlra18dtta4 million from the sale of stock and warrants to institutional investors in fiscal 2006 |
| Management believes that these proceeds, combined with a projected increase in sales, consolidation of certain operations and continued cost containment will be adequate to fund operations through Fiscal Year 2007 |
| If the projected sales do not materialize, we will need to reduce expenses further and raise additional capital through the issuance of debt or equity securities |
| If additional funds are raised through the issuance of preferred stock or debt, these securities could have rights, privileges or preferences senior to those of our common stock, and debt covenants could impose restrictions on our operations |
| Moreover, such financing may not be available to us on acceptable terms, if at all |
| Failure to raise additional funds may adversely affect our ability to achieve our intended business objectives |
| Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amount or classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern |
| The exercise of outstanding warrants, options and other rights to obtain additional shares will dilute the value of our shares of common stock and could cause the price of our shares of common stock to decline |
| As of March 31, 2006, there were 84cmam253cmam058 shares of our common stock issued and outstanding and there were 23cmam464cmam942 shares of common stock reserved for issuance under our equity incentive and stock purchase plans |
| As of March 31, 2006, there were warrants, stock options and restricted stock awards outstanding for approximately 28cmam929cmam268 shares of our common stock |
| The exercise of these warrants and options and the issuance of the common stock pursuant to our equity incentive plans will result in dilution in the value of the shares of our outstanding common stock and the voting power represented thereby |
| In addition, the exercise price of the warrants may be lowered under the price adjustment provisions in the event of a “dilutive issuance,” that is, if we issue common stock at any time prior to their maturity at a per share price below such conversion or exercise price, either directly or in connection with the issuance of securities that are convertible into, or exercisable for, shares of our common stock |
| A reduction in the exercise price may result in the issuance of a significant number of additional shares upon the exercise of the warrants |
| 10 _________________________________________________________________ The warrants do not establish a “floor” that would limit reductions in such conversion price or exercise price |
| The downward adjustment of the exercise price of these warrants could result in further dilution in the value of the shares of our outstanding common stock and the voting power represented thereby |
| No prediction can be made as to the effect, if any, that future sales of shares of our common stock, or the availability of shares for future sale, will have on the market price of our common stock prevailing from time to time |
| Sales of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, may adversely affect the market price of our common stock and may make it more difficult for us to sell our equity securities in the future at a time and price which we deem appropriate |
| To the extent our stockholders and the other holders of our warrants and options exercise such securities and then sell the shares of our common stock they receive upon exercise, our stock price may decrease due to the additional amount of shares available in the market |
| The subsequent sales of these shares could encourage short sales by our securityholders and others, which could place further downward pressure on our stock price |
| Moreover, holders of these warrants and options may hedge their positions in our common stock by shorting our common stock, which could further adversely affect our stock price |
| If we fail to meet the continued listing requirements of the Nasdaq Stock Market, our stock could be delisted |
| Our stock is currently listed on The Nasdaq Capital Market |
| The Nasdaq Stock Market’s Marketplace Rules impose certain minimum financial requirements on us for the continued listing of our stock |
| One such requirement is the minimum bid price on our stock of dlra1dtta00 per share |
| Beginning in 2002, there have been periods of time during which we have been out of compliance with the dlra1dtta00 minimum bid requirements of The Nasdaq Capital Market |
| On August 18, 2005, we were notified by the Nasdaq that the bid price of our common stock closed below the minimum dlra1dtta00 per share requirement for continued inclusion under the Nasdaq’s Marketplace rules |
| In order to regain compliance, our stock must trade at or above dlra1dtta00 per share for a period of a minimum of at least ten consecutive business days, although the Nasdaq Stock Market, at its discretion, could require us to maintain this share price for a longer period of time |
| We have 180 calendar days, or until February 13, 2006, to regain compliance; provided, however, that if we are in compliance with all other listing requirements except for the minimum dlra1dtta00 per share requirement, we will be eligible for an additional 180 days to regain compliance |
| On February 13, 2006, we were granted an additional 180 days to regain compliance by August 11, 2006 |
| As previously announced, we intend to conduct a reverse stock split of our common stock in hopes of regaining compliance with this minimum per share price requirement |
| However, we cannot assure you that effecting this reverse stock split will result in us regaining compliance with the Nasdaq listing requirements |
| If we are unable to regain compliance or fall out of compliance in the future with Nasdaq listing requirements, we may take actions in order to achieve compliance |
