<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 SEPTEMBER 30, 2000
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
2201 SOUTH MCDOWELL BLVD.
PETALUMA, CALIFORNIA 94954
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER (707) 763-5600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of September 30, 2000, there were 12,492,791 shares of the registrant's
Common Stock outstanding.
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<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 and six months ended
September 30, 2000.................................. 1
Condensed Consolidated Balance Sheets, as of
September 30, 2000
and March 31, 2000............................... 2
Condensed Consolidated Statements of Cash
Flows -- for the six months ended September 30, 2000
and 1999............................................ 3
Notes to Condensed Consolidated Financial
Statements.......................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............ 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET
RISK........................................... 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 9
ITEM 5. RISK FACTORS........................................ 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................... 15
SIGNATURES.................................................. 16
</TABLE>
i
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue............................................. $13,276 $ 4,700 $20,960 $11,359
Cost of sales....................................... 7,662 3,164 12,100 7,666
------- ------- ------- -------
Gross profit................................... 5,614 1,536 8,860 3,693
------- ------- ------- -------
Operating expenses:
Research and development.......................... 2,313 2,496 4,781 5,124
Sales and marketing............................... 1,326 1,222 2,545 2,420
General and administrative........................ 1,844 1,923 3,766 4,224
------- ------- ------- -------
Total operating expenses.................. 5,483 5,641 11,092 11,768
------- ------- ------- -------
Operating profit (loss)................... 131 (4,105) (2,232) (8,075)
Other income, net................................... 31 117 104 322
------- ------- ------- -------
Net profit (loss)................................... $ 162 $(3,988) $(2,128) $(7,753)
======= ======= ======= =======
Net loss per common share:
Basic............................................. $ 0.01 $ (0.37) $ (0.17) $ (0.72)
Diluted........................................... $ 0.01 $ (0.37) $ (0.17) $ (0.72)
Shares used in per share computation:
Basic............................................. 12,489 10,761 12,471 10,744
Diluted........................................... 13,378 10,761 12,471 10,744
</TABLE>
See accompanying notes.
1
<PAGE> 4
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 11,351 $ 12,627
Receivables, net.......................................... 9,830 6,438
Inventories............................................... 14,613 13,261
Prepaid expenses and other current assets................. 1,273 679
-------- --------
Total current assets.............................. 37,067 33,005
Property and equipment, net................................. 1,708 2,223
Other assets, net........................................... 346 345
-------- --------
$ 39,121 $ 35,573
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable under lines of credit............................. $ 5,558 $ 430
Accounts payable.......................................... 3,676 2,538
Accrued expenses and other current liabilities............ 4,424 5,044
-------- --------
Total current liabilities......................... 13,658 8,012
Long-term portion of capital lease obligation............... 87 130
-------- --------
Total liabilities................................. 13,745 8,142
-------- --------
Stockholders' equity:
Common stock.............................................. 125 124
Additional paid-in capital................................ 64,816 64,699
Cumulative translation adjustment......................... 216 261
Accumulated deficit....................................... (39,781) (37,653)
-------- --------
Total stockholders' equity........................ 25,376 27,431
-------- --------
$ 39,121 $ 35,573
======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 5
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (2,128) $ (7,753)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization.......................... 314 813
Allowance for doubtful accounts and sales return
allowances............................................ (229) 141
Changes in operating assets and liabilities
Accounts Receivable....................................... (3,138) (1,827)
Inventory................................................. (1,034) (2,405)
Prepaid expenses and other assets......................... (590) 246
Accounts Payable and other current liabilities............ 617 (26)
-------- --------
Net cash used in operating activities............. (6,188) (10,811)
-------- --------
Cash flows used in investing activities -- purchases of
property and equipment.................................... (108) (30)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 118 99
Borrowings under lines of credit.......................... 21,308 4,484
Repayments of notes payable............................... (16,180) (1,244)
Repayment of capital lease financing...................... (147) (40)
-------- --------
Net cash provided by financing activities......... 5,099 3,299
-------- --------
Effect of exchange rates on cash and cash equivalents....... (79) 80
-------- --------
Net decrease in cash and cash equivalents................... (1,276) (7,462)
Cash and cash equivalents at beginning of period............ 12,627 17,569
-------- --------
Cash and cash equivalents at end of period.................. $ 11,351 $ 10,107
======== ========
</TABLE>
See accompanying notes.
3
<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, 2000
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 ("SEC"), 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 included in the annual report on Form 10-K of Tegal Corporation
(the "Company") for the year ended March 31, 2000. The results of operations for
the three and six months ended September 30, 2000 are not necessarily indicative
of results to be expected for the entire year.
