<PAGE> 1
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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 JUNE 30, 1998
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 June 30, 1998, there were 10,567,538 shares of the registrant's
Common Stock outstanding.
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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, 1998 and 1997................... 2
Condensed Consolidated Balance Sheets, as of June 30, 1998
and March 31, 1998.......................................... 3
Condensed Consolidated Statements of Cash Flows -- for the
three months ended June 30, 1998 and 1997................... 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 FINANCIAL STATEMENTS
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Revenue..................................................... $ 6,484 $ 9,086
Cost of sales............................................... 4,101 5,062
------- -------
Gross profit.............................................. 2,383 4,024
Operating expenses:
Research and development.................................. 2,640 2,799
Sales and marketing....................................... 1,425 1,423
General and administrative................................ 1,915 1,414
------- -------
Total operating expenses............................... 5,980 5,636
------- -------
Operating loss......................................... (3,597) (1,612)
Other income, net........................................... 207 394
------- -------
Loss before income taxes.................................... (3,390) (1,218)
Provision for income taxes.................................. -- --
------- -------
Net loss.................................................... $(3,390) $(1,218)
======= =======
Net loss per common share:
Basic.................................................. $ (0.32) $ (0.12)
Diluted................................................ $ (0.32) $ (0.12)
Shares used in per share computation:
Basic.................................................. 10,568 10,281
Diluted................................................ 10,568 10,281
</TABLE>
See accompanying notes.
2
<PAGE> 4
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
-------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 23,147 $25,660
Receivables, net.......................................... 4,928 7,482
Inventories............................................... 15,657 14,424
Prepaid expenses and other current assets................. 2,192 2,249
-------- -------
Total current assets.............................. 45,924 49,815
Property and equipment, net................................. 4,509 4,982
Other assets, net........................................... 357 349
-------- -------
$ 50,790 $55,146
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 625 $ 285
Accounts payable.......................................... 2,286 2,691
Accrued expenses and other current liabilities............ 6,430 7,265
-------- -------
Total current liabilities......................... 9,341 10,241
Long-term portion of capital lease obligation............... 83 101
-------- -------
Total liabilities................................. 9,424 10,342
-------- -------
Stockholders' Equity:
Common stock.............................................. 106 106
Additional paid-in capital................................ 55,177 55,177
Cumulative translation adjustment......................... (577) (529)
Accumulated deficit....................................... (13,340) (9,950)
-------- -------
Total stockholders' equity........................ 41,366 44,804
-------- -------
$ 50,790 $55,146
======== =======
</TABLE>
See accompanying notes.
3
<PAGE> 5
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,390) $(1,218)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 526 652
Changes in operating assets and liabilities............ 190 (3,245)
------- -------
Net cash used in operating activities............. (2,674) (3,811)
------- -------
Cash flows used in investing activities -- purchases of
property and equipment.................................... (53) (449)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... -- 117
Borrowings under lines of credit.......................... 340 2,255
Repayment of capital lease financing...................... (78) (95)
------- -------
Net cash provided by financing activities......... 262 2,277
------- -------
Effect of exchange rates on cash and cash equivalents....... (48) 242
------- -------
Net decrease in cash and cash equivalents................... (2,513) (1,741)
Cash and cash equivalents at beginning of period............ 25,660 30,323
------- -------
Cash and cash equivalents at end of period.................. $23,147 $28,582
======= =======
</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, 1998
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, 1998. The results of
operations for the three months ended June 30, 1998 are not necessarily
indicative of results to be expected for the entire year.
2. INVENTORIES:
Inventories consisted of:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
-------- ---------
<S> <C> <C>
Raw Materials........................................... $ 1,861 $ 2,050
Work in Progress........................................ 3,236 2,053
Finished Goods and Spares............................... 10,560 10,321
------- -------
$15,657 $14,424
======= =======
</TABLE>
3. NET INCOME (LOSS) PER COMMON SHARE:
FAS 128 requires the reconciliation of the numerators and the denominators
of the basic and diluted per share computation as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Net loss (numerator)..................................... $(3,390) $(1,218)
======= =======
Shares calculation (denominator):
Weighted average shares outstanding during the period.... 10,568 10,281
Effect of dilutive securities:
Common stock equivalents................................. -- --
------- -------
Average shares outstanding -- assuming dilution.......... 10,568 10,281
======= =======
Basic earnings per share................................. $ (0.32) $ (0.12)
======= =======
Earnings per share assuming dilution..................... $ (0.32) $ (0.12)
======= =======
</TABLE>
Options to purchase 2,013,649 and 1,476,838 shares of common stock were
outstanding during the three months ended June 30, 1998 and June 30, 1997,
respectively, but were not reflected in the computations of diluted EPS because
the Company recorded a net loss in those periods and to do so would have been
anti-dilutive.
