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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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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 THREE MONTH PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-26824
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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 December 31, 1997, there were 10,369,020 shares of the registrant's
Common Stock outstanding.
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TEGAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations -- for the three and nine
months ended December 31, 1997 and 1996...................................... 2
Condensed Consolidated Balance Sheets, as of December 31, 1997 and March
31,1997...................................................................... 3
Condensed Consolidated Statements of Cash Flows -- for the nine months ended
December 31, 1997 and 1996................................................... 4
Notes to Condensed Consolidated Financial Statements......................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................... 7
PART II. OTHER INFORMATION
ITEM 4. LEGAL PROCEEDINGS............................................................ 10
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................. 10
SIGNATURES................................................................... 11
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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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
Revenue............................................. $12,257 $13,120 $33,069 $44,129
Cost of sales....................................... 7,671 7,750 19,560 24,159
------- ------- ------- -------
Gross profit...................................... 4,586 5,370 13,509 19,970
Operating expenses:
Research and development.......................... 2,583 2,557 8,376 7,783
Sales and marketing............................... 1,554 1,040 4,811 4,545
General and administrative........................ 1,862 1,271 4,686 4,698
------- ------- ------- -------
Total operating expenses.................. 5,999 4,868 17,873 17,026
------- ------- ------- -------
Operating income (loss)................... (1,413) 502 (4,364) 2,944
Other income, net................................... 224 206 861 644
------- ------- ------- -------
Income (loss) before income taxes................... (1,189) 708 (3,503) 3,588
Provision for income taxes.......................... 0 177 0 897
------- ------- ------- -------
Net income (loss)................................... $(1,189) $ 531 $(3,503) $ 2,691
======= ======= ======= =======
Net income (loss) per common share:
Basic............................................. $ (0.11) $ 0.05 $ (0.34) $ 0.27
Diluted........................................... $ (0.11) $ 0.05 $ (0.34) $ 0.25
Shares used in per share computation:
Basic............................................... 10,362 10,113 10,325 10,095
Diluted............................................. 10,362 10,640 10,325 10,655
See accompanying notes.
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TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 24,342 $30,323
Receivables, net................................................... 12,080 12,322
Inventories........................................................ 13,293 13,154
Prepaid expenses and other current assets.......................... 2,121 2,274
------- -------
Total current assets....................................... 51,836 58,073
Property and equipment, net.......................................... 5,295 5,298
Other assets, net.................................................... 351 153
------- -------
$ 57,482 $63,524
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable...................................................... $ 838 $ 252
Accounts payable................................................... 2,364 3,442
Accrued expenses and other current liabilities..................... 7,632 8,987
------- -------
Total current.............................................. 10,834 12,681
Long-term portion of capital lease obligation........................ 148 301
------- -------
Total liabilities.......................................... 10,982 12,982
------- -------
Stockholders' equity:
Common Stock....................................................... 104 103
Additional paid-in capital......................................... 54,970 54,821
Cumulative translation adjustment.................................. (666) 23
Accumulated deficit................................................ (7,908) (4,405)
------- -------
Total stockholders' equity................................. 46,500 50,542
------- -------
$ 57,482 $63,524
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See accompanying notes.
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TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1997 1996
------- -------
Cash flows from operating activities:
Net income (loss)...................................................... $(3,503) $ 2,691
Adjustments to reconcile net income (loss) to cash provided by (used
in) operating activities:...........................................
Depreciation and amortization..................................... 1,842 1,817
Purchase credit redemptions....................................... - (1,587)
Changes in operating assets and liabilities....................... (2,320) 6,108
------- -------
Net cash provided by (used in) operating activities............ (3,981) 9,029
------- -------
Cash flows used in investing activities -- purchases of property and
equipment.............................................................. (1,801) (1,397)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock................................. 150 22
Borrowings under lines of credit....................................... 586 114
Repayment of capital lease financing................................... (246) (289)
------- -------
Net cash provided by (used in) financing activities............ 490 (153)
------- -------
Effect of exchange rates on cash and cash equivalents.................... (689) (114)
------- -------
Net increase (decrease) in cash and cash equivalents..................... (5,981) 7,365
Cash and cash equivalents at beginning of period......................... 30,323 23,283
------- -------
Cash and cash equivalents at end of period............................... $24,342 $30,648
======= =======
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 nine months ended December 31, 1997 are not
necessarily indicative of results to be expected for the entire year.
2. INVENTORIES:
Inventories consisted of:
DEC.
