<PAGE> 1
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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 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THREE MONTH PERIOD ENDED JUNE 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)
<TABLE>
<S> <C>
DELAWARE 68-0370244
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 15, 1997, there were 10,309,892 shares of the registrant's
Common Stock outstanding.
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<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 months ended
June 30, 1997 and 1996......................................................... 2
Condensed Consolidated Balance Sheets, as of June 30, 1997 and March 31,
1997........................................................................... 3
Condensed Consolidated Statements of Cash Flows -- for the three months ended
June 30, 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 1. LEGAL PROCEEDINGS.............................................................. 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................... 10
SIGNATURES..................................................................... 11
</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,
-------------------
1997 1996
------- -------
<S> <C> <C>
Revenue.................................................................. $ 9,086 $18,251
Cost of sales............................................................ 5,062 9,900
------- -------
Gross profit........................................................... 4,024 8,351
Operating expenses:
Research and development............................................... 2,799 2,629
Sales and marketing.................................................... 1,423 1,766
General and administrative............................................. 1,414 1,840
------- -------
Total operating expenses....................................... 5,636 6,235
------- -------
Operating income (loss)........................................ (1,612) 2,116
Other income (expense), net.............................................. 394 210
------- -------
Income (loss) before income taxes........................................ (1,218) 2,326
Provision for income taxes............................................... -- 581
------- -------
Net income (loss)........................................................ $(1,218) $ 1,745
======= =======
Net income (loss) per common share....................................... $ (0.12) $ 0.16
======= =======
Shares used in per share computation..................................... 10,281 10,677
======= =======
</TABLE>
See accompanying notes
2
<PAGE> 4
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE MARCH
30, 31,
1997 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $28,582 $30,323
Receivables, net....................................................... 10,199 12,322
Inventories............................................................ 14,329 13,154
Prepaid expenses and other current assets.............................. 2,529 2,274
------- -------
Total current assets........................................... 55,639 58,073
Property and equipment, net.............................................. 5,821 5,298
Other assets, net........................................................ 415 153
------- -------
$61,875 $63,524
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.......................................................... $ 2,507 $ 252
Accounts payable....................................................... 2,659 3,442
Accrued expenses and other current liabilities......................... 6,716 8,987
------- -------
Total current liabilities...................................... 11,882 12,681
Long-term portion of capital lease obligation............................ 310 301
------- -------
Total liabilities.............................................. 12,192 12,982
------- -------
Stockholders' Equity:
Common stock........................................................... 103 103
Additional paid-in capital............................................. 54,938 54,821
Cumulative translation adjustment...................................... 265 23
Accumulated deficit.................................................... (5,623) (4,405)
------- -------
Total stockholders' equity..................................... 49,683 50,542
------- -------
$61,875 $63,524
======= =======
</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,
-------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................................... $(1,218) $ 1,745
Adjustments to reconcile net income (loss) to cash provided by (used
in) operating activities:
Depreciation and amortization..................................... 652 560
Purchase credit redemptions....................................... -- (393)
Changes in operating assets and liabilities:...................... (3,245) (6,536)
------- -------
Net cash used in operating activities.......................... (3,811) (4,624)
------- -------
Cash flows used in investing activities -- purchases of property and
equipment.............................................................. (449) (903)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock................................. 117 5
Borrowings under notes payable......................................... 2,255 2,675
Repayment of capital lease financing................................... (95) (75)
------- -------
Net cash provided by financing activities...................... 2,277 2,605
------- -------
Effect of exchange rates on cash and cash equivalents.................... 242 (106)
------- -------
Net decrease in cash and cash equivalents................................ (1,741) (3,028)
Cash and cash equivalents at beginning of period......................... 30,323 23,283
------- -------
Cash and cash equivalents at end of period............................... $28,582 $20,255
======= =======
</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, 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
regulation 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 months ended June 30, 1997 are not necessarily
indicative of results to be expected for the entire year.
2. INVENTORIES:
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1996
--------- ----------
<S> <C> <C>
Raw Materials................................................... $ 2,481 $ 3,988
Work in Progress................................................ 6,120 2,126
Finished Goods and Spares....................................... 5,728 7,040
------- -------
$ 14,329 $ 13,154
======= =======
</TABLE>
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 25.0% for
the three months ended June 30, 1996. The effective tax rate for the period
ended June 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 period
ended June 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
quarter ended June 30, 1997, because any benefit derived would require
offsetting current losses against future profitability where such
profitability's timing and magnitude is uncertain.
5
<PAGE> 7
TEGAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30,
-----------------
1997 1996
------- ------
<S> <C> <C>
Basic earnings per share.................... $(0.12) $0.17
Diluted earnings per share.................. -- $0.16
</TABLE>
6
<PAGE> 8
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 month periods ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30,
---------------
1997 1996
----- -----
<S> <C> <C>
Revenue.............................................. 100.0% 100.0%
Cost of sales........................................ 55.7 54.2
----- -----
Gross profit....................................... 44.3 45.8
----- -----
Operating expenses:
Research and development........................... 30.8 14.4
Sales and marketing................................ 15.7 9.7
General and administrative......................... 15.6 10.1
----- -----
Total operating expenses........................ 62.0 34.2
----- -----
Operating income................................ (17.7) 11.6
Other income (expense), net.......................... 4.3 1.2
----- -----
Income before income taxes...................... (13.4) 12.8
Provision for income taxes........................... 0.0 3.2
----- -----
Net income (loss)............................... (13.4)% 9.6%
===== =====
</TABLE>
Revenue. Revenue for the three months ended June 30, 1997 was $9.1 million,
down 50% over the comparable period in 1996. This decrease was due to reduced
unit sales of the Company's non-critical etch systems whose sales are
principally driven by customer decisions to expand production capacity and a
delay in finalizing an order for a critical etch system from a Korean customer.