5
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TEGAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
4. INCOME TAX EXPENSE:
No provision for federal or state income tax has been recorded for the
three month periods ended June 30, 1998 and 1997, respectively, as the Company
has recorded a net loss before taxes for both periods. The Company did not
recognize a benefit for these net losses before taxes because any benefit
derived would require offsetting current losses against future profitability
where such profitability's timing and magnitude are uncertain.
5. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). FAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value, and the
corresponding derivative gains or losses be either reported in the statement of
operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. Adopting the provisions of SFAS 133
are not expected to have a material effect on the Company's consolidated
financial statements, which will be effective for the Company's fiscal year
ending March 31, 2001.
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, 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, 1998, as filed with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
The Company 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, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30,
--------------
1998 1997
----- -----
<S> <C> <C>
Revenue..................................................... 100.0% 100.0%
Cost of sales............................................... 63.2 55.7
----- -----
Gross profit................................................ 36.8 44.3
----- -----
Operating expenses:
Research and development.................................. 40.7 30.7
Sales and marketing....................................... 22.0 15.7
General and administrative................................ 29.6 15.6
----- -----
Total operating expenses.......................... 92.3 62.0
----- -----
Operating loss.............................................. (55.5) (17.7)
Other income, net........................................... 3.2 4.3
----- -----
Income before income taxes.................................. (52.3) (13.4)
Provision for income taxes.................................. 0.0 0.0
----- -----
Net loss.................................................... (52.3)% (13.4)%
===== =====
</TABLE>
Revenue. Revenue for the three months ended June 30, 1998 was $6.5 million,
down 28.6% over the comparable period in 1997. The decrease from the comparable
period in the prior year was primarily attributable to the absence of any
critical etch system sales in the current period. In the comparable period in
the prior year, the Company recognized revenue on one 6500 series system sale.
Revenue from spare parts and service sales was $4.1 million for the three
month period ended June 30, 1998, down from $4.5 million for the three month
period ended June 30, 1997, which the Company believes is a result of customers
curtailing spare parts purchases during the current industry slowdown.
7
<PAGE> 9
International sales as a percentage of the Company's revenue was
approximately 66.1% and 58.7% for the three months ended June 30, 1998 and 1997,
respectively. The Company believes that international sales will continue to
represent a significant portion of its revenue.
The Company believes that the slowdown in the semiconductor equipment
industry is likely to persist for the next several quarters. While the Company
believes that those industry conditions are likely to adversely affect its
revenues for the next several quarters, the Company anticipates that its
revenues for the next one to two quarters are likely to be above the revenue for
the three month period ended June 30, 1998.
Gross profit. Gross profit as a percentage of revenue (gross margin) was
36.8% and 44.3% for the three months ended June 30, 1998 and 1997, respectively.
The decline in gross margin for the three months ended June 30, 1998 compared to
the comparable period in the prior year was principally attributable to
spreading reduced manufacturing overhead expenses over substantially lower
revenue volume.
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 $2.8 million for the three months ended June 30, 1998 and 1997,
respectively, representing 40.7% and 30.7% of revenue, respectively. The
decrease in research and development spending for the period ended June 30,
1998, compared to the comparable period in the prior year was attributable to
decreased spending on 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
for each of the three months ended June 30, 1998 and 1997, representing 22.0%
and 15.7% of revenue, respectively.
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 $1.4 million for the three months ended June 30,
1998 and 1997, representing 29.6% and 15.6% of revenue, respectively. The
increase in general and administrative spending for the period ended June 30,
1998, compared to the comparable period in the prior year was primarily
attributable to the Company incurring additional legal expenses in connection
with its patent disputes with Austria Mikro Systeme International AG and AMS
Austria MikroSysteme International, Inc. ("AMS") and Tokyo Electron Limited
("TEL"). See "Part II, Item 1. Legal Proceedings."
