<PAGE> 1
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, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 01-26824
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, 1996, there were 10,112,464 shares of the registrant's
Common Stock outstanding.
<PAGE> 2
TEGAL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations -
for the three and six months ended September 30, 1996 and 1995...................2
Condensed Consolidated Balance Sheets,
as of September 30, 1996 and March 31, 1996......................................3
Condensed Consolidated Statements of Cash Flows -
for the six months ended September 30, 1996 and 1995.............................4
Notes to Condensed Consolidated Financial Statements.............................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................................6
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................................................11
SIGNATURES......................................................................14
</TABLE>
1
<PAGE> 3
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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 12,757 $ 14,266 $ 31,008 $ 27,359
Cost of sales 6,508 7,086 16,408 13,719
-------- -------- -------- --------
Gross margin 6,249 7,180 14,600 13,640
Operating expenses:
Research and development 2,597 2,502 5,226 4,740
Marketing and selling 1,739 1,506 3,505 3,187
General and administrative 1,587 1,220 3,427 2,413
-------- -------- -------- --------
Total operating expenses 5,923 5,228 12,158 10,340
-------- -------- -------- --------
Operating income 326 1,952 2,442 3,300
Other income (expense), net 228 (679) 438 (905)
-------- -------- -------- --------
Income before income taxes 554 1,273 2,880 2,395
Income taxes 139 135 720 247
-------- -------- -------- --------
Net income $ 415 $ 1,138 $ 2,160 $ 2,148
======== ======== ======== ========
Net income per common share $ 0.04 $ 0.15 $ 0.20 $ 0.28
======== ======== ======== ========
Shares used in per share computation 10,647 7,589 10,669 7,559
======== ======== ======== ========
</TABLE>
See accompanying notes
2
<PAGE> 4
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,892 $ 23,283
Receivables, net 13,626 16,191
Inventories 16,928 16,947
Prepaid expenses and other current assets 527 1,095
-------- --------
Total current assets 59,973 57,516
Property and equipment, net 6,037 6,027
Other assets, net 179 229
-------- --------
$ 66,189 $ 63,772
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,519 $ 915
Accounts payable 2,163 4,700
Accrued expenses and other current liabilities 7,451 6,358
Product warranty 2,666 2,586
-------- --------
Total current liabilities 15,799 14,559
Motorola credit liability 613 1,587
-------- --------
Total liabilities 16,412 16,146
-------- --------
Stockholders' equity:
Common stock 101 101
Additional paid-in capital 54,476 54,455
Cumulative translation adjustment 585 615
Accumulated deficit (5,385) (7,545)
-------- --------
Total stockholders' equity 49,777 47,626
-------- --------
$ 66,189 $ 63,772
======== ========
</TABLE>
See accompanying notes
3
<PAGE> 5
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,160 $ 2,148
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 1,210 635
Accretion of senior term loan -- 267
Purchase credit redemptions (974) (971)
Allowance for doubtful accounts and sales
allowances 234 (70)
Changes in operating assets and liabilities 1,604 (4,077)
-------- --------
Net cash (used in) provided by operations 4,234 (2,068)
-------- --------
Cash flows used in investing activities -- purchases of
property and equipment (1,220) (1,109)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 21 17
Borrowings under lines of credit 2,604 2,933
-------- --------
Net cash provided by financing activities 2,625 2,950
-------- --------
Effect of exchange rates on cash and cash equivalents (30) (7)
-------- --------
Net increase (decrease) in cash and cash equivalents 5,609 (234)
Cash and cash equivalents at beginning of period 23,283 2,351
-------- --------
Cash and cash equivalents at end of period $ 28,892 $ 2,117
======== ========
</TABLE>
See accompanying notes
4
<PAGE> 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, these unaudited condensed consolidated financial
statements contain all adjustments necessary for fair presentation. Results of
operations for the three and six months ended September 30, 1996 are not
necessarily indicative of results to be expected for the full year. The
condensed consolidated financial statements and notes are presented as permitted
by Form 10-Q and do not contain certain information included in the Company's
annual consolidated financial statements and related notes. For information as
to the significant accounting policies followed by the Company and other
financial and operating information, see the Company's Form 10-K as filed with
the Securities and Exchange Commission (SEC) on June 28, 1996. These financial
statements should be read in conjunction with the financial statements included
in that Form 10-K.
