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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2201 SOUTH MCDOWELL BLVD. P.O. BOX 6020
PETALUMA, CALIFORNIA 94955-6020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER (707) 763-5600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [ ]
As of September 30, 1997, there were 10,342,962 shares of the registrant's
Common Stock outstanding.
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TEGAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
----
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations -- for the three and six
months ended September 30, 1997 and 1996..................................... 2
Condensed Consolidated Balance Sheets, as of September 30, 1997 and March 31,
1997......................................................................... 3
Condensed Consolidated Statements of Cash Flows -- for the six months ended
September 30, 1997 and 1996.................................................. 4
Notes to Condensed Consolidated Financial Statements......................... 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
ITEM 2. OPERATIONS................................................................... 6
PART II -- OTHER INFORMATION
ITEM 4. LEGAL PROCEEDINGS............................................................ 8
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................. 9
SIGNATURES................................................................... 10
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
Revenue........................................... $11,726 $12,757 $20,812 $31,008
Cost of sales..................................... 6,827 6,508 11,889 16,408
------- ------- ------- -------
Gross profit................................. 4,899 6,249 8,923 14,600
Operating expenses:
Research and development........................ 2,994 2,597 5,793 5,226
Sales and marketing............................. 1,834 1,739 3,257 3,505
General and administrative...................... 1,410 1,587 2,824 3,427
------- ------- ------- -------
Total operating expenses................ 6,238 5,923 11,874 12,158
------- ------- ------- -------
Operating income (loss)...................... (1,339) 326 (2,951) 2,442
Other income (expense), net....................... 243 228 637 438
------- ------- ------- -------
Income (loss) before income taxes................. (1,096) 554 (2,314) 2,880
Provision for income taxes........................ 0 139 0 720
------- ------- ------- -------
Net income (loss)................................. $(1,096) $ 415 $(2,314) $ 2,160
======= ======= ======= =======
Net income (loss) per common share................ $ (0.11) $ 0.04 $ (0.22) $ 0.20
======= ======= ======= =======
Shares used in per share computation.............. 10,331 10,647 10,306 10,662
======= ======= ======= =======
See accompanying notes.
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TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, MARCH 31,
1997 1997
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents...................................... $28,240 $30,323
Receivables, net............................................... 10,239 12,322
Inventories.................................................... 13,928 13,154
Prepaid expenses and other current assets...................... 2,269 2,274
------- -------
Total current assets................................... 54,676 58,073
Property and equipment, net...................................... 5,721 5,298
Other assets, net................................................ 330 153
------- -------
$60,727 $63,524
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.................................................. $ 2,779 $ 252
Accounts payable............................................... 2,475 3,442
Accrued expenses and other current liabilities................. 6,723 8,987
------- -------
Total current liabilities.............................. 11,977 12,681
Long-term portion of capital lease obligation.................... 310 301
------- -------
Total liabilities...................................... 12,287 12,982
------- -------
Stockholders' equity:
Common stock................................................... 103 103
Additional paid-in capital..................................... 54,949 54,821
Cumulative translation adjustment.............................. 107 23
Accumulated deficit............................................ (6,719) (4,405)
------- -------
Total stockholders' equity............................. 48,440 50,542
------- -------
$60,727 $63,524
======= =======
See accompanying notes
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TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
------- -------
Cash flows from operating activities:
Net income (loss)...................................................... $(2,314) $ 2,160
Adjustments to reconcile net income (loss) to cash provided by (used
in) operating activities:
Depreciation and amortization....................................... 1,264 1,210
Purchase credit redemptions......................................... -- (974)
Changes in operating assets and liabilities......................... (1,742) 1,991
------- -------
Net cash provided by (used in) operating activities............ (2,792) 4,387
------- -------
Cash flows used in investing activities -- purchases of property and
equipment.............................................................. (1,687) (1,220)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock................................. 128 21
Borrowings under lines of credit....................................... 2,339 2,604
Repayment of capital lease financing................................... (155) (153)
------- -------
Net cash provided by financing activities...................... 2,312 2,472
------- -------
Effect of exchange rates on cash and cash equivalents.................... 84 (30)
------- -------
Net increase (decrease) in cash and cash equivalents..................... (2,083) 5,609
Cash and cash equivalents at beginning of period......................... 30,323 23,283
------- -------
Cash and cash equivalents at end of period............................... $28,240 $28,892
======= =======
See accompanying notes
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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, 1997
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, 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 financial statements
and footnotes thereto included in the annual report on Form 10-K of Tegal
Corporation ("the Company") for the year ended March 31, 1997. The results of
operations for the three and six months ended September 30, 1997 are not
necessarily indicative of results to be expected for the entire year.