2. INVENTORIES:
Inventories consisted of:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
<S> <C> <C>
Raw materials........................................ $ 2,909 $ 2,579
Work in progress..................................... 1,477 633
Finished goods and spares............................ 10,227 10,049
------- -------
$14,613 $13,261
======= =======
</TABLE>
3. NET LOSS PER COMMON SHARE:
Basic Earnings Per Share (EPS) is calculated by dividing net profit (loss)
for the period by the weighted average common shares outstanding for that
period. Diluted EPS takes into account the number of additional common shares
that would have been outstanding if the dilutive potential common shares had
been issued.
The following is a reconciliation between the number of shares used in
calculating the basic and diluted EPS:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares used to compute basic EPS........ 12,489 10,761 12,471 10,744
Add effect of dilutive securities:
Shares issuable under stock options... 891 -- -- --
Shares issuable under warrants........ 6 -- -- --
------ ------ ------ ------
Shares used to compute diluted EPS.... 13,386 10,761 12,471 10,744
====== ====== ====== ======
</TABLE>
Common stock equivalents for the three months ended September 30, 1999 and
the six months ended September 30, 2000 and September 30, 1999 were 352,710 and
837,165 and 407,898, respectively, and have been excluded from shares used in
calculating diluted loss per share because their effect would be antidilutive.
4. INCOME TAX EXPENSE:
We did not record a provision for federal or state income tax for the six
month periods ended September 30, 2000 and 1999, respectively, because we have
recorded a net loss before taxes for those periods.
4
<PAGE> 7
TEGAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
We 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"). 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 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 derivatives. Adopting the provisions of SFAS
133 are not expected to have a material effect on our consolidated financial
statements, which will be effective for Tegal's fiscal year ending March 31,
2002.
In December 1999, the Securities and Exchange Commission ("SEC") issued a
draft Staff Accounting Bulletin No. 101 ("SAB"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles ("GAAP") to revenue recognition in
financial statements. We will be required to adopt SAB 101 in the quarter ending
March 31, 2001 and are currently evaluating its impact on its financial
statements and related disclosures.
6. ROYALTY REVENUE:
We recognized $0.5M royalty revenue in the quarter ended September 30,
2000, upon approval of this commercial transaction by the court between us and
the party that infringed upon our patent rights. Additionally, as a subsequent
event, on October 27, 2000, we completed an agreement on a patent infringement
matter and received a cash payment of $350,000.
7. LINES OF CREDIT:
At September 30, 2000, we had borrowed approximately $5.0 million under our
domestic line of credit secured by substantially all of our assets which is
further limited by the amount of accounts receivable and inventory on the
balance sheet. The facility has a maximum borrowing capacity of $10.0 million,
is available until April 30, 2003 and bears interest at prime plus 1.5 percent
or 11 percent as of September 30, 2000. In addition to the foregoing facility,
as of September 30, 2000, our Japanese subsidiary had available a 404 million
Yen (approximately $3.8 million at exchange rates prevailing on September 30,
2000) unused portion of two Japanese bank lines of credit totaling 450 million
Yen (approximately $4.2 million at exchange rates prevailing on September 30,
2000) secured by Japanese customer promissory notes held by such subsidiary in
advance of payment on customers' accounts receivable. The two Japanese bank
lines bear interest at Japanese prime (1.5 percent as of September 30, 2000)
plus 0.25 percent and 0.625 percent, respectively.
5
<PAGE> 8
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information 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 our products, our
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 cyclicality of the semiconductor
industry, 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 our SEC reports. For further
information, refer to the business description and risk factors sections
included in our Form 10-K for the year ended March 31, 2000, and the risk
factors section included in this Form 10-Q (Part II, Item 5) as filed with the
SEC.
RESULTS OF OPERATIONS
Tegal 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, telecommunications equipment, and small flat panel
displays.
The following table sets forth certain financial items as a percentage of
revenue for the three periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue..................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of sales............................... 57.7 67.3 57.7 67.5
----- ----- ----- -----
Gross profit........................... 42.3 32.7 42.3 32.5
----- ----- ----- -----
Operating expenses:
Research and development.................. 17.4 53.1 22.8 45.1
Sales and marketing....................... 10.0 26.0 12.1 21.3
General and administrative................ 13.9 40.9 18.0 37.2
----- ----- ----- -----
Total operating expenses.......... 41.3 120.0 52.9 103.6
----- ----- ----- -----
Operating profit (loss)..................... 1.0 (87.3) (10.6) (71.1)
Other income, net........................... 0.2 2.4 0.5 2.8
----- ----- ----- -----
Net profit (loss)...................... (1.2) (84.9) (10.2) (68.3)
===== ===== ===== =====
</TABLE>
Revenue. Revenue for the three and six months ended September 30, 2000 was
$13.3 million and $21.0 million respectively, up 282% and 185% over the
comparable period in 1999. The increase for the three months ended September 30,
2000 was principally due to the sale of 14 additional 900 series systems, one
additional 6500 series system over the same period in the prior year and a
royalty payment from TEL in connection with the legal proceedings. The increase
for the six months ended September 30, 2000 was principally due to the sale of
30 additional 900 series systems over the same period in the prior year.