Other income, net. Other income, net consists primarily of interest income
on outstanding cash balances, and gains and losses on foreign exchange.
Income tax expense. No provision for federal or state income tax has been
recorded for the three months ended June 30, 1998 and 1997, respectively, as the
Company has recorded a net loss before taxes in both periods. The Company did
not recognize a benefit for this net loss before taxes in those periods 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 three month periods ended June 30, 1998 and 1997, the Company
financed its operations through the use of outstanding cash balances.
Net cash used in operations was $2.7 million during the three months ended
June 30, 1998, due principally to a net loss of $2.9 million after adjusting for
depreciation, an increase in inventory, and a decline in accrued expenses and
accounts payable, offset in part, by a decline in accounts receivable. Net cash
used in operations was $3.8 million for the three months ended June 30, 1997,
due principally to a net loss of $0.6 million after adjusting for depreciation,
a decline in accrued expenses and accounts payable and an increase in
inventories offset, in part, by a decline in accounts receivable.
8
<PAGE> 10
Net capital expenditures totaled $0.1 million and $0.4 million for the
three months ended June 30, 1998 and 1997, 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 $0.3 million and $2.3
million for the three months ended June 30, 1998 and 1997, respectively. In both
periods, the increase was due principally to increased borrowings under the
Company's two Japanese borrowing facilities offset, in part, by repayment of
capital lease obligations.
As of June 30, 1998, the Company had approximately $23.1 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, 1998, 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. The Company is presently negotiating the terms of a
renewal of a portion of the domestic line of credit for approximately $12.5
million. In addition to the foregoing facility, as of June 30, 1998, the
Company's Japanese subsidiary had available a 513 million Yen (approximately
$3.7 million at exchange rates prevailing on June 30, 1998) unused portion of
two Japanese bank lines of credit totaling 600 million Yen (approximately $4.3
million at exchange rates prevailing on June 30, 1998) 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.
MARKET RISK DISCLOSURE
The Company has an investment portfolio of securities that are principally
comprised of money market funds. These funds are subject to interest rate risk
and may fall in value if market interest rates increase. The Company attempts to
limit this exposure by investing primarily in short-term securities having a
maturity of three months or less.
The Company has foreign subsidiaries which operate and sell the Company's
products in various global markets. As a result, the Company's cashflow and
earnings are exposed to fluctuations in interest rate and foreign currency
exchange rates. The Company attempts to limit these exposures through the use of
various hedge instruments, primarily forward exchange contracts and currency
option contracts (with maturities of less than three months) to manage its
exposure associated with firm obligations and net asset and liability positions
denominated in non-functional currencies.
9
<PAGE> 11
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. ("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.
On March 17, 1998, the Company filed a suit in the United States District
Court in the Eastern District of Virginia against Tokyo Electron Limited and
several of its U.S. subsidiaries (collectively, "TEL") alleging that TEL's
current generation of etch equipment infringes certain of the Company's patents.
The Company is seeking, among other things, injunctive relief barring TEL from
importing or selling such products. No assurance can be given as to the outcome
of such legal proceedings or as to the effect of any such outcome on the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on May 11, 1998
regarding the filing of a registration statement on Form S-3.
10
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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: August 13, 1998
TEGAL CORPORATION
(Registrant)
/s/ DAVID CURTIS
--------------------------------------
David Curtis
Chief Financial Officer, Treasurer and
Secretary (Principal Financial
Officer)
11
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 23,147
<SECURITIES> 0
<RECEIVABLES> 5,485
<ALLOWANCES> 557
<INVENTORY> 15,657
<CURRENT-ASSETS> 45,924
<PP&E> 14,078
<DEPRECIATION> 9,569
<TOTAL-ASSETS> 50,790
<CURRENT-LIABILITIES> 9,341
<BONDS> 0
0
0
<COMMON> 106
<OTHER-SE> 41,260
<TOTAL-LIABILITY-AND-EQUITY> 50,790
<SALES> 6,484
<TOTAL-REVENUES> 6,484
<CGS> 4,101
<TOTAL-COSTS> 4,101
<OTHER-EXPENSES> 2,640
<LOSS-PROVISION> 16
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> (3,390)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,390)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,390)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