2. INVENTORIES:
Inventories consisted of (in thousands):
SEPT. 30, MARCH 31,
1997 1997
--------- ---------
Raw Materials........................................... $ 3,188 $ 3,988
Work in Progress........................................ 2,047 2,126
Finished Goods and Spares............................... 8,693 7,040
------- -------
$ 13,928 $13,154
======= =======
3. NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per share is based on the weighted average number of
shares of common stock outstanding during the period using the treasury stock
method. Net income per share includes common equivalent shares from options and
warrants outstanding using the treasury stock method except if their effect is
anti-dilutive.
4. INCOME TAX EXPENSE:
Income taxes as a percentage of income before income taxes was 25% for the
three and six month periods ended September 30, 1996. The effective tax rate for
the periods ended September 30, 1996, was substantially below the federal
statutory rate due to utilization of tax loss carryforwards and reductions in
the valuation allowance. No provision for federal or state income tax has been
recorded for the three and six month periods ended September 30, 1997, as the
Company has recorded a net loss before taxes. The Company did not recognize a
benefit for this net loss before taxes in the three and six month periods ended
September 30, 1997, because any benefit derived would require offsetting current
losses against future profitability where such profitability's timing and
magnitude is uncertain.
5. RECENT ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share." This statement
is effective for the Company's fiscal year ending March 31, 1998. The Statement
redefines earnings per share under generally accepted accounting principles.
Under the new standard, primary earnings per share is replaced by basic earnings
per share and fully diluted earnings per share is replaced by diluted earnings
per share. If the Company had adopted this Statement earnings per share would
have been:
THREE MONTHS
ENDED
SEPTEMBER 30,
----------------
1997 1996
------ -----
Basic earnings per share.................................... $(0.11) $0.04
Diluted earnings per share.................................. -- $0.04
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information contained herein contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, which can
be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," or "continue" or the negative thereof or
other variations thereon or comparable terminology or which constitute projected
financial information. The forward-looking statements relate to the near-term
semiconductor capital equipment industry outlook, demand for the Company's
products, the Company's 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, current soft
demand for semiconductor manufacturing equipment, particularly for equipment
procured for capacity additions such as the Company's non-critical etch systems,
the cyclicality of the semiconductor industry, dependence on recently introduced
systems for the critical etch markets, 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
the Company's SEC reports. For further information, refer to the business
description and additional risk factors sections included in the Company's Form
10-K for the year ended March 31, 1997, as filed with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
Tegal Corporation designs, manufactures, markets and services plasma etch
systems used in the fabrication of integrated circuits, read-write heads for the
disk drive industry, printer heads and small flat panel displays.
The following table sets forth certain financial items as a percentage of
revenue for the three and six month periods ended September 30, 1997 and 1996:
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1997 1996 1997 1996
----- ----- ----- -----
Revenue..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 58.2 51.0 57.1 52.9
----- ----- ----- -----
Gross profit........................................... 41.8 49.0 42.9 47.1
----- ----- ----- -----
Operating expenses:
Research and development.................................. 25.6 20.4 27.9 16.9
Sales and marketing....................................... 15.6 13.6 15.6 11.3
General and administrative................................ 12.0 12.4 13.6 11.0
----- ----- ----- -----
Total operating expenses............................... 53.2 46.4 57.1 39.2
----- ----- ----- -----
Operating income....................................... (11.4) 2.6 (14.2) 7.9
Other income (expense), net................................. 2.1 1.7 3.1 1.4
----- ----- ----- -----
Income before income taxes.................................. (9.3) 4.3 (11.1) 9.3
Provision for income taxes.................................. 0.0 1.0 0.0 2.3
===== ===== ===== =====
Net income (loss)................................. (9.3)% 3.3% (11.1)% 7.0%
===== ===== ===== =====
Revenue. Revenue for the three and six months ended September 30, 1997 was
$11.7 and $20.8 million respectively, down 8.1% and 32.8% over the comparable
periods in 1996. The decrease of $1.0 million for the three month period ended
September 30, 1997 was due to reduced unit sales of the Company's non-critical
etch systems (sales of which are principally driven by customer decisions to
expand production capacity) offset, in part, by an increase in revenue from
sales of the Company's critical etch systems and increased spare parts and
service sales. The decrease in revenue for the six months ended September 30,
1997 was due
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principally to decreased unit sales of both non-critical and critical etch
systems over the comparable period in the prior year.
