<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 JUNE 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 July 17, 1996, there were 10,085,554 shares of the registrant's Common
Stock outstanding.
<PAGE> 2
TEGAL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations -
for the three months ended June 30, 1996 and 1995............... 2
Condensed Consolidated Balance Sheets,
as of June 30, 1996 and March 31, 1996.......................... 3
Condensed Consolidated Statements of Cash Flows -
for the three months ended June 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............................................... 9
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 9
SIGNATURES...................................................... 12
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
1996 1995
-------- --------
<S> <C> <C>
Revenue $ 18,251 $ 13,093
Cost of sales 9,900 6,633
-------- --------
Gross margin 8,351 6,460
Operating expenses:
Research and development 2,629 2,238
Marketing and selling 1,766 1,681
General and administrative 1,840 1,193
-------- --------
Total operating expenses 6,235 5,112
-------- --------
Operating income 2,116 1,348
Other income (expense), net 210 (226)
-------- --------
Income before income taxes 2,326 1,122
Income taxes 581 112
-------- --------
Net income $ 1,745 $ 1,010
======== ========
Net income per common share $ 0.16 $ 0.13
======== ========
Shares used in per share computation 10,677 7,548
======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 4
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,255 $ 23,283
Receivables, net 21,452 16,191
Inventories 16,294 16,947
Prepaid expenses and other current assets 809 1,095
-------- --------
Total current assets 58,810 57,516
Property and equipment, net 6,370 6,027
Other assets, net 184 229
-------- --------
$ 65,364 $ 63,772
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,515 $ 915
Accounts payable 3,995 4,700
Accrued expenses and other current liabilities 4,478 6,358
Product warranty 2,912 2,586
-------- --------
Total current liabilities 14,900 14,559
Motorola credit liability 1,194 1,587
-------- --------
Total liabilities 16,094 16,146
-------- --------
Stockholders' Equity:
Common stock 101 101
Additional paid-in capital 54,460 54,455
Cumulative translation adjustment 509 615
Accumulated deficit (5,800) (7,545)
-------- --------
Total stockholders' equity 49,270 47,626
-------- --------
$ 65,364 $ 63,772
======== ========
</TABLE>
See accompanying notes
3
<PAGE> 5
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,745 $ 1,010
Adjustments to reconcile net income to
cash provided by (used in) operating activities:
Depreciation and amortization 560 276
Accretion of senior term loan -- 131
Purchase credit redemptions (393) (566)
Allowance for doubtful accounts and sales
allowances 551 (35)
Changes in operating assets and liabilities (7,087) (484)
-------- --------
Net cash (used in) provided by operating activities (4,624) 332
-------- --------
Cash flows used in investing activities -- purchases of
property and equipment (903) (587)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 5 --
Borrowings under lines of credit 2,600 28
-------- --------
Net cash provided by financing activities 2,605 28
-------- --------
Effect of exchange rates on cash and cash equivalents (106) 50
-------- --------
Net decrease in cash and cash equivalents (3,028) (177)
Cash and cash equivalents at beginning of period 23,283 2,351
-------- --------
Cash and cash equivalents at end of period $ 20,255 $ 2,174
======== ========
</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 months ended June 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>
June 30, March 31,
1996 1996
---- ----
<S> <C> <C>
Raw Materials $ 3,800 $ 4,036
Work in Progress 2,722 3,173
Finished Goods and Spares 9,772 9,738
------- -------
$16,294 $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 month periods ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
1996 1995
----- -----
<S> <C> <C>
Revenue 100.0% 100.0%
Cost of sales 54.2 50.7
----- -----
Gross margin 45.8 49.3
----- -----
Operating expenses:
Research and development 14.4 17.1
Marketing and selling 9.7 12.8
General and administrative 10.1 9.1
----- -----
Total operating expenses 34.2 39.0
----- -----
Operating income 11.6 10.3
Other income (expense), net 1.2 (1.7)
----- -----
Income before income taxes 12.8 8.6
Income taxes 3.2 0.9
----- -----
Net income 9.6% 7.7%
===== =====
</TABLE>
6
<PAGE> 8
Revenue
Revenue for the three months ended June 30, 1996 was $18.3 million, up 39.4%
over the comparable period in 1995. This increase was due to increased sales of
the Company's newer 6500 series critical etch systems and 980 series
non-critical etch systems which carry higher selling prices than the Company's
older six inch and smaller wafer capable non-critical etch systems. As a result
of weakening demand for the Company's non-critical etch systems experienced in
the three months ended June 30, 1996 and the current semiconductor industry
slowdown, the Company believes that it will be difficult to maintain its first
quarter revenue level for the next two or three quarters.
Revenue from spare parts and service sales was $5.8 million for the three month
periods ended June 30, 1996 and 1995, accounting for 31.7% and 44.4% of total
revenue, respectively.
International sales as a percentage of the Company's revenue accounted for
approximately 80.7% and 66.0% for the three months ended June 30, 1996 and 1995,
respectively. The Company believes that international sales will continue to
represent a significant portion of its revenue.