Revenue from spare parts and service sales was $4.4 and $7.9 million for
the three and six months period ended September 30, 2000, up from $3.2 million
and $6.7 million for the three and six months period ended September 30, 1999,
which we believe is a result of customers' increased utilization of Tegal's etch
systems.
International sales as a percentage of the Company's revenue was
approximately 46.9% and 55.3% for the three months and 55.1% and 64.9% for the
six months ended September 30, 2000 and 1999, respectively. The Company believes
that international sales will continue to represent a significant portion of its
revenue.
6
<PAGE> 9
Gross profit. Gross profit as a percentage of revenue (gross margin) was
42.3% and 32.7% for the three months and 42.3% and 32.5% for the six months
ended September 30, 2000 and 1999, respectively. The increase in gross margin
for the three and six months ended September 30, 2000, compared to the same
period in the prior year was principally attributable to an improved gross
margin on systems due to an improved product mix and to increased absorption of
fixed expenses on higher production volume.
Research and development. Research and development expenses consist
primarily of salaries, prototype material and other costs associated with our
ongoing systems and process technology development, applications and field
process support efforts. Research and development expenses were $2.3 million and
$2.5 million for the three months and $4.8 million and $5.1 million for the six
months ended September 30, 2000 and 1999, respectively, representing 17.4% and
53.1%, for the three months and 22.8% and 45.1% for the six months of revenue,
respectively.
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 $1.3 million
$1.2 million for the three months and $2.5 million and $2.4 million for the six
months ended September 30, 2000 and 1999, representing 10.0% and 26.0% for the
three months and 12.1% and 21.3% for the six months 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 $1.8 million and $1.9 million for the three months and $3.8 and
$4.2 million for the six months ended September 30, 2000 and 1999, respectively,
representing 13.9% and 40.9% for the three months and 18.0% and 37.2% for the
six months of revenue, respectively. The slight decrease in general and
administrative spending for the three and six months period ended September 30,
2000, compared to the same period in the prior year was primarily attributable
to our incurring $0.4 million less in legal expenses in the six months ended
September 30, 2000 in connection with our patent litigation.
Other income, net. Other income, net consists primarily of interest income
and expense on outstanding cash balances and lines of credit, and gains and
losses on foreign exchange.
We did not record a provision for federal or state income tax for the six
month periods ended September 30, 2000 and 1999, respectively, because we have
recorded a net loss before taxes for those periods. We 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.
LIQUIDITY AND CAPITAL RESOURCES
For the six months period ended September 30, 2000, we financed our
operations through the use of outstanding cash balances and borrowings against
our promissory note borrowing facilities in Japan, and our domestic line of
credit. For the six months period ended September 30, 1999, we financed our
operations through the use of outstanding cash balances and the promissory note
borrowing facilities in Japan.
Net cash used in operations was $6.2 million during the six months ended
September 30, 2000, due principally to a net loss of $1.8 million after
adjusting for depreciation, an increase in inventory, accounts receivable, and
prepaid expenses. Net cash used in operations was $10.8 million for the six
months ended September 30, 1999, due principally to a net loss of $6.9 million
after adjusting for depreciation, an increase in accounts receivable and
inventory and a decrease in prepaid expenses.
Net capital expenditures totaled approximately $108,000 and $30,000 for the
six months ended September 30, 2000 and 1999 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 $5.1 million and $3.3
million for the six months ended September 30, 2000 and 1999, respectively. The
increase for the six months ended September 30, 2000 was
7
<PAGE> 10
due principally to increased borrowing against our domestic line of credit
offset, in part, by repayment of capital lease obligations. The increase for the
six months ended September 30, 1999 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 September 30, 2000, we had approximately $11.4 million of cash and
cash equivalents. In addition to cash and cash equivalents, our other principal
sources of liquidity consisted of the unused portions of several bank borrowing
facilities.
We believe that anticipated cash flow from operations, funds available
under our lines of credit and existing cash and cash equivalent balances will be
sufficient to meet our cash requirements for the next twelve months. Rapid
revenue growth may require that we seek additional equity or debt capital to
meet our working capital needs beyond the next twelve months. See Item 5 -- Risk
Factors -- our future capital needs may exceed our ability to raise capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment portfolio of securities 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. We attempt to limit this exposure by
investing primarily in short-term securities having a maturity of three months
or less.
We have foreign subsidiaries which operate and sell our products in various
global markets. As a result, our cash flow and earnings are exposed to
fluctuations in interest and foreign currency exchange rates. We attempt 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.
There have been no material changes regarding market risk since the disclosures
made in the Company's Form 10-K/A for the year ended March 31, 2000.
