<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 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 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 December 31, 1998, there were 10,631,697 shares of the registrant's
Common Stock outstanding.
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TEGAL CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations -- for the
three and nine months ended December 31, 1998 and 1997...... 3
Condensed Consolidated Balance Sheets, as of December 31,
1998 and March 31, 1998..................................... 4
Condensed Consolidated Statements of Cash Flows -- for the
nine months ended December 31, 1998 and 1997................ 5
Notes to Condensed Consolidated Financial Statements........ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 12
SIGNATURES.................................................. 13
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue............................................ $ 6,456 $12,257 $ 22,973 $33,069
Cost of sales...................................... 4,642 7,671 16,064 19,560
------- ------- -------- -------
Gross profit........................ 1,814 4,586 6,909 13,509
Operating expenses:
Research and development......................... 2,060 2,583 7,073 8,376
Sales and marketing.............................. 1,148 1,554 4,032 4,811
General and administrative....................... 2,414 1,862 6,502 4,686
------- ------- -------- -------
Total operating expenses............ 5,622 5,999 17,607 17,873
------- ------- -------- -------
Operating loss...................... (3,808) (1,413) (10,698) (4,364)
Other income (expense), net........................ (126) 224 300 861
------- ------- -------- -------
Loss before income taxes........................... (3,934) (1,189) (10,398) (3,503)
Provision for income taxes......................... 0 0 0 0
------- ------- -------- -------
Net loss............................ $(3,934) $(1,189) $(10,398) $(3,503)
======= ======= ======== =======
Net loss per common share:
Basic and diluted................... $ (0.37) $ (0.11) $ (0.98) $ (0.34)
Shares used in per share computation:
Basic and diluted................... 10,623 10,362 10,603 10,325
</TABLE>
See accompanying notes.
3
<PAGE> 4
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 20,583 $25,660
Receivables, net.......................................... 5,431 7,482
Inventories............................................... 13,831 14,424
Prepaid expenses and other current assets................. 1,952 2,249
-------- -------
Total current assets.............................. 41,797 49,815
Property and equipment, net................................. 3,794 4,982
Other assets, net........................................... 364 349
-------- -------
$ 45,955 $55,146
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 709 $ 285
Accounts payable.......................................... 1,873 2,691
Accrued expenses and other current liabilities............ 8,018 7,265
-------- -------
Total current liabilities......................... 10,600 10,241
Long-term portion of capital lease obligation............... 46 101
-------- -------
Total liabilities................................. 10,646 10,342
-------- -------
Stockholders' Equity:
Common stock.............................................. 106 106
Additional paid-in capital................................ 55,353 55,177
Cumulative translation adjustment......................... 198 (529)
Accumulated deficit....................................... (20,348) (9,950)
-------- -------
Total stockholders' equity........................ 35,309 44,804
-------- -------
$ 45,955 $55,146
======== =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(10,398) $(3,503)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization.......................... 1,654 1,842
Changes in operating assets and liabilities............ 2,986 (2,320)
-------- -------
Net cash used in operating activities................ (5,758) (3,981)
-------- -------
Cash flows used in investing activities:
Purchases of property and equipment....................... (466) (1,801)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 177 150
Borrowings under lines of credit.......................... 424 586
Repayment of capital lease financing...................... (181) (246)
-------- -------
Net cash provided by financing activities............ 420 490
-------- -------
Effect of exchange rates on cash and cash equivalents....... 727 (689)
-------- -------
Net decrease in cash and cash equivalents................... (5,077) (5,981)
Cash and cash equivalents at beginning of period............ 25,660 30,323
-------- -------
Cash and cash equivalents at end of period.................. $ 20,583 $24,342
======== =======
</TABLE>
See accompanying notes.
5
<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 and nine months ended December 31, 1998 are not
necessarily indicative of results to be expected for the entire year.