2. INVENTORIES:
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
Sept. 30, March 31,
1996 1996
------------ ------------
<S> <C> <C>
Raw Materials $ 4,751 $ 4,036
Work in Progress 4,143 3,173
Finished Goods and Spares 8,034 9,738
------------ ------------
$16,928 $16,947
============ ============
</TABLE>
3. NET INCOME PER COMMON SHARE:
Net income per share is based on the weighted average number of shares of common
stock, common equivalent shares from the convertible preferred stock using the
"as if converted" method and dilutive common equivalent shares from options and
warrants outstanding during the period using the treasury stock method.
5
<PAGE> 7
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 following contains cautionary statements identifying
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
RESULTS OF OPERATIONS
Tegal Corporation designs, manufactures, markets and services plasma etch
systems used in the fabrication of integrated circuits.
The following table sets forth certain financial items as a percentage of
revenue for the three and six month periods ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------- -----------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 51.0 49.7 52.9 50.1
------- ------- ------- -------
Gross margin 49.0 50.3 47.1 49.9
------- ------- ------- -------
Operating expenses:
Research and development 20.4 17.5 16.9 17.3
Marketing and selling 13.6 10.6 11.3 11.6
General and administrative 12.4 8.6 11.0 8.8
------- ------- ------- -------
Total operating expenses 46.4 36.7 39.2 37.7
------- ------- ------- -------
Operating income 2.6 13.6 7.9 12.2
Other income (expense), net 1.7 (4.8) 1.4 (3.3)
------- ------- ------- -------
Income before income taxes 4.3 8.8 9.3 8.9
Income taxes 1.0 0.9 2.3 0.9
------- ------- ------- -------
Net income 3.3 % 7.9 % 7.0 % 8.0 %
======= ======= ======= =======
</TABLE>
6
<PAGE> 8
Revenue. Revenue for the three and six months ended September 30, 1996 was $12.8
million and $31.0 million respectively, down 10.6% and up 13.3%, respectively,
over comparable periods in 1995. The decline in the three months ended September
30, 1996 was principally due to a $1.9 million decline in spare parts and
service sales as customers reduced their spare parts inventories in response to
the current semiconductor industry slowdown. The increase in revenue for the six
month period ended September 30, 1996 over the prior year was attributable
principally to an increase in the number of 6500 series critical etch systems
and 980 non-critical etch systems sold during the period over the comparable
period in 1995. The Company expects to experience continued pressure on revenues
until such time as the semiconductor industry resumes making significant
manufacturing capacity additions.
Revenue from spare parts and service sales as a percentage of total revenue was
approximately 30.4% and 41.0% for the three months and 31.2% and 42.6% for the
six months ended September 30, 1996 and 1995, respectively.
International sales as a percentage of the Company's revenue accounted for
approximately 56.2% and 63.5% for the three months and 70.6% and 64.7% for the
six months ended September 30, 1996 and 1995, respectively.
Gross margin. Gross margin was 49.0% and 50.3% for the three months and 47.1%
and 49.9% for the six months ended September 30, 1996 and 1995, respectively.
The decline in gross margin for the three and six months ended September 30,
1996, resulted primarily from increased sales of 6500 series systems, which
currently carry lower gross margins than the Company's non-critical etch
systems. The 6500 series systems have experienced, as is typical with recently
introduced products, high startup costs and low initial margins. The Company
expects that these high startup costs on the 6500 series systems will continue
at least through fiscal 1997 until the substantially fixed manufacturing
overhead is absorbed over a larger production volume and the Company can obtain
larger vendor discounts on purchased components through volume purchases. There
can be no assurance that the Company's overall gross margins or gross margins on
its 6500 series systems will increase.
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 and
$2.5 million for the three months and $5.2 million and $4.7 million for the six
months ended September 30, 1996 and 1995, respectively, representing 20.4%,
17.5%, 16.9% and 17.3% of revenue, respectively. The increase in research and
development spending in absolute dollars in the periods ended September 30, 1996
compared to the comparable periods in the prior year was attributable to
increased spending on salaries, prototype material and support costs. This
increase funded development of new 6500 series functions, running an increased
number of customer wafer samples in the Company's demonstration laboratory and
design and test changes to the Company's standard systems configurations called
for by customers' special order requirements.
