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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 DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 01-26824
TEGAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0370244
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2201 SOUTH MCDOWELL BLVD. P.O. BOX 6020
PETALUMA, CALIFORNIA 94955-6020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER (707) 763-5600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of December 31, 1996, there were 10,113,462 shares of the registrant's
Common Stock outstanding.
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TEGAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations -- for the three and nine
months ended December 31, 1996 and 1995....................................... 2
Condensed Consolidated Balance Sheets, as of December 31, 1996 and March 31,
1996.......................................................................... 3
Condensed Consolidated Statements of Cash Flows -- for the nine months ended
December 31, 1996 and 1995.................................................... 4
Notes to Condensed Consolidated Financial Statements.......................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................... 6
PART II. OTHER INFORMATION
ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 9
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K.............................................. 9
SIGNATURE..................................................................... 10
1
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)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
Revenue........................................... $13,120 $17,176 $44,129 $44,535
Cost of sales..................................... 7,750 10,290 24,159 24,009
------- ------- ------- -------
Gross margin.................................... 5,370 6,886 19,970 20,526
Operating expenses:
Research and development........................ 2,557 2,526 7,783 7,266
Marketing and selling........................... 1,040 1,738 4,545 4,925
General and administrative...................... 1,271 1,192 4,698 3,605
------- ------- ------- -------
Total operating expenses................ 4,868 5,456 17,026 15,796
------- ------- ------- -------
Operating income........................ 502 1,430 2,944 4,730
Other income (expense), net....................... 206 184 644 (721)
------- ------- ------- -------
Income before income taxes........................ 708 1,614 3,588 4,009
Income taxes...................................... 177 162 897 409
------- ------- ------- -------
Net income........................................ $ 531 $ 1,452 $ 2,691 $ 3,600
======= ======= ======= =======
Net income per common share....................... $ 0.05 $ 0.15 $ 0.25 $ 0.43
======= ======= ======= =======
Shares used in per share computation.............. 10,640 9,805 10,655 8,308
======= ======= ======= =======
See accompanying notes
2
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 30,648 $23,283
Receivables, net................................................... 9,067 16,191
Inventories........................................................ 13,570 16,947
Prepaid expenses and other current assets.......................... 555 1,095
------- -------
Total current assets....................................... 53,840 57,516
Property and equipment, net.......................................... 5,607 6,027
Other assets, net.................................................... 170 229
------- -------
$ 59,617 $63,772
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable...................................................... $ 1,028 $ 915
Accounts payable................................................... 1,410 4,700
Accrued expenses and other current liabilities..................... 4,552 6,358
Product warranty................................................... 2,401 2,586
------- -------
Total current liabilities.................................. 9,391 14,559
Motorola credit liability............................................ 0 1,587
------- -------
Total liabilities.......................................... 9,391 16,146
------- -------
Stockholders' equity:
Common stock....................................................... 101 101
Additional paid-in capital......................................... 54,477 54,455
Cumulative translation adjustment.................................. 502 615
Accumulated deficit................................................ (4,854) (7,545)
------- -------
Total stockholders' equity................................. 50,226 47,626
------- -------
$ 59,617 $63,772
======= =======
See accompanying notes
3
TEGAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1996 1995
------- -------
Cash flows from operating activities:
Net income............................................................. $ 2,691 $ 3,600
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization..................................... 1,817 1,016
Accretion of senior term loan..................................... -- 303
Purchase credit redemptions....................................... (1,587) (1,355)
Allowance for doubtful accounts and sales allowances.............. 305 16
Changes in operating assets and liabilities....................... 5,514 (3,443)
------- -------
Net cash provided by operations................................ 8,740 137
------- -------
Cash flows used in investing activities -- purchases of property and
equipment.............................................................. (1,397) (2,030)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock................................. 22 34,249
Borrowings (payments) under lines of credit............................ 114 (10,100)
------- -------
Net cash provided by financing activities...................... 136 24,149
------- -------
Effect of exchange rates on cash and cash equivalents.................... (114) (195)
------- -------
Net increase in cash and cash equivalents................................ 7,365 22,061
Cash and cash equivalents at beginning of period......................... 23,283 2,351
------- -------
Cash and cash equivalents at end of period............................... $30,648 $24,412
======= =======
See accompanying notes
4
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, 1996
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 Tegal's (the Company's) annual report on Form
10-K for the year ended March 31, 1996. The results of operations for the three
and nine months ended December 31, 1996 are not necessarily indicative of
results to be expected for the entire year.
2. INVENTORIES:
Inventories consisted of (in thousands):
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
Raw Materials.............................................. $ 3,164 $ 4,036
Work in Progress........................................... 2,016 3,173
Finished Goods and Spares.................................. 8,390 9,738
------- -------
$ 13,570 $16,947
======= =======
3. NET INCOME PER COMMON SHARE:
Net income per share is based on the weighted average number of shares of
common stock, common equivalent shares from the convertible preferred stock
using the "as if converted" method and dilutive common equivalent shares from
options and warrants outstanding during the period using the treasury stock
method.