| If an initial delisting decision is made by the Nasdaq’s staff, we may appeal the decision as permitted by Nasdaq rules |
| If we are delisted and cannot obtain listing on another major market or exchange, our stock’s liquidity would suffer, and we would likely experience reduced investor interest |
| Such factors may result in a decrease in our stock’s trading price |
| Delisting also may restrict us from issuing additional securities or securing additional financing |
| The semiconductor industry is cyclical and may experience periodic downturns that may negatively affect customer demand for our products and result in losses such as those experienced in the past |
| Our business depends upon the capital expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits |
| The semiconductor industry is highly cyclical and historically has experienced periodic downturns, which often have had a detrimental effect on the semiconductor industry’s demand for semiconductor capital equipment, including etch and deposition systems manufactured by us |
| In response to the current prolonged industry slow-down, we have initiated a substantial cost containment program and completed a corporate-wide restructuring to preserve our cash |
| However, the need for continued investment in research and development, possible capital equipment requirements and extensive ongoing customer service and support requirements worldwide will continue to limit our ability to reduce expenses in response to these downturns |
| As a result, we may continue to experience operating losses such as those we have experienced in the past, which could materially adversely affect us |
| 11 _________________________________________________________________ Our competitors have greater financial resources and greater name recognition than we do and therefore may compete more successfully in the semiconductor capital equipment industry than we can |
| We believe that to be competitive, we will require significant financial resources in order to offer a broad range of systems, to maintain customer service and support centers worldwide and to invest in research and development |
| Many of our existing and potential competitors, including, among others, Applied Materials, Inc, Lam Research Corporation, Novellus 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, deposition and other production equipment and broader process equipment offerings, as well as greater name recognition than we do |
| We cannot assure you that we will be able to compete successfully against these companies in the United States or worldwide |
| We depend on sales of our advanced products to customers that may not fully adopt our product for production use |
| We have designed our advanced etch and deposition products for customer applications in emerging new films, polysilicon and metal which we believe to be the leading edge of critical applications for the production of advanced semiconductor and other microelectronic devices |
| Revenues from the sale of our advanced etch and deposition systems accounted for 69prca, 30prca and 40prca of total revenues in fiscal 2006, 2005 and 2004, respectively |
| Our advanced systems are currently being used primarily for research and development activities or low volume production |
| For our advanced systems to achieve full market adoption, our customers must utilize these systems for volume production |
| We cannot assure you that the market for devices incorporating emerging films, polysilicon or metal will develop as quickly or to the degree we expect |
| If our advanced systems do not achieve significant sales or volume production due to a lack of full customer adoption, our business, financial condition, results of operations and cash flows will be materially adversely affected |
| Our potential customers may not adopt our products because of their significant cost or because our potential customers are already using a competitor’s tool |
| A substantial investment is required to install and integrate capital equipment into a semiconductor production line |
| Additionally, we believe that once a device manufacturer has selected a particular vendor’s capital equipment, that manufacturer generally relies upon that vendor’s equipment for that specific production line application and, to the extent possible, subsequent generations of that vendor’s systems |
| Accordingly, it may be extremely difficult to achieve significant sales to a particular customer once that customer has selected another vendor’s capital equipment unless there are compelling reasons to do so, such as significant performance or cost advantages |
| Any failure to gain access and achieve sales to new customers will adversely affect the successful commercial adoption of our products and could have a detrimental effect on us |
| Our quarterly operating results may continue to fluctuate |
| Our revenue and operating results have fluctuated and are likely to continue to fluctuate significantly from quarter to quarter, and we cannot assure you that we will achieve profitability in the future |
| Our 900 series etch systems typically sell for prices ranging between dlra250 and dlra600, while prices of our 6500 series critical etch systems and our Endeavor deposition system typically range between dlra1dtta8 million and dlra3dtta0 million |
| To the extent we are successful in selling our 6500 and Endeavor series systems, the sale of a small number of these systems will probably account for a substantial portion of revenue in future quarters, and a transaction for a single system could have a substantial impact on revenue and gross margin for a given quarter |