Marketing and selling. Marketing and selling expenses consist primarily of
salaries, commissions, trade show promotion and travel and living expenses
associated with those functions. Marketing and selling expenses were $1.7
million and $1.5 million for the three months and $3.5 million and $3.2 million
for the six months ended September 30, 1996 and 1995, respectively, representing
13.6%, 10.6%, 11.3% and 11.6% of revenue, respectively. After deducting a $0.3
million non-recurring sales office relocation expense from the six month period
ended September 30, 1995, the six month period ended September 30, 1996 was $0.6
million higher than the comparable period in the prior year, with the increase
primarily due to higher sales commission expenses on a larger revenue base than
occurred in the comparable period in the prior year and to increased advertising
expenses.
General and administrative. General and administrative expenses consist
primarily of compensation for general management, accounting and finance, human
resources and management information systems functions and for legal, consulting
and accounting fees of the Company. General and administrative expenses were
$1.6 million and $1.2 million for the three months and $3.4 million and $2.4
million for the six months ended September 30, 1996 and 1995, respectively,
representing 12.4%, 8.6%, 11.0% and 8.8% of revenue, respectively. Included in
the general and administrative expenses for the six month period ended September
30, 1996, was an approximately $0.3 million expense associated with completing
an upgrade to the Company's business system begun in late fiscal 1996
7
<PAGE> 9
and approximately $0.6 million additional expenses incurred in connection with
being a public company which was not the case in the comparable period in the
prior year.
Other income (expenses), net. Other income (expense), net, consists of interest
income on the unused proceeds of the Company's initial public offering (IPO)
completed in October 1995, interest expense on bank borrowings, interest
accretion on the Motorola term loan prior to the repayment of those obligations
from the net proceeds of the IPO, foreign exchange gains and losses, and gains
and losses on the sale of fixed assets. Other income, net was $0.2 million for
the three months and $0.4 million for the six months ended September 30, 1996.
Other expense, net, was $0.7 million for the three months and $0.9 million for
the six months ended September 30, 1995. The other income, net generated in the
three and six months ended September 30, 1996 was principally due to the Company
generating interest income on the Company's unused cash balance. The other
expense, net generated in the three and six months ended September 30, 1995 was
principally due to interest expense incurred in connection with the Company's
domestic bank borrowings prior to the IPO and a $0.4 million foreign exchange
loss in the three month period ended September 30, 1995 as a consequence of
delays in placing foreign currency hedges for the first two weeks of July 1995,
when exchange rates moved materially in the Company's disfavor.
Income tax expense. Income taxes as a percentage of income before income taxes
were 25.1% and 10.6% for the three months and 25.0% and 10.3% for the six months
ended September 30, 1996 and 1995, respectively. The effective tax rate in 1995
was substantially below the federal statutory rate due to utilization of tax
loss carryforwards. The Company expects that its effective tax rate for the
remainder of fiscal 1997 will approximate 25% due to the continuing utilization
of foreign tax loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
For the six month period ended September 30, 1996 and 1995, the Company has
financed its operations through cash generated from operations, use of net
proceeds from the IPO and bank borrowings.
Net cash provided by operations was $4.2 million during the six months ended
September 30, 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 cash used in operations during the six month period ended September 30, 1995
was $2.1 million and was primarily attributable to an increase in accounts
receivable and inventories and the application of Motorola purchase credits to
redeem preferred stock prior to the IPO.
Net capital expenditures totaled $1.2 million and $1.1 million in the six months
ended September 30, 1996 and 1995, respectively. Capital expenditures in both
periods were incurred principally to acquire design tools, analytical equipment
and computers. In addition, in the six months ended September 30, 1996,
approximately $0.3 million was incurred on leasehold improvements to the
Company's manufacturing and demonstration laboratory facilities.
Net cash provided by financing activities totaled $2.6 million in the six months
ended September 30, 1996 and was 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.