2. INVENTORIES:
Inventories consisted of:
<TABLE>
<CAPTION>
DEC. 31, MARCH 31,
1998 1998
-------- ---------
<S> <C> <C>
Raw Materials........................................... $ 2,489 $ 2,050
Work in Progress........................................ 1,551 2,053
Finished Goods and Spares............................... 9,791 10,321
------- -------
$13,831 $14,424
======= =======
</TABLE>
3. NET (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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss (numerator)....................... $(3,934) $(1,189) $(10,399) $(3,503)
======= ======= ======== =======
Shares calculation (denominator):
Weighted average shares outstanding during
the period............................... 10,623 10,362 10,603 10,325
Basic and diluted earnings per share....... $ (0.37) $ (0.11) $ (0.98) $ (0.34)
======= ======= ======== =======
</TABLE>
Options and warrants to purchase 2,582,559 and 2,199,000 shares of common
stock were outstanding as of December 31, 1998 and December 31, 1997,
respectively, but were not reflected in the computations of diluted earnings per
share because the Company recorded a net loss in those periods and to do so
would have been anti-dilutive.
4. INCOME TAX EXPENSE:
No provision for federal or state income tax has been recorded for the
three and nine month periods ended December 31, 1998 and 1997, respectively, as
the Company has recorded a net loss before taxes for those periods. The Company
did not recognize a benefit for these net losses before taxes because any
benefit
6
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TEGAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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"). SFAS 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 on 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.
7
<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 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
Securities and Exchange Commission ("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
SEC.
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 and nine month periods ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 71.9 62.6 69.9 59.1
------ ------ ------ ------
Gross profit................................ 28.1 37.4 30.1 40.9
------ ------ ------ ------
Operating expenses:
Research and development.................... 31.9 21.1 30.8 25.3
Sales and marketing......................... 17.8 12.7 17.6 14.5
General and administrative.................. 37.4 15.2 28.3 14.2
------ ------ ------ ------
Total operating expenses................. 87.1 48.9 76.7 54.0
------ ------ ------ ------
Operating loss........................... (59.0) (11.5) (46.6) (13.2)
Other income (expense), net................... (1.9) 1.8 1.3 2.6
------ ------ ------ ------
Loss before income taxes...................... (60.9) (9.7) (45.3) (10.6)
Provision for income taxes.................... 0.0 0.0 0.0 0.0
------ ------ ------ ------
Net loss...................................... (60.9)% (9.7)% (45.3)% (10.6)%
====== ====== ====== ======
</TABLE>
Revenue. Revenue for the three and nine months ended December 31, 1998 was
$6.5 million and $23.0 million respectively, down 47.3% and 30.5% over the
comparable periods in 1997. The decrease in revenue of $5.8 million for the
three months ended December 31, 1998 was principally due to six less systems
sales including one less 6500 series system, and reduced spare parts and service
sales. The decrease in revenue for the nine months ended December 31, 1998 of
$10.1 million was principally due to sales of three fewer 6500 series systems
and reduced spare parts and service sales.
Revenue from spare parts and service sales was $2.8 million and $10.9
million for the three and nine month periods ended December 31, 1998, down from
$4.6 million and $14.0 million for the comparable
8
<PAGE> 9
periods in the prior year. The Company believes the revenue decline is a result
of customers reducing spare parts purchases during the current industry slowdown
and to a lesser extent, to increased competition from third party spare parts
suppliers.
International sales as a percentage of the Company's revenue was
approximately 72.7% and 61.0% for the three months and 71.9% and 65.9% for the
nine months ended December 31, 1998 and 1997, 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
28.1% and 37.4% for the three months and 30.1% and 40.9% for the nine months
ended December 31, 1998 and 1997, respectively. The decline in gross margin for
the three and nine months ended December 31, 1998 compared to the comparable
periods in the prior year was principally attributable to spreading
manufacturing and spare parts overhead expenses over substantially lower revenue
volumes.
Restructuring Charge. For the nine months ended December 31, 1998 the
Company took a one-time restructuring charge of $0.7 million for severance costs
and facilities consolidation attributable to downsizing actions taken in
September 1998. Of these charges approximately $350,000 was reflected in cost of
sales, $200,000 was reflected in general and administrative expenses and the
balance was evenly split between research and development and sales and
marketing expenses.