4. INCOME TAX EXPENSE:
Income taxes as a percentage of income before income taxes were 25.0% and
10.0% for the three months and 25.0% and 10.2% for the nine months ended
December 31, 1996 and 1995, respectively. The effective tax rate in 1995 was
substantially below the federal statutory rate due to utilization of tax loss
carryforwards and a reduction in the valuation allowance.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information contained herein contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, which can
be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," or "continue" or the negative thereof or
other variations thereon or comparable terminology or which constitute projected
financial information. The following contains cautionary statements identifying
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
RESULTS OF OPERATIONS
Tegal Corporation designs, manufactures, markets and services plasma etch
systems used in the fabrication of integrated circuits.
The following table sets forth certain financial items as a percentage of
revenue for the three and nine month periods ended December 31, 1996 and 1995:
THREE MONTHS
ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------- -----------------
1996 1995 1996 1995
----- ----- ----- -----
Revenue....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 59.1 59.9 54.7 53.9
----- ----- ----- -----
Gross margin................................ 40.9 40.1 45.3 46.1
----- ----- ----- -----
Operating expenses:
Research and development.................... 19.5 14.7 17.6 16.3
Marketing and selling....................... 7.9 10.1 10.3 11.1
General and administrative.................. 9.7 7.0 10.7 8.1
----- ----- ----- -----
Total operating expenses............ 37.1 31.8 38.6 35.5
----- ----- ----- -----
Operating income.................... 3.8 8.3 6.7 10.6
Other income (expense), net................... 1.6 1.1 1.4 (1.6)
----- ----- ----- -----
Income before income taxes.................... 5.4 9.4 8.1 9.0
Income taxes.................................. 1.4 0.9 2.0 0.9
----- ----- ----- -----
Net income.................................... 4.0% 8.5% 6.1% 8.1%
===== ===== ===== =====
Revenue. Revenue for the three and nine months ended December 31, 1996 was
$13.1 million and $44.1 million respectively, down 23.6% and 0.9%, respectively,
over comparable periods in 1995. The decline in revenue for the three months
ended December 31, 1996 was principally due to a $3.8 million decline in non-
critical etch system sales which the Company believes resulted from customers'
decisions to curtail adding further production capacity in the face of excess
capacity in the semiconductor industry and a $0.7 million decline in spare parts
and service sales as customers reduced their spare parts inventories in response
to the current semiconductor industry slowdown. Revenues for the Company's 6500
series critical etch system increased $0.4 million for the three months ended
December 31, 1996 due to an increase in average selling prices and increased
$5.5 million for the nine months ended December 31, 1996 principally due to
increased unit sales over comparable periods in the prior year. The Company
believes that development of advanced semiconductor devices and their related
production processes that require 0.35 and 0.25 micron circuit width
capabilities may continue to support demand for its 6500 series critical etch
systems in spite of the continuing industry slowdown, since the development of
that capability is necessary for device manufacturers to produce the next
generation of advanced semiconductor devices. No assurance of such continued
demand can, however, be given.
6
International sales as a percentage of the Company's revenue accounted for
approximately 66.3% and 58.4% for the three months and 69.3% and 62.2% for the
nine months ended December 31, 1996 and 1995, respectively.
Gross margin. Gross margin was 40.9% and 40.1% for the three months and
45.3% and 46.1% for the nine months ended December 31, 1996 and 1995,
respectively. The slight increase in gross margin for the three months ended
December 31, 1996 resulted primarily from improved margins in the Company's
service business resulting from increased service revenue and improved field
service productivity, offset, in part by a decline in non-critical etch system
revenue which typically generates high gross margins and low absorption of
manufacturing overhead late in the period. The decline in gross margin for the
nine months ended December 31, 1996, resulted primarily from a change in the
sales mix toward sales of 6500 series systems, which currently carry lower gross
margins than the Company's non-critical etch systems.
The 6500 series systems have experienced, as is typical with recently
introduced products, high startup costs and low initial margins. The Company now
expects that these high startup costs on the 6500 series systems will continue
at least through calendar year 1997 until the substantially fixed manufacturing
overhead is absorbed over a larger production volume and the Company can obtain
larger vendor discounts on purchased components through volume purchases. There
can be no assurance that the Company's overall gross margins or gross margins on
its 6500 series systems will increase.
Research and development. Research and development expenses consist
primarily of salaries, prototype material and other costs associated with the
Company's ongoing systems and process technology development, applications and
field process support efforts. Research and development expenses were $2.6
million and $2.5 million for the three months ended December 31, 1996 and 1995,
respectively, and $7.8 million and $7.3 million for the nine months ended
December 31, 1996 and 1995, respectively, representing 19.5%, 14.7%, 17.6% and
16.3% of revenue, respectively. The increase in research and development
spending in the nine months ended December 31, 1996 compared to the comparable
period in the prior year was attributable to increased spending on salaries,
prototype material and support costs. This increase funded development of new
6500 series functions, running an increased number of customer wafer samples in
the Company's demonstration laboratory and design and test changes to the
Company's standard systems configurations called for by customers' special order
requirements.
Marketing and selling. Marketing and selling expenses consist primarily of
salaries, commissions, trade show promotion and travel and living expenses
associated with those functions. Marketing and selling expenses were $1.0
million and $1.7 million for the three months and $4.5 million and $4.9 million
for the nine months ended December 31, 1996 and 1995, respectively, representing
7.9%, 10.1%, 10.3% and 11.1% of revenue, respectively. The decline in marketing
and