As of September 30, 1996, the Company had approximately $28.9 million of cash
and cash equivalents. In addition to cash and cash equivalents, the Company's
other principal sources of liquidity consisted of the unused portions of several
bank borrowing facilities. At September 30, 1996, the Company had an aggregate
of $13.0 million available under two domestic lines of credit, secured by
substantially all of the Company's assets. Both facilities are available until
August 15, 1997. In addition to the foregoing facilities, as of September 30,
1996, the Company's Japanese subsidiary had available a 575 million Yen
(approximately $5.2 million at exchange rates prevailing on September 30, 1996)
unused portion of two Japanese bank lines of credit totaling 600 million Yen
(approximately $5.4 million at exchange rates prevailing September 30, 1996)
secured by Japanese customer promissory notes held by such subsidiary in advance
of payment on customers' accounts receivable.
8
<PAGE> 10
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.
9
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 4. LEGAL PROCEEDINGS
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. The Company believes that the claims made by Lucent Technologies
Inc. 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
At the Company's Annual Stockholders' Meeting held on September 10,
1996, the following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
Robert V. Hery 8,868,839 21,361
Fred Nazem 8,866,351 23,849
Jeffrey M. Krauss 8,867,901 22,299
Thomas R. Mika 8,798,001 92,199
Edward A. Dohring 8,868,401 21,799
</TABLE>
The following proposals were approved at the Company's Annual
Stockholders' Meeting:
<TABLE>
<CAPTION>
Affirmative Negative Votes Broker
Votes Votes Withheld/Abstained Non-Votes
----- ----- ------------------ ---------
<S> <C> <C> <C> <C> <C>
1. Amendment of the 6,781,913 300,399 31,449 1,776,439
Amended and Restated
Equity Incentive Plan
increasing the authorized
shares by 1,557,858, from
1,942,142 shares to
3,500,000 shares.
2. Amendment of the 1990 6,219,352 936,489 39,049 1,695,310
Stock Option Plan
increasing the authorized
shares by 142,143, from
407,857 shares to 550,000
shares.
</TABLE>
10
<PAGE> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Exhibit 11 - Computation of Net Income Per Share
(b) Reports on On August 26, 1996, a current report on Form 8-K
Form 8-K was filed with the SEC in connection with the
Company's announcement of a reduction in its
work force taken in response to a decline in
semiconductor industry capital spending.
11
<PAGE> 13
TEGAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Name Description Page
<S> <C> <C>
Exhibit 11 Computation of Net Income Per Share 12
Exhibit 27 Financial Data Schedule 14
</TABLE>
12
<PAGE> 1
TEGAL CORPORATION AND SUBSIDIARIES EXHIBIT 11
STATEMENT REGARDING COMPUTATION
OF NET INCOME PER SHARE
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 415 $ 1,138 $ 2,160 $ 2,148
======= ======= ======= =======
Weighted average shares outstanding
during the period 10,104 675 10,087 664
Preferred stock on an "as if" converted -- 5,876 -- 5,876
Common shares issued and stock options
granted in accordance with Staff
Accounting Bulletin No. 83 -- 1 -- 1
Common stock equivalents 543 1,037 582 1,018
------- ------- ------- -------
Shares used in per share computation 10,647 7,589 10,669 7,559
======= ======= ======= =======
Net income per share $ 0.04 $ 0.15 $ 0.20 $ 0.28
======= ======= ======= =======
</TABLE>
13
<PAGE> 2
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: November 12, 1996
TEGAL CORPORATION
(Registrant)
/s/ David Curtis
----------------------------------
David Curtis
Chief Financial Officer, Treasurer and
Secretary (Principal Financial Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 28,892
<SECURITIES> 0
<RECEIVABLES> 14,313
<ALLOWANCES> 687
<INVENTORY> 16,928
<CURRENT-ASSETS> 59,973
<PP&E> 12,276
<DEPRECIATION> 6,239
<TOTAL-ASSETS> 66,189
<CURRENT-LIABILITIES> 15,799
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 49,676
<TOTAL-LIABILITY-AND-EQUITY> 66,189
<SALES> 12,757
<TOTAL-REVENUES> 12,757
<CGS> 6,508
<TOTAL-COSTS> 6,508
<OTHER-EXPENSES> 2,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> 554
<INCOME-TAX> 139
<INCOME-CONTINUING> 415
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 415
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