Gross Margin
Gross margin was 45.8% and 49.3% for the three months ended June 30, 1996 and
1995, respectively. The decline in gross margin for the three months ended June
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 $2.2 million for the
three months ended June 30, 1996 and 1995, respectively, representing 14.4% and
17.1% of revenue, respectively. The increase in research and development
spending in absolute dollars in the period ended June 30, 1996 compared to the
comparable period 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. The Company expects that research and development expenses
will continue to increase in absolute dollars.
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 $1.8 million and $1.7 million for the three
months ended June 30, 1996 and 1995, representing 9.7% and 12.8% of revenue,
respectively. The three month period ended June 30, 1995 included a $0.3 million
non-recurring provision for sales office relocation expense. After deducting
this non-recurring expense, the three month period ended June 30, 1996 would
have been $0.4 million higher than the year earlier period, with the increase
primarily due to higher sales commission expenses on a larger revenue base than
occurred in the year earlier period and 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 $1.8 million and $1.2
million for the three months ended June 30, 1996 and 1995, representing 10.1%
and 9.1% of revenue, respectively. Included in the general and administrative
expenses for the three month period ended June 30, 1996, was an approximately
$0.3 million expense associated with completing an upgrade to
7
<PAGE> 9
the Company's business system begun in late fiscal 1996 and approximately $0.2
million additional expenses incurred in connection with being a public company
which was not the case in the year earlier period.
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 out of the 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 ended June 30,
1996. Other expense, net, was $0.2 million for the three months ended June 30,
1995. The other income, net generated in the three months ended June 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 months ended
June 30, 1995 was principally due to interest expense incurred in connection
with the Company's domestic bank borrowings prior to the IPO.
Income Tax Expense
Income taxes as a percentage of income before income taxes were 25.0% and 10.0%
for the three months ended June 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 three month periods ended June 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 used in operations was $4.6 million during the three months ended June
30, 1996, due principally to growth in accounts receivable, tax payments made in
the three months ended June 30, 1996, and reductions in accounts payable and
other accrued liabilities, offset, in part, by net income. Net cash provided by
operations during the three month period ended June 30, 1995 was $0.3 million
and was generated primarily from net income and a decline in accounts
receivable, partially offset by an increase in inventories and a decline in
accounts payable.
Net capital expenditures totaled $0.9 million and $0.6 million in the three
months ended June 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 three months ended June 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 three
months ended June 30, 1996 and 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
receivables balances in Japan.
As of June 30, 1996, the Company had approximately $20.3 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 June 30, 1996, the Company had an aggregate of $13.0
million available under two domestic lines of credit totaling $13.0 million,
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
June 30, 1996, the Company's Japanese subsidiary had available a 374 million Yen
(approximately $3.4 million at exchange rates prevailing on June 30, 1996)
unused portion of two Japanese bank lines of credit totaling 600 million Yen
(approximately $5.5 million at exchange rates prevailing June 30, 1996) 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.
8
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 4. LEGAL PROCEEDINGS
On June 10, 1996, Lucent Technologies Inc., a manufacturing subsidiary
of AT&T Corp., 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
No matters were submitted to a vote of security holders during the
three month period ended June 30, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits 11
(b) Reports on Form 8-K On June 28, 1996, a report on Form 8-K was
filed with the SEC in connection with the
Company's adoption of a shareholders' rights
plan.
9
<PAGE> 11
TEGAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Name Description Page
- ------------ ----------- ----
Exhibit 11 Computation of Net Income Per Share 11
Exhibit 27 Financial Data Schedule
10
<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
June 30,
--------
1996 1995
------- -------
<S> <C> <C>
Net income $ 1,745 $ 1,010
======= =======
Weighted average shares outstanding
during the period 10,068 651
Preferred stock on an "as if" converted -- 5,876
Common shares issued and stock options
granted in accordance with Staff
Accounting Bulletin No. 83 -- 1
Common stock equivalents 609 1,020
------- -------
Shares used in per share computation 10,677 7,548
======= =======
Net income per share $ 0.16 $ 0.13
======= =======
</TABLE>
11
<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: July 19, 1996
TEGAL CORPORATION
(Registrant)
/s/ David Curtis
---------------------------------------
David Curtis
Vice President Finance and Administration
Chief Financial Officer, Treasurer and
Secretary (Principal Financial Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 23,283
<SECURITIES> 0
<RECEIVABLES> 21,812
<ALLOWANCES> 1,018
<INVENTORY> 16,947
<CURRENT-ASSETS> 57,516
<PP&E> 11,179
<DEPRECIATION> 5,152
<TOTAL-ASSETS> 63,772
<CURRENT-LIABILITIES> 14,559
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 62,615
<TOTAL-LIABILITY-AND-EQUITY> 63,772
<SALES> 18,251
<TOTAL-REVENUES> 18,251
<CGS> 9,900
<TOTAL-COSTS> 9,900
<OTHER-EXPENSES> 2,629
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> 2,326
<INCOME-TAX> 581
<INCOME-CONTINUING> 1,745
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,745
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