The order from the Korean customer was finalized and the system is expected to
ship in the second quarter.
7
<PAGE> 9
Revenue from spare parts and service sales was $4.6 million for the three
month period ended June 30, 1997, down from $5.8 million for the three month
period ended June 30, 1996, which the Company believes is a result of customers
depleting their inventory levels of spare parts during the industry slowdown.
International sales as a percentage of the Company's revenue was
approximately 58.7% and 80.7% for the three months ended June 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
44.3% and 45.8% for the three months ended June 30, 1997 and 1996, respectively.
The decline in gross margin for the three months ended June 30, 1997, resulted
primarily from a reduced revenue base in systems spare parts and service sales
and a shift in the product mix to systems with a lower contribution margin
available to offset primarily fixed overhead costs.
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 $2.8
million and $2.6 million for the three months ended June 30, 1997 and 1996,
respectively, representing 30.8% and 14.4% of revenue, respectively. The
increase in research and development spending in absolute dollars in the period
ended June 30, 1997, compared to the comparable period in the prior year was
attributable to increased spending on demonstration lab and prototype material.
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 $1.4 million
and $1.8 million for the three months ended June 30, 1997 and 1996,
respectively, representing 15.7% and 9.7% of revenue, respectively. The decline
in sales and marketing expense in absolute dollars for the three months ended
June 30, 1997 compared to the comparable period in the prior year was due
principally to reduced spending on 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 $1.8 million for the three months ended June 30,
1997 and 1996, representing 15.6% and 10.1% of revenue, respectively. Included
in general and administrative expenses for the three month period ended June 30,
1996, was 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 (expense), net 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 25.0% for the three months ended June 30, 1996. The effective tax rate
for the period ended June 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 period ended June 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 quarter ended June 30, 1997, because any benefit derived
would require offsetting current losses against future profitability where such
profitability's timing and magnitude is uncertain.
Net income. Net income per share was $(0.12) and $0.16 for the three months
ended June 30, 1997 and 1996 respectively. The Company expects demand for its
systems to remain soft for the next several quarters resulting in expected
losses for each of the remaining quarters of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the three month periods ended June 30, 1997 and 1996, the Company has
financed its operations through the use of net proceeds from its October 1995
Initial Public Offering and bank borrowings.
8
<PAGE> 10
Net cash used in operations was $3.8 million during the three months ended
June 30, 1997, due principally to a decline in accrued expenses and accounts
payable and an increase in inventories offset, in part, by a decline in accounts
receivable and a net loss of $0.6 million after adjusting for depreciation. 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
period and reductions in accounts payable and accrued expenses, offset, in part,
by net income.
Net capital expenditures totaled $0.4 million and $0.9 million in the three
months ended June 30, 1997 and 1996, respectively. Capital expenditures in both
periods were incurred principally for leasehold improvements and to acquire
design tools, analytical equipment and computers.
Net cash provided by financing activities totaled $2.3 million and $2.6
million in the three months ended June 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 receivables
balances in Japan.
9
<PAGE> 11
As of June 30, 1997, the Company had approximately $28.6 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, 1997, the Company had an aggregate
borrowing capacity 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 April 1997, the Company executed commitment
letters with two banks to increase its domestic borrowing facilities to a
maximum of $20.0 million for one year from the execution of loan documents. The
Company expects to execute those loan documents in August 1997. In addition to
the foregoing facilities, as of June 30, 1997, the Company's Japanese subsidiary
had available a 301 million Yen (approximately $2.6 million at exchange rates
prevailing on June 30, 1997) unused portion of two Japanese bank lines of credit
totaling 600 million Yen (approximately $5.2 million at exchange rates
prevailing on June 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.
10
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
However, 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.
Lucent and AMS have settled the claim and AMS is now seeking indemnification
from the Company. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibits Exhibit 11 Computation of Net Income Per Share
(b) Reports on Form 8-K There were no reports on Form 8-K filed for the period
which this Form 10-Q covers.
</TABLE>
11
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities 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 29, 1997
TEGAL CORPORATION
(Registrant)
/s/ DAVID CURTIS
--------------------------------------
David Curtis
Chief Financial Officer, Treasurer and
Secretary (Principal Financial
Officer)
12
<PAGE> 14
TEGAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NAME DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------------- ----
<S> <C> <C>
Exhibit 11 Computation of Net Income Per Share........................................ 13
Exhibit 27 Financial Data Schedule (Edgar only).......................................
</TABLE>
13
<PAGE> 1
EXHIBIT 11
TEGAL CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION
OF NET INCOME (LOSS) PER SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1997 1996
------- -------
<S> <C> <C>
Net income (loss)...................................... $(1,218) $ 1,745
======= =======
Weighted average shares outstanding during the
period............................................... 10,281 10,068
Common stock equivalents............................... -- 609
------- -------
Shares used in per share computation................... 10,281 10,677
======= =======
Net income per share................................. $ (0.12) $ 0.16
======= =======
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 28,582
<SECURITIES> 0
<RECEIVABLES> 10,866
<ALLOWANCES> 667
<INVENTORY> 14,329
<CURRENT-ASSETS> 2,529
<PP&E> 13,259
<DEPRECIATION> 7,438
<TOTAL-ASSETS> 61,875
<CURRENT-LIABILITIES> 11,882
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 49,580
<TOTAL-LIABILITY-AND-EQUITY> 61,875
<SALES> 9,086
<TOTAL-REVENUES> 9,086
<CGS> 5,062
<TOTAL-COSTS> 5,062
<OTHER-EXPENSES> 2,799
<LOSS-PROVISION> 164
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> (1,218)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,218)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,218)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