Revenue from spare parts and service sales as a percentage of total revenue
was approximately 41.3% and 30.3% for the three months and 45.5% and 31.2% for
the six months ended September 30, 1997 and 1996 respectively.
International sales as a percentage of the Company's revenue was
approximately 76.5% and 56.2% for the three months and 68.7% and 70.6% for the
six months ended September 30, 1997 and 1996, respectively. The Company believes
that international sales will continue to represent a significant portion of its
revenue.
Gross profit. Gross profit as a percentage of revenue (gross margin) was
41.8% and 49.0% for the three months and 42.9% and 47.1% for the six months
ended September 30, 1997 and 1996, respectively. The decline in gross margin for
the three and six months ended September 30, 1997, was principally attributable
to declines in the percentage of total revenue derived from the Company's
non-critical etch systems that typically experience higher gross margins than
the Company's critical etch systems gross margins and to lower margins in the
service business due to recent investments in supporting the Company's key 6500
series customer sites.
Research and development. Research and development expenses consist
primarily of salaries, prototype material and other costs associated with the
Company's ongoing systems and process technology development, applications and
field process support efforts. Research and development expenses were $3.0
million and $2.6 million for the three months ended and $5.8 and $5.2 million
for the six months ended September 30, 1997 and 1996, respectively, representing
25.6%, 20.4%, 27.9% and 16.9% of revenue, respectively. The increases in
research and development spending in absolute dollars in the periods ended
September 30, 1997, compared to the comparable periods in the prior year were
attributable to increased spending on process engineering salaries and material
in support of the Company's key 6500 series customer sites.
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 $1.8 million
and $1.7 million for the three months and $3.3 million and $3.5 million for the
six months ended September 30, 1997 and 1996, respectively, representing 15.6%,
13.6%, 15.6% and 11.3% of revenue respectively. The increase in sales and
marketing expense for the three months ended September 30, 1997 compared to the
comparable period in the prior year was due to increased spending on trade shows
and advertising. The decrease in sales and marketing expenses in absolute
dollars for the six months ended September 30, 1997 over the comparable period
in the prior year was due principally to reduced sales commissions on a lower
revenue base.
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 $1.4 million and $1.6 million for the three months ended and $2.8
and $3.4 million for the six months ended September 30, 1997 and 1996,
representing 12.0%, 12.4%, 13.6% and 11.0% of revenue, respectively. Included in
general and administrative expenses for the six month period ended September 30,
1996, was an approximately $0.3 million non-recurring expense associated with
completing an upgrade to the Company's business system begun in late fiscal
1996.
Other income (expenses), net. Other income (expenses), net primarily
consists of interest income on the unused proceeds of the Company's initial
public offering ("IPO") completed in October 1995 and interest expense on bank
borrowings.
Income tax expense. Income taxes as a percentage of income before income
taxes was 25% for the three and six month periods ended September 30, 1996. The
effective tax rate for the periods ended September 30, 1996, was substantially
below the federal statutory rate due to utilization of tax loss carryforwards
and reductions in the valuation allowance. No provision for federal or state
income tax has been recorded for the three and six month periods ended September
30, 1997, as the Company has recorded a net loss before taxes. The Company did
not recognize a benefit for this net loss before taxes in the three and six
month periods
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ended September 30, 1997, because any benefit derived would require offsetting
current losses against future profitability where such profitability's timing
and magnitude is uncertain.
LIQUIDITY AND CAPITAL RESOURCES
For the six month periods ended September 30, 1997 and 1996, the Company
financed its operations through cash generated from operations, use of net
proceeds from the IPO and bank borrowings.
Net cash used in operations was $2.9 million during the six months ended
September 30, 1997, due principally to a net loss of $1.0 million after
adjusting for depreciation, a decline in accrued expenses and accounts payable
and an increase in inventories offset, in part, by a decline in accounts
receivable. Net cash provided by operations was $4.2 million during the six
months ended September, 1996, due principally to net income in the period, non
cash depreciation expenses, a decrease in accounts receivable and an increase in
other accrued liabilities, offset, in part, by a decrease in accounts payable.