| Other factors that could affect our quarterly operating results include: · our timing of new systems and technology announcements and releases and ability to transition between product versions; · seasonal fluctuations in sales; · changes in the mix of our revenues represented by our various products and customers; · adverse changes in the level of economic activity in the United States or other major economies in which we do business; · foreign currency exchange rate fluctuations; · expenses related to, and the financial impact of, possible acquisitions of other businesses; and · changes in the timing of product orders due to unexpected delays in the introduction of our customers’ products, due to lifecycles of our customers’ products ending earlier than expected or due to market acceptance of our customers’ products |
| 12 _________________________________________________________________ Some of our sales cycles are lengthy, exposing us to the risks of inventory obsolescence and fluctuations in operating results |
| Sales of our systems depend, in significant part, upon the decision of a prospective customer to add new manufacturing capacity or to expand existing manufacturing capacity, both of which typically involve a significant capital commitment |
| We often experience delays in finalizing system sales following initial system qualification while the customer evaluates and receives approvals for the purchase of our systems and completes a new or expanded facility |
| Due to these and other factors, our systems typically have a lengthy sales cycle (often 12 to 18 months in the case of critical etch and deposition systems) during which we may expend substantial funds and management effort |
| Lengthy sales cycles subject us to a number of significant risks, including inventory obsolescence and fluctuations in operating results over which we have little or no control |
| Because technology changes rapidly, we may not be able to introduce our products in a timely enough fashion |
| The semiconductor manufacturing industry is subject to rapid technological change and new system introductions and enhancements |
| We believe that our future success depends on our ability to continue to enhance our existing systems and their process capabilities, and to develop and manufacture in a timely manner new systems with improved process capabilities |
| We may incur substantial unanticipated costs to ensure product functionality and reliability early in our products’ life cycles |
| We cannot assure you that we will be successful in the introduction and volume manufacture of new systems or that we will be able to develop and introduce, in a timely manner, new systems or enhancements to our existing systems and processes which satisfy customer needs or achieve market adoption |
| Our financial performance may adversely affect the morale and performance of our personnel and our ability to hire new personnel |
| Our common stock has declined in value below the exercise price of many options granted to employees pursuant to our stock option plans |
| Thus, the intended benefits of the stock options granted to our employees, the creation of performance and retention incentives, may not be realized |
| As a result of these factors, our remaining personnel may seek employment with larger, more established companies or companies perceived as having less volatile stock prices |
| Provisions in our agreements, charter documents, stockholder rights plan and Delaware law may deter takeover attempts, which could decrease the value of your shares |
| Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors |
| Our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer |
| Delaware law imposes some restrictions on mergers and other business combinations between us and any holder of 15prca or more of our outstanding common stock |
| In addition, we have adopted a stockholder rights plan that makes it more difficult for a third party to acquire us without the approval of our board of directors |
| These provisions apply even if the offer may be considered beneficial by some of our stockholders |
| We may not be able to protect our intellectual property or obtain licenses for third parties’ intellectual property and therefore we may be exposed to liability for infringement or the risk that our operations may be adversely affected |
| Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we may not be able to protect our technology adequately and competitors may be able to develop similar technology independently |
| Additionally, patent applications that we may file may not be issued and foreign intellectual property laws may not protect our intellectual property rights |
| There is also a risk that patents licensed by or issued to us will be challenged, invalidated or circumvented and that the rights granted thereunder will not provide competitive advantages to us |
| Furthermore, others may independently develop similar systems, duplicate our systems or design around the patents licensed by or issued to us |
| Litigation could result in substantial cost and diversion of effort by us, which by itself could have a detrimental effect on our financial condition, operating results and cash flows |
| Further, adverse determinations in such litigation could result in our loss of proprietary rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our systems |
| In addition, licenses under third parties’ intellectual property rights may not be available on reasonable terms, if at all |
| Our customers are concentrated and therefore the loss of a significant customer may harm our business |
| The composition of our top five customers has changed from year to year, but net system sales to our top five customers in each of fiscal 2006, 2005, and 2004 accounted for 68dtta9prca, 80dtta0prca and 84dtta8prca, respectively, of our total net system sales |
| ST Microelectronics accounted for 54dtta3prca of our total revenue in fiscal 2006 |