31, MARCH 31,
1997 1997
------- ---------
Raw Materials........................................... $ 3,139 $ 3,988
Work in Progress........................................ 2,467 2,126
Finished Goods and Spares............................... 7,687 7,040
------- -------
$13,293 $13,154
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3. NET INCOME (LOSS) PER COMMON SHARE:
Basic net income (loss) per share is based on the weighted average number
of shares of common stock outstanding during the period. Diluted 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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share." The Statement
redefines earnings per share (EPS) 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. As required, the Company adopted the new standard in
the third quarter of fiscal 1998, and this has been applied to all periods
presented.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1997 1996 1997 1996
------- ------- -------- ------
Net Income (loss) (numerator)....................... $(1,189) $ 531 $ (3,503) $2,691
======== ======= ======= =======
Shares calculation (denominator):
Weighted average shares outstanding during the
period............................................ 10,362 10,113 10,325 10,095
Effect of dilutive securities:
Common stock equivalents............................ -- 527 -- 560
-------- ------- ------- -------
Average shares outstanding -- assuming dilution..... 10,362 10,640 10,325 10,655
======== ======= ======= =======
Basic earnings per share............................ $ (0.11) $ 0.05 $ (0.34) $ 0.27
======== ======= ======= =======
Earnings per share assuming dilution................ $ (0.11) $ 0.05 $ (0.34) $ 0.25
======== ======= ======= =======
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TEGAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Options to purchase 2,199,000 shares of common stock were outstanding as of
December 31, 1997, but were not reflected in the computations of diluted EPS
because the Company was in a loss situation and to do so would have been
anti-dilutive. Out of the options to purchase 2,199,000 shares of common stock
outstanding, as of December 31, 1997, options to purchase 588,000 shares of
common stock had an exercise price greater than the average market price of the
common shares outstanding during the three months ended December 31, 1997.
Options to purchase 322,000 shares of common stock were outstanding as of
December 31, 1996, but were not included in the computation of diluted EPS for
the three and nine months ended December 31, 1996 because the option's exercise
price was greater than the average market price of the common shares.
4. INCOME TAX EXPENSE:
Income taxes as a percentage of income before income taxes was 25% for the
three and nine months ended December 31, 1996. The effective tax rate for the
periods ended December 31, 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 nine months ended December 31, 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 nine months ended December 31,
1997, because any benefit derived would require offsetting current losses
against future profitability where such profitability's timing and magnitude is
uncertain.
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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, the impact of the
Asian financial crisis on semiconductor capital equipment demand, 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 nine month periods ended December 31, 1997 and 1996:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
--------------- ---------------
1997 1996 1997 1996
----- ----- ----- -----
Revenue..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 62.6 59.1 59.1 54.7
----- ----- ----- -----
Gross profit.............................................. 37.4 40.9 40.9 45.3
----- ----- ----- -----
Operating expenses:
Research and development.................................. 21.1 19.5 25.3 17.6
Sales and marketing....................................... 12.7 7.9 14.5 10.3
General and administrative................................ 15.2 9.7 14.2 10.7
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Total operating expenses............................... 48.9 37.1 54.0 38.6
----- ----- ----- -----
Operating income....................................... (11.5) 3.8 (13.2) 6.7
Other income (expense), net................................. 1.8 1.6 2.6 1.4
----- ----- ----- -----
Income before income taxes.................................. (9.7) 5.4 (10.6) 8.1
Provision for income taxes.................................. 0.0 1.4 0.0 2.0
----- ----- ----- -----
Net income (loss)........................................... (9.7)% 4.0% (10.6)% 6.1%
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Revenue. Revenue for the three and nine months ended December 31, 1997 was
$12.3 and $33.1 million respectively, down 6.6% and 25.1% over the comparable
periods in 1996. The decrease in revenue of $0.8 million for the three month
period ended December 31, 1997 was principally attributable to lower sales of
spare parts due to unusually high spares revenue in the prior year. The decrease
in revenue for the nine months ended December 31, 1997 was due principally to
decreased unit sales of non-critical etch systems due to the
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down turn in capacity expansion in the semiconductor industry and a decrease in
unit sales of critical etch systems due to the inherent uneven demand that is
typical of new product adoption cycles.
Revenue from spare parts and service sales as a percentage of total revenue
was approximately 37.7% and 41.4% for the three months and 42.4% and 34.2% for
the nine months ended December 31, 1997 and 1996, respectively.