8
<PAGE> 11
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 17, 1998, we 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 65DI and 85DI
IEM etch equipment infringe certain of our patents. The suit was tried to the
court in May 1999, and on August 31, 1999, the court found both patents-in-suit
valid, and found that TEL had willfully infringed Tegal's '223 dual-frequency
triode etcher patent. The court enjoined TEL from further sales or service of
its IEM etchers. In addition, the court ordered TEL to pay attorney's fees and
court costs to Tegal. TEL has filed an appeal of the court's ruling. A follow-on
action against TEL concerning a later generation of IEM equipment is pending in
the same court. The court granted summary judgment on noninfringment for TEL in
this case on August 7, 2000 and entered final judgment on September 11, 2000.
The case is currently on appeal to the Federal Circuit Court of Appeals. We can
not assure you of the outcome of the appeal or the follow-on action or of the
effect of any such outcome on our business.
On September 1, 1999, we filed a patent infringement action against Lam
Research Corporation ("Lam"), asserting infringement of the '223 patent and a
second, related patent. That suit was also filed in the Eastern District of
Virginia, Richmond Division. We are seeking injunctive relief barring Lam from
manufacturing, selling and supporting products that incorporate the Company's
patented technology. We are further seeking enhanced damages for willful
infringement of our patents. Lam filed a motion to dismiss that action for lack
of jurisdiction, or in the alternative to transfer that action to the Northern
District of California. On December 7, 1999, the motion to transfer was granted.
The case has since been transferred to the Northern District of California.
Discovery has begun in that action. We can not assure you of the outcome of that
lawsuit or of the effect of any such outcome on our business.
As is typical in the semiconductor industry, we have received notices from
time to time from third parties alleging infringement claims. In July 1991, we
were advised by General Signal Corporation ("GSC") that we may need a license
under certain U.S. patents owned by GSC relating to "cluster tool" equipment.
Our 6500 series systems are generally configured with multiple process chambers
and, therefore, may be deemed "cluster tool" equipment. A number of companies
which were contacted by GSC with regard to licensing these patents formed an
ad-hoc committee to investigate the validity of the GSC patents. As a result of
such investigation, in November 1992 the committee members, including Tegal,
jointly notified GSC that they believe the subject patents are invalid and that,
accordingly, no license is necessary. In the fall of 1994, GSC filed suit
against Applied Materials, a non-member of the ad-hoc investigative committee,
alleging infringement of such patents. We believe that GSC's dispute with
Applied Materials has subsequently been settled. To date, GSC has taken no
action against us in connection with the licensing of these patents. We further
believe that GSC filed for bankruptcy protection and has since been dissolved.
Nevertheless, we can not assure you that GSC or its successors will not take any
such action in the future or, if any such action is taken, what the outcome of
such action may be.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Stockholders' Meeting held on September 19, 2000,
the following individuals were re-elected to the Board of Directors:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
---------- --------------
<S> <C> <C>
Michael L. Parodi................................. 10,599,474 891,713
Jeffrey M. Krauss................................. 10,589,526 901,661
Thomas R. Mika.................................... 10,596,674 894,513
Edward A. Dohring................................. 10,601,314 889,873
</TABLE>
9
<PAGE> 12
The proposal to adopt an amendment to the Company's 1998 Equity
Participation Plan to increase the maximum authorized shares from 900,000 to
1,900,000 shares was approved by the stockholders as follows:
<TABLE>
<S> <C>
Votes For................................................... 2,548,593
Votes Against............................................... 1,860,942
Abstentions................................................. 37,165
Broker Non-Votes............................................ 7,044,487
</TABLE>
The proposal to adopt an amendment to the Company's stock option plan for
Outside Directors to increase the maximum authorized shares from 300,000 to
600,000 shares was approved by the stockholders as follows:
<TABLE>
<S> <C>
Votes For................................................... 2,519,342
Votes Against............................................... 1,888,560
Abstentions................................................. 38,798
Broker Non-Votes............................................ 7,044,487
</TABLE>
ITEM 5. RISK FACTORS
THE SEMICONDUCTOR INDUSTRY IS CYCLICAL AND MAY EXPERIENCE PERIODIC DOWNTURNS
WHICH MAY NEGATIVELY AFFECT CUSTOMER DEMAND FOR OUR PRODUCTS AND RESULT IN
LOSSES SUCH AS THOSE WE RECENTLY EXPERIENCED.
Our business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and systems utilizing integrated circuits. The
semiconductor industry is highly cyclical and historically has experienced
periodic downturns, which often have had a material adverse effect on the
semiconductor industry's demand for semiconductor capital equipment, including
etch systems manufactured by us. The semiconductor industry experienced such a
slowdown from 1996 through mid 1999. Prior semiconductor industry downturns have
adversely affected our revenue, gross margins and results of operations. The
most recent downturn resulted in our reporting losses for each of the past three
fiscal years. In addition, the need for continued investment in research and
development, substantial capital equipment requirements, and extensive ongoing
customer service and support requirements worldwide will continue to limit our
ability to reduce expenses in response to any such downturn or slowdown in the
future. Our revenue, gross margin and results of operations may be materially
adversely affected by future downturns or slowdowns in the rate of capital
investment in the semiconductor industry. Moreover, although the semiconductor
industry may experience growth that causes significant growth in the
semiconductor capital equipment industry, there can be no assurance that such
growth can be sustained or that we will be positioned to benefit from such
growth.