| Fujitsu, Western Digital, and RF Micro Devices accounted for 38dtta2prca, 12dtta8prca and 10dtta1prca respectively, of our net system sales in 2005 |
| Intel, Fuji Film, and Matsushita accounted for 31dtta4prca, 22dtta9prca and 12dtta6prca respectively, of our net system sales in 2004 |
| Other than the these customers, no single customer represented more than 10prca of our total revenue in fiscal 2006, 2005, and 2004 |
| Although the composition of the group comprising our largest customers may vary from year to year, the loss of a significant customer or any reduction in orders by any significant customer, including reductions due to market, economic or competitive conditions in the semiconductor and related device manufacturing industry, may have a material adverse effect on us |
| 13 _________________________________________________________________ We are exposed to additional risks associated with international sales and operations |
| International sales accounted for 76prca, 70prca and 67prca of total revenue for fiscal 2006, 2005 and 2004, respectively |
| International sales are subject to certain risks, including the imposition of government controls, fluctuations in the US dollar (which could increase the sales price in local currencies of our systems in foreign markets), changes in export license and other regulatory requirements, tariffs and other market barriers, political and economic instability, potential hostilities, restrictions on the export or import of technology, difficulties in accounts receivable collection, difficulties in managing representatives, difficulties in staffing and managing international operations and potentially adverse tax consequences |
| We cannot assure you that any of these factors will not have a detrimental effect on our operations, financial results and cash flows |
| We generally attempt to offset a portion of our US dollar denominated balance sheet exposures subject to foreign exchange rate remeasurement by purchasing forward currency contracts for future delivery |
| We cannot assure you that our future results of operations and cash flows will not be adversely affected by foreign currency fluctuations |
| In addition, the laws of certain countries in which our products are sold may not provide our products and intellectual property rights with the same degree of protection as the laws of the United States |
| Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty |
| Changing laws, regulations and standard relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Market rules are creating uncertainty for public companies |
| We continually evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs |
| These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies |
| This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, we have invested resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |
| If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed |
| Our stock price is volatile and could result in a material decline in the value of your investment in Tegal |
| We believe that factors such as announcements of developments related to our business, fluctuations in our operating results, sales of our common stock into the marketplace, failure to meet or changes in analysts’ expectations, general conditions in the semiconductor industry or the worldwide economy, announcements of technological innovations or new products or enhancements by us or our competitors, developments in patents or other intellectual property rights, developments in our relationships with our customers and suppliers, natural disasters and outbreaks of hostilities could cause the price of our common stock to fluctuate substantially |
| In addition, in recent years the stock market in general, and the market for shares of small capitalization stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies |
| We cannot assure you that the market price of our common stock will not experience significant fluctuations in the future, including fluctuations that are unrelated to our performance |
| Potential disruption of our supply of materials required to build our systems could have a negative effect on our operations and damage our customer relationships |
| Materials delays have not been significant in recent years |
| Nevertheless, we procure certain components and sub-assemblies included in our systems from a limited group of suppliers, and occasionally from a single source supplier |
| For example, we depend on MECS Corporation, a robotic equipment supplier, as the sole source for the robotic arm used in all of our 6500 series systems |
| We currently have no existing supply contract with MECS Corporation, and we currently purchase all robotic assemblies from MECS Corporation on a purchase order basis |
| Disruption or termination of certain of these sources, including our robotic sub-assembly source, could have an adverse effect on our operations and damage our relationship with our customers |
| 14 _________________________________________________________________ Any failure by us to comply with environmental regulations imposed on us could subject us to future liabilities |
| We are subject to a variety of governmental regulations related to the use, storage, handling, discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process |
| We believe that we are currently in compliance in all material respects with these regulations and that we have obtained all necessary environmental permits generally relating to the discharge of hazardous wastes to conduct our business |
| Nevertheless, our failure to comply with present or future regulations could result in additional or corrective operating costs, suspension of production, alteration of our manufacturing processes or cessation of our operations |