International sales as a percentage of the Company's revenue was
approximately 61.0% and 66.3% for the three months and 65.9% and 69.3% for the
nine months ended December 31, 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
37.4% and 40.9% for the three months and 40.9% and 45.3% for the nine months
ended December 31, 1997 and 1996, respectively. The decline in gross margin for
the three months ended December 31, 1997 compared to the comparable period in
the prior year was principally due to nonrecurring expenses in the service
business in support of the Company's key 6500 series customer sites, partially
offset by increased gross margins in the systems business due to higher average
selling prices on the Company's 6500 series systems. The decline in gross margin
for the nine months ended December 31, 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, coupled with lower margins in the service
business due to recent investments in supporting the Company's key 6500 series
customer sites. The Company believes the investments are necessary to induce
customers to reorder such systems.
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 $2.6
million for both of the three months and $8.4 and $7.8 million for the nine
months ended December 31, 1997 and 1996, respectively, representing 21.1%,
19.5%, 25.3% and 17.6% of revenue, respectively. The increase in research and
development spending in absolute dollars for the nine month period ended
December 31, 1997, compared to the comparable period in the prior year was
attributable to increased spending on process engineering salaries and prototype
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 $1.6 million
and $1.0 million for the three months and $4.8 million and $4.5 million for the
nine months ended December 31, 1997 and 1996, respectively, representing 12.7%,
7.9%, 14.5% and 10.3% of revenue, respectively. The increase in sales and
marketing expenses for the three and nine months ended December 31, 1997
compared to the comparable period in the prior year was principally due to
increased spending on commission expenses on sales generated by outside sales
agents, trade shows, advertising, salaries, travel and entertainment expenses.
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 $1.9 million and $1.3 million for the three months and $4.7
million for both of the nine months ended December 31, 1997 and 1996,
representing 15.2%, 9.7%, 14.2% and 10.7% of revenue, respectively. The increase
in general and administrative expenses for the three months ended December 31,
1997 compared to the comparable period in the prior year was mainly attributable
to increased spending on legal fees related to intellectual property, recruiting
expenses and outside services.
Other income, net. Other income, net primarily consists of interest income
on the unused proceeds of the Company's initial public offering ("IPO")
completed in October 1995, partially offset by interest expense on bank
borrowings.
Income tax expense. Income taxes as a percentage of income before income
taxes was 25% for the three and nine months ended December 31, 1996. The
effective tax rate for the periods ended December 31, 1996, was substantially
below the federal statutory rate due to utilization of tax loss carryforwards
and reductions in
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the valuation allowance. No provision for federal or state income tax has been
recorded for the three and nine months ended December 31, 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 nine months ended December 31,
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 nine months ended December 31, 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 $4.0 million during the nine months ended
December 31, 1997, due principally to a net loss of $1.7 million after adjusting
for depreciation, a decline in accrued expenses, taxes payable and accounts
payable and an increase in inventories offset, in part, by a decline in accounts
receivable. Net cash provided by operations was $9.0 million during the nine
months ended December 1996, due principally to net income in the period,
non-cash depreciation expense and a decrease in accounts receivable and
inventories offset, in part, by a decrease in accounts payable.
Net capital expenditures totaled $1.8 million and $1.4 million in the nine
months ended December 31, 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 $0.5 million for the nine
months ended December 31, 1997, due principally to increased borrowings under
the Company's two Japanese promissory note borrowing facilities in advance of
payment on accounts receivable balances in Japan offset, in part, by repayment
of capital lease obligations. Net cash used in financing activities for the nine
months ended December 31, 1996 totaled $0.2 million, due principally to
repayment of capital lease obligations offset, in part, by increased borrowings
under the Company's two Japanese promissory note borrowing facilities.
As of December 31, 1997, the Company had approximately $24.3 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 December 31, 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
December 31, 1997, the Company's Japanese subsidiary had available a 491 million
Yen (approximately $3.8 million at exchange rates prevailing on December 31,
1997) unused portion of two Japanese bank lines of credit totaling 600 million
Yen (approximately $4.6 million at exchange rates prevailing on December 31,
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 the next
twelve months.
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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. ("Lucent"), 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
U.S. claim and AMS is now seeking indemnification from the Company through an
arbitration proceeding with respect to the U.S. claim. The Company has been
informed that Lucent recently filed a claim for patent infringement in Germany
against AMS for the sale of integrated circuits manufactured with the Company's
dry plasma etch systems. AMS has requested indemnification for the German
matter. The Company believes that the claims made by AMS are 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.
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three
month period ended December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 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: February 13, 1998
TEGAL CORPORATION
(Registrant)
/s/ DAVID CURTIS
--------------------------------------
David Curtis
Chief Financial Officer, Treasurer and
Secretary (Principal Financial
Officer)
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