OUR COMPETITORS HAVE GREATER FINANCIAL RESOURCES AND GREATER NAME RECOGNITION
THAN WE DO AND THEREFORE MAY COMPETE MORE SUCCESSFULLY IN THE CRITICAL ETCH
INDUSTRY THAN WE CAN.
We believe that to be competitive, we will require significant financial
resources in order to offer a broad range of systems, to maintain customer
service and support centers worldwide and to invest in research and development.
Many of our existing and potential competitors, including, among others, Applied
Materials, Inc., Lam Research Corporation and Tokyo Electron Limited, have
substantially greater financial resources, more extensive engineering,
manufacturing, marketing and customer service and support capabilities, larger
installed bases of current generation etch and other production equipment and
broader process equipment offerings as well as greater name recognition than we
do. We expect our competitors to continue to improve the design and performance
of their current systems and processes and to introduce new systems and
processes with improved price and performance characteristics. We cannot assure
you that we will be able to compete successfully in the United States or
worldwide.
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<PAGE> 13
WE DEPEND ON SALES OF OUR 6500 SERIES SYSTEMS IN CRITICAL ETCH MARKETS THAT MAY
NOT FULLY ADOPT OUR PRODUCT FOR PRODUCTION USE.
We have designed our 6500 series systems, our generation of critical etch
systems, for sub-0.35 micron critical etch applications in emerging films,
polysilicon and metal which we believe to be the leading edge of critical etch
applications. Revenues from the sale of 6500 series systems has accounted for
22% and 19% of total revenues in fiscal 1999 and 2000, respectively. Our 6500
series systems which have been installed are currently being used primarily for
research and development activities or low volume production. For the 6500
series systems to achieve full market adoption, our customers must utilize these
systems for volume production.
Because we must make new product development commitments well in advance of
sales, new product decisions must anticipate both the future requirements for
etch processes needed by semiconductor manufacturers and the equipment required
to address such applications. There can be no assurance that the market for
critical etch emerging film, polysilicon or metal etch systems will develop as
quickly or to the degree we expect. Our 6500 series systems may not achieve full
market adoption. In addition, the selling cycles of these new systems are
typically lengthy.
In connection with the development and production of the 6500 series, we
have increased our operating expenses and are likely to invest in increased
inventory levels in the future. The failure to achieve market acceptance of this
generation of systems in a timely manner could result in, among other things, an
increase in operating expenses and inventory obsolescence without corresponding
sales, any of which could have a material adverse effect on our business,
financial condition and results of operations.
If the 6500 series does not achieve significant sales or volume production
due to a lack of full customer adoption, inability to correct technical,
manufacturing or other difficulties which may develop with this series, or for
any other reason, our business, financial condition and results of operations
would be materially adversely affected.
OUR POTENTIAL CUSTOMERS MAY NOT ADOPT OUR PRODUCTS BECAUSE A SUBSTANTIAL
INVESTMENT IS REQUIRED TO INSTALL AND USE OUR PRODUCTS.
A substantial investment is required to install and integrate capital
equipment into a semiconductor production line. We believe that once a device
manufacturer has selected a particular vendor's capital equipment, that
manufacturer generally relies upon that vendor's equipment for that specific
production line application and, to the extent possible, subsequent generations
of that vendor's systems. Accordingly, it may be extremely difficult to achieve
significant sales to a particular customer once another vendor's capital
equipment has been selected by that customer unless there are compelling reasons
to do so, such as significant performance or cost advantages. In addition,
certain of our competitors may seek to sell, as an attractively priced package,
etch equipment together with other process equipment, such as deposition
equipment. Furthermore, some semiconductor manufacturers have already made
initial buying decisions for the next generation of sub-0.35 micron etch
requirements. Any failure to gain access and achieve sales to new customers will
adversely affect the successful commercial adoption of our 6500 series systems
and could have a material adverse effect on us.
OUR QUARTERLY OPERATING RESULTS MAY CONTINUE TO FLUCTUATE.
Our revenue and operating results have fluctuated and are likely to
continue to fluctuate significantly from quarter to quarter, and there can be no
assurance as to future profitability.
Our 900 series etch systems typically sell for prices ranging between
$250,000 and $600,000, while prices of our 6500 series critical etch systems
typically range between $1.8 million and $3.0 million. To the extent we are
successful in selling our 6500 series systems, the sale of a small number of
these systems will probably account for a substantial portion of revenue in
future quarters, and a transaction for a single system could have a substantial
impact on revenue and gross margin for a given quarter.