Net capital expenditures totaled $1.7 million and $1.2 million in the six
months ended September 30, 1997 and 1996, respectively. Capital expenditures in
both periods were incurred principally for demonstration equipment, leasehold
improvements and to acquire design tools, analytical equipment and computers.
Net cash provided by financing activities totaled $2.5 million and $2.6
million in the six months ended September 30, 1997 and 1996, respectively. In
both periods, the increase was due principally to increased borrowings under the
Company's two Japanese promissory note borrowing facilities to discount customer
promissory notes provided to the Company in advance of payment on accounts
receivable balances in Japan.
As of September 30, 1997, the Company had approximately $28.2 million of
cash and cash equivalents. In addition to cash and cash equivalents, the
Company's other principal sources of liquidity consisted of unused portions of
several bank borrowing facilities. At September 30, 1997, the Company had an
aggregate borrowing capacity of $20.0 million available under a domestic line of
credit secured by substantially all of the Company's assets. The facility is
available until August 15, 1998. In addition to the foregoing facility, as of
September 30, 1997, the Company's Japanese subsidiary had available a 288
million Yen (approximately $2.4 million at exchange rates prevailing on
September 30, 1997) unused portion of two Japanese bank lines of credit totaling
600 million Yen (approximately $5.0 million at exchange rates prevailing on
September 30, 1997) secured by Japanese customer promissory notes held by such
subsidiary in advance of payment on customers' accounts receivable.
The Company believes that anticipated cash flow from operations, funds
available under its lines of credit and existing cash and cash equivalent
balances will be sufficient to meet the Company's cash requirements for at least
the next twelve months.
PART II -- OTHER INFORMATION
ITEM 4. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
However, on June 10, 1996, Lucent Technologies Inc., filed a claim with the
United States District Court for the Northern District of California alleging
patent infringement by Austria Mikro Systeme International AG and AMS Austria
Mikro Systeme International, Inc. ("AMS") for the sale of integrated circuits
manufactured with the Company's dry plasma etch systems. On March 7, 1995, the
Company executed an indemnification agreement with AMS, covering certain uses of
select equipment sold to AMS. Lucent and AMS have settled the claim and AMS is
now seeking indemnification from the Company through an arbitration proceeding.
The Company believes that the claim made by AMS is without merit and that the
ultimate outcome of any defense of any required indemnification obligation to
AMS is unlikely to have a material adverse effect on the Company's results of
operations or financial condition. No assurance can be given, however, as to the
outcome of such legal proceedings or as to the effect of any such outcome on the
Company's results of operations or financial condition.
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ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Stockholders' Meeting held on September 23, 1997,
the following individuals were re-elected to the Board of Directors:
VOTES FOR VOTES WITHHELD
--------- --------------
Robert V. Hery..................................... 7,027,442 27,621
Fred Nazem......................................... 7,028,903 26,160
Jeffrey M. Krauss.................................. 7,028,335 26,728
Thomas R. Mika..................................... 7,028,965 26,098
Edward A. Dohring.................................. 7,024,735 30,328
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 -- Computation of Net Income (Loss) Per Share
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the period which this Form 10-Q
covers.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 28, 1997
TEGAL CORPORATION
(Registrant)
/s/ DAVID CURTIS
--------------------------------------
David Curtis
Chief Financial Officer, Treasurer and
Secretary (Principal Financial
Officer)
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TEGAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT NAME DESCRIPTION PAGE
- ------------ --------------------------------------------------------------------- ----
Exhibit 11 Computation of Net Income (Loss) Per Share 12
Exhibit 27 Financial Data Schedule 13
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EXHIBIT 11
TEGAL CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION
OF NET INCOME (LOSS) PER SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
Net Income (loss)................................. $(1,096) $ 415 $(2,314) $ 2,160
======= ======= ======= =======
Weighted average shares outstanding during the
period.......................................... 10,331 10,104 10,306 10,087
Common stock equivalents.......................... -- 543 -- 582
------- ------- ------- -------
Shares used in per share computation.............. 10,331 10,647 10,306 10,669
======= ======= ======= =======
Net income (loss) per share............. $ (0.11) $ 0.04 $ (0.22) $ 0.20
======= ======= ======= =======
12