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 $2.1
million and $2.6 million for the three months and $7.1 million and $8.4 million
for the nine months ended December 31, 1998 and 1997, respectively, representing
31.9%, 21.1%, 30.8% and 25.3% of revenue, respectively. The decrease in research
and development spending for the three and nine month periods ended December 31,
1998, compared to the comparable periods in the prior year was attributable to
decreased spending on prototype materials and lower salaries and wages on a
reduced headcount.
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 $1.1 million
and $1.6 million for the three months and $4.0 million and $4.8 million for the
nine months ended December 31, 1998 and 1997, respectively, representing 17.8%,
12.7% and 17.6%, 14.5% of revenue, respectively. The decrease in sales and
marketing expense for the three and nine months ended December 31, 1998 compared
to the comparable periods in the prior year was due principally to reduced sales
commissions on a lower revenue base and reduced advertising expenses.
General and administrative. General and administrative expenses consist
primarily of compensation for general management, accounting and finance, human
resources, information systems and investor relations functions and for legal,
consulting and accounting fees of the Company. General and administrative
expenses were $2.4 million and $1.9 million for the three months and $6.5
million and $4.7 million for the nine months ended December 31, 1998 and 1997,
respectively, representing 37.4%, 15.2%, 28.3% and 14.2% of revenue,
respectively. The increase in general and administrative spending for the three
and nine month periods ended December 31, 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.
and Tokyo Electron Limited. See "Part II, Item 1. Legal Proceedings."
Other income (expense), net. Other income (expense), net consists primarily
of interest income on outstanding cash balances, and gains and losses on foreign
exchange. For the three months ended December 31, 1998, the Company incurred a
$0.3 million foreign exchange loss on its overseas inventories and hedging
activities which more than offset $0.2 million of interest income on outstanding
cash balances.
Income tax expense. No provision for federal or state income tax has been
recorded for the three and nine months ended December 31, 1998 and 1997,
respectively, as the Company has recorded a net loss before taxes in those
periods. The Company did not recognize a benefit for this net loss before taxes
in those periods
9
<PAGE> 10
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 December 31, 1998 and 1997, the Company
financed its operations through the use of outstanding cash balances.
Net cash used in operations was $5.8 million during the nine months ended
December 31, 1998, due principally to a net loss of $8.7 million after adjusting
for depreciation offset, in part, by reductions in net inventories and accounts
receivable. Net cash used in operations was $4.0 million for the nine months
ended December 31, 1997, due principally to a net loss of $1.7 million after
adjusting for depreciation, a decline in accrued expenses and accounts payable
and an increase in inventories offset, in part, by a decline in accounts
receivable.
Net capital expenditures totaled $0.5 million and $1.8 million for the nine
months ended December 31, 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 $0.4 million and $0.5
million for the nine months ended December 31, 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 December 31, 1998, the Company had approximately $20.6 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 December 31, 1998, the Company had an
aggregate borrowing capacity of $12.5 million available under a domestic line of
credit secured by substantially all of the Company's assets. The facility is
available until August 15, 1999. In addition to the foregoing facility, as of
December 31, 1998, the Company's Japanese subsidiary had available a 542 million
Yen (approximately $4.8 million at exchange rates prevailing on December 31,
1998) unused portion of two Japanese bank lines of credit totaling 600 million
Yen (approximately $5.3 million at exchange rates prevailing on December 31,
1998) secured by Japanese customer promissory notes held by such subsidiary in
advance of payment on customers' accounts receivable.
The Company believes that funds available under its lines of credit and
existing cash and cash equivalent balances will be sufficient to meet the
Company's cash requirements for the next twelve months.
YEAR 2000 COMPLIANCE
In the past, many information technology products were designed with two
digit year codes that did not recognize century and millennium fields. As a
result these hardware and software products may not function or may give
incorrect results beginning in the Year 2000. The "Year 2000 Issue" is faced by
substantially every company which relies on computer systems. In order to
address this issue, such hardware and software products may need to be upgraded
or replaced in order to correctly process dates beginning in the Year 2000.