11
<PAGE> 14
Our backlog at the beginning of each quarter does not normally include all
systems sales needed to achieve planned revenue for the quarter. Consequently,
we depend on obtaining orders for shipment within a particular quarter to
achieve our revenue objectives for that period. Because we build a portion
(typically
25 - 35 percent) of our systems according to forecast, the absence of
significant backlog for an extended period of time could hinder our ability to
plan expense, production and inventory levels, which could materially adversely
affect our operating results. Furthermore, a substantial portion of our net
revenue has historically been realized near the end of the quarter. Accordingly,
the failure to receive anticipated orders or delays in shipments near the end of
a quarter, due, for example, to unanticipated customer delays, cancellations or
manufacturing difficulties, may cause quarterly net revenue to fall
significantly short of our objectives, which could materially adversely affect
our operating results.
The timing of new systems and technology announcements and releases by us
and others may also contribute to fluctuations in quarterly operating results,
including cases in which new systems or technology offerings cause customers to
defer ordering systems from our existing product lines. Our revenue and
operating results may also fluctuate due to the timing and mix of systems sold,
the volume of service provided and spare parts delivered in a particular quarter
and changes in pricing by us, our competitors or suppliers. The impact of these
and other factors on our revenue and operating results in any future periods is,
and will continue to be, difficult for us to forecast.
The need for continued investment in research and development, for capital
equipment requirements and for extensive ongoing customer service and support
capability worldwide result in significant fixed costs which will be difficult
to reduce in the event that we do not meet our sales objectives. Our expense
levels are based, in part, on expectations of future revenue. If revenue in a
particular quarter does not meet expectations, fixed operating expenses will
adversely affect results of operations. A variety of factors influence the level
of revenue in a particular quarter. Those factors include the timing and mix of
systems sales, the introduction or announcement of new systems by us or our
competitors, management decisions to commence or discontinue product lines, our
ability to design, introduce and manufacture new systems on a timely basis, the
timing of research and development expenditures and expenses attendant to the
further development of marketing, process support and service capabilities,
specific economic conditions in the semiconductor industry or major global
semiconductor markets, general economic conditions and exchange rate
fluctuations. The impact of these and other factors on our revenue and operating
results in any future periods are, and will continue to be, difficult for us to
forecast.
BECAUSE TECHNOLOGY CHANGES RAPIDLY, WE MAY NOT BE ABLE TO INTRODUCE OUR PRODUCTS
IN A TIMELY ENOUGH FASHION.
The semiconductor manufacturing industry is subject to rapid technological
change and new system introductions and enhancements. We believe that our future
success depends on our ability to continue to enhance our existing systems and
their process capabilities, and to develop and manufacture in a timely manner
new systems with improved process capabilities. The industry also is subject to
fundamental changes in equipment requirements, such as the prior shift from six
inch wafer equipment to eight inch wafer equipment and the shift from eight inch
wafer equipment to twelve inch wafer equipment which is just now beginning.
We must manage system transitions successfully, as introductions of new
systems could adversely affect sales of existing systems, including our 6500
series. There can be no assurance that we will be successful in the introduction
and volume manufacture of new systems or that we will be able to develop and
introduce, in a timely manner, new systems or enhancements to our existing
systems and processes which satisfy customer needs or achieve market adoption.
Our failure to accomplish any of the above would adversely affect our business,
financial condition and results of operations. In addition, we may incur
substantial unanticipated costs to ensure product functionality and reliability
early in our products' life cycles. If new products have quality or reliability
problems, we could experience reduced orders, delays in collecting accounts
receivable, higher manufacturing costs, and additional service and warranty
expenses, any of which could have a material adverse effect on our business,
financial condition and operating results.
12
<PAGE> 15
OUR SALES CYCLES ARE LENGTHY, EXPOSING US TO THE RISKS OF INVENTORY OBSOLESCENCE
AND FLUCTUATIONS IN OPERATING RESULTS.
Sales of our systems depend, in significant part, upon the decision of a
prospective customer to add new manufacturing capacity or to expand existing
manufacturing capacity, both of which typically involve a significant capital
commitment. We often experience delays in finalizing system sales following
initial system qualification while the customer evaluates and receives approvals
for the purchase of our systems and completes a new or expanded facility. Due to
these and other factors, our systems typically have a lengthy sales cycle (often
12 to 18 months in the case of critical etch systems) during which we may expend
substantial funds and management effort. Lengthy sales cycles subject us to a
number of significant risks, including inventory obsolescence and fluctuations
in operating results over which we have little or no control.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR OBTAIN LICENSES FOR
THIRD PARTIES' INTELLECTUAL PROPERTY AND THEREFORE WE MAY BE EXPOSED TO
LIABILITY FOR INFRINGEMENT OR THE RISK THAT OUR OPERATIONS MAY BE ADVERSELY
AFFECTED.
Although we attempt to protect our intellectual property rights through
patents, copyrights, trade secrets and other measures, we may not be able to
protect our technology adequately and competitors may be able to develop similar
technology independently. Additionally, patent applications that we may file may
not be issued and foreign intellectual property laws may not protect our
intellectual property rights. There is also a risk that patents licensed by or
issued to us will be challenged, invalidated or circumvented and that the rights
granted thereunder will not provide competitive advantages to us. Furthermore,
others may independently develop similar systems, duplicate our systems or
design around the patents licensed by or issued to us.
Although there are currently no pending claims or lawsuits by or against us
regarding possible infringement claims, other than those matters disclosed under
Part II, Item 1 -- Legal Proceedings, infringement claims by other third
parties, or claims for indemnification resulting from infringement claims, may
be asserted in the future and such assertions, if proven to be true, may
materially adversely affect us. In the future, additional litigation may be
necessary to enforce patents issued or exclusively licensed to us, to protect
trade secrets or know-how exclusively licensed to or owned by us or to defend us
against claimed infringement of the rights of others and to determine the scope
and validity of the proprietary rights of others. Existing litigation and any
future litigation could result in substantial cost and diversion of effort by
us, which by itself could have a material adverse effect on our financial
condition and operating results. Further, adverse determinations in such
litigation could result in our loss of proprietary rights, subject us to
significant liabilities to third parties, require us to seek licenses from third
parties or prevent us from manufacturing or selling our systems, any of which
could have a material adverse effect on us. In addition, licenses under third
parties' intellectual property rights may not be available on reasonable terms,
if at all. See Part II, Item 1 -- Legal Proceedings.
OUR FUTURE CAPITAL NEEDS MAY EXCEED OUR ABILITY TO RAISE CAPITAL.
The development, manufacture and marketing of etch systems are highly
capital intensive. In order to be competitive, we must continue to make
significant expenditures for, among other things, capital equipment and the
manufacture of evaluation and demonstration unit inventory for our 6500 series
etch systems. We believe that our existing cash balances, anticipated cash flow
from operations and funds available under our existing lines of credit will
satisfy our financing requirements for the next twelve months. Rapid revenue
growth may require that we seek additional capital to meet our working capital
needs beyond the next 12 months. Likewise, a sharp decline in future orders and
revenues might have a similar effect should we be unable to reduce our expenses
to the degree necessary to avoid incurring losses. To the extent that such
financial resources are insufficient to fund our activities, additional funds
will be required. There can be no assurance that additional financing will be
available on reasonable terms or at all. To the extent that additional capital
is raised through the sale of additional equity or convertible debt securities,
the issuance of such securities could result in additional dilution to our
stockholders.
13
<PAGE> 16
OUR CUSTOMERS ARE CONCENTRATED AND THEREFORE THE LOSS OF A SIGNIFICANT CUSTOMER
MAY HARM OUR BUSINESS.
Tegal's top five customers accounted for 53.1%, 66.4% and 61.2% of our
systems revenues in fiscal, 2000, 1999 and 1998, respectively. Three customers
accounted for more than 10% of net systems sales in fiscal 2000. Although the
composition of the group comprising our largest customers may vary from year to
year, the loss of a significant customer or any reduction in orders by any
significant customer, including reductions due to market, economic or
competitive conditions in the semiconductor manufacturing industry, may have a
material adverse effect on our business, financial condition and results of
operations. Our ability to increase our sales in the future will depend, in
part, upon our ability to obtain orders from new customers as well as the
financial condition and success of our existing customers and the general
economy, which is largely beyond our ability to control.
WE ARE EXPOSED TO ADDITIONAL RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS.
International sales accounted for 59%, 72% and 61% of total revenue for
fiscal 2000, 1999 and 1998, respectively. International sales are subject to
certain risks, including the imposition of government controls, fluctuations in
the U.S. dollar (which could increase the sales price in local currencies of the
Company's systems in foreign markets), changes in export license and other
regulatory requirements, tariffs and other market barriers, political and
economic instability, potential hostilities, restrictions on the export or
import of technology, difficulties in accounts receivable collection,
difficulties in managing distributors or representatives, difficulties in
staffing and managing international operations and potentially adverse tax
consequences. There can be no assurance that any of these factors will not have
a material adverse effect on us.
Sales of our systems in certain countries are billed in local currency, and
we have two lines of credit denominated in Japanese Yen. We generally attempt to
offset a portion of our U.S. dollar denominated balance sheet exposures subject
to foreign exchange rate remeasurement each period held by our foreign
subsidiaries whose books are denominated in currencies other than U.S. dollars
by purchasing currency options and forward currency contracts for future
delivery. There can be no assurance that our future results of operations will
not be adversely affected by foreign currency fluctuations. In addition, the
laws of certain countries in which our products are sold may not provide our
products and intellectual property rights with the same degree of protection as
the laws of the United States.
OUR STOCKHOLDER RIGHTS PLAN MAY DETER TAKEOVER ATTEMPTS.