The Company has formed a team and named an executive sponsor to identify
remedies and test and develop contingency plans for the Year 2000 Issue. The
Company estimates that the tasks identified by this team will be completed by
September 1999. To date, the Company has evaluated its internal systems as well
as its products to determine their Year 2000 status. The Company's primary risk
is in its network PC environment, which may result in added difficulty or
inability to conduct various internal analyses used in the management of the
Company's business. Another principal risk exists with respect to the Company's
analytical and test instrumentation used in the Company's demonstration and
process development labs. The Company has recently identified this latter risk
and plans to conduct an impact analysis in this area.
The Company's Enterprise Resource Planning (ERP) system is provided by a
software vendor and contains some custom modifications to meet the Company's
business requirements. The vendor-provided
10
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software is Information Technology Association of America certified Year 2000
compliant. The custom modifications are being evaluated to identify the changes
necessary to make them compliant. The Company estimates that the required
modifications will be completed by September 1999. The Company's current product
offerings have been tested and determined to either be Year 2000 compliant or,
where they are not compliant, an upgrade program is available to address the
problem.
The Company expects to complete its Year 2000 contingency plan by March
1999 and is considering, among other issues, required modifications and upgrades
to all its business software and hardware, the readiness of its key suppliers
and other third parties and the effect their compliance readiness might have on
the Company. The Company has commenced its assessment of the Y2K readiness of
its key suppliers. It has sent out approximately 1400 surveys and is in the
process of reviewing them. The Company is not currently planning on assessing
the compliance readiness of its customers. The Company's customers are generally
considerably larger than the Company and are unlikely to complete any
questionnaire which the Company might furnish to its customers to assess Year
2000 compliance. The Company does not anticipate that its ability to conduct its
business operations with its suppliers or customers is likely to be materially
adversely impacted by Year 2000 issues since purchase and sales order
transactions are generally transmitted by mail, phone or facsimile between
parties as opposed to through some form of electronic data interchange.
The total expense of preparing the Company for Year 2000 compliance is
estimated at approximately $0.4 million, which is not material to the Company's
business operations or financial condition. Nevertheless, satisfactorily
addressing the Year 2000 Issue is dependent on many factors, some of which are
not within the Company's control. Should the Company's internal systems, or the
internal systems of one or more of its significant vendors, customers, or other
third parties fail to achieve Year 2000 compliance, the Company's business and
its results of operations could be materially adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 cash flow and
earnings are exposed to fluctuations in interest 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.
11
<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. ("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. In March 1995,
the Company executed an agreement with AMS, containing an indemnification
provision 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 filed a claim for patent infringement in
Germany against AMS for the worldwide sale of integrated circuits manufactured
with the Company's dry plasma etch systems. Lucent and AMS have settled that
matter with respect to worldwide sales. AMS has requested indemnification for
that 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.
On January 21, 1999 the Court issued an order interpreting the patents-in-suit
in the manner urged by the Company and rejecting the interpretation arguments
made by TEL. 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's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three
month period ended December 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on January 15, 1999 reporting an
amendment to the Company's shareholder rights plan.
12
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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: February 12, 1999
TEGAL CORPORATION
(Registrant)
/s/ DAVID CURTIS
--------------------------------------
David Curtis
Chief Financial Officer, Treasurer and
Secretary (Principal Financial
Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,583
<SECURITIES> 0
<RECEIVABLES> 5,761
<ALLOWANCES> 330
<INVENTORY> 13,831
<CURRENT-ASSETS> 41,797
<PP&E> 14,703
<DEPRECIATION> 10,909
<TOTAL-ASSETS> 45,955
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0
0
<COMMON> 106
<OTHER-SE> 35,203
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<SALES> 6,456
<TOTAL-REVENUES> 6,456
<CGS> 4,642
<TOTAL-COSTS> 4,642
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<INCOME-PRETAX> (3,934)
<INCOME-TAX> 0
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<CHANGES> 0
<NET-INCOME> (3,934)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