Under the terms of our stockholder rights plan, our Board of Directors is
authorized to issue preferred stock without further stockholder approval or to
exercise the anti-takeover provisions of our stockholder rights plan in the
event of an unsolicited attempt to assume control over the Company. Should our
Board of Directors exercise such rights, such action could have the effect of
delaying, deferring or preventing a change in control of Tegal.
OUR STOCK PRICE IS VOLATILE AND COULD RESULT IN A MATERIAL DECLINE IN THE VALUE
OF YOUR INVESTMENT IN TEGAL.
We believe that factors such as announcements of developments related to
our business, fluctuations in our operating results, sales of our common stock
into the market place, failure to meet or changes in analysts' expectations,
general conditions in the semiconductor industry or the worldwide economy,
announcements of technological innovations or new products or enhancements by us
or our competitors, developments in patents or other intellectual property
rights, developments in our relationships with our customers and suppliers,
natural disasters and outbreaks of hostilities could cause the price of our
common stock to fluctuate substantially. In addition, in recent years the stock
market in general, and the market for shares of small capitalization stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. Furthermore, the
Securities and Exchange Commission is currently directing that semiconductor
capital equipment companies revise their revenue recognition practices to record
revenue upon customer acceptance rather than upon shipment or delivery of
systems, as is the current prevailing practice. As currently intended, this
application of Staff Accounting Bulletin (SAB) 101 will go into effect no later
than the fourth fiscal quarter after a company's year end which occurs after
December 15, 1999. As a result, SAB 101 will apply to our fourth quarter ending
March 31, 2001.
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<PAGE> 17
In this case, our reported revenue and earnings for the quarter ending March 31,
2001 may be less than the revenues and earnings which we would otherwise report
due to timing differences between system shipment and customer acceptance. There
can be no assurance that the market price of our common stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to our performance.
DOMESTIC AND INTERNATIONAL ECONOMIC CONDITIONS MAY EXPOSE OUR BUSINESS TO THE
RISK OF LIMITED DEMAND FOR OUR PRODUCTS.
Our business is subject to general economic conditions, both in the United
States and abroad. A significant decline in economic conditions in any
significant geographic area could have a material adverse effect on us. For
example, in the last two years an economic crisis in Asia has led to weak demand
for our products in certain Asian economies -- notably South Korea. Such
economic events may continue to adversely affect our results of operations, and
additional economic events of a similar nature could, in the future, affect
demand for our products, which could have a material adverse effect on our
business, financial condition and operating results.
POTENTIAL DISRUPTION OF OUR SUPPLY OF MATERIALS REQUIRED TO BUILD OUR SYSTEMS
COULD HAVE A NEGATIVE EFFECT ON OUR OPERATIONS AND DAMAGE OUR CUSTOMER
RELATIONSHIPS.
Material delays have not been significant in recent years. Nevertheless, we
procure certain components and sub-assemblies included in our systems from a
limited group of suppliers, and occasionally from a single source supplier. In
particular, we depend on MECS Corporation, a robotic equipment supplier, as the
sole source for the robotic arm used in all of our 6500 series systems. We
currently have no existing supply contract with MECS Corporation, and we
currently purchase all robotic assemblies from MECS Corporation on a purchase
order basis. Disruption or termination of certain of these sources, including
our robotic sub-assembly source, could have an adverse effect on our operations.
While we believe that alternative sources could be obtained and qualified to
supply these components or sub-assemblies, a prolonged inability to obtain such
components or sub-assemblies, receipt of defective components or sub-assemblies,
as well as difficulties or delays in shifting to alternative sources, could have
a material adverse effect on our operating results and could damage our
relationships with our customers.
ANY FAILURE BY US TO COMPLY WITH ENVIRONMENTAL REGULATIONS IMPOSED ON US COULD
SUBJECT US TO FUTURE LIABILITIES.
We are subject to a variety of governmental regulations related to the use,
storage, handling, discharge or disposal of toxic, volatile or otherwise
hazardous chemicals used in our manufacturing process. We believe that we are
currently in compliance in all material respects with these regulations and that
we have obtained all necessary environmental permits generally relating to the
discharge of hazardous wastes to conduct our business. Nevertheless, our failure
to comply with present or future regulations could result in fines being imposed
on us, suspension of production, alteration of our manufacturing processes, or
cessation of our operations. These environmental regulations could require us to
acquire expensive remediation equipment or to incur other expenses to comply
with environmental regulations. Any failure by us to control the use, disposal
or storage of, or adequately restrict the discharge of, hazardous substances
could subject us to future liabilities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are referenced or included in this report:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
15
<PAGE> 18
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.
TEGAL CORPORATION
(Registrant)
/s/ PAUL N. ERICKSON
--------------------------------------
Paul N. Erickson
Chief Financial Officer
(Principal Financial Officer)
/s/ KATHY PETRINI
--------------------------------------
Kathy Petrini
Corporate Controller, Treasurer and
Secretary
Dated: November 13, 2000
16
<PAGE> 19
EXHIBIT INDEX TO TEGAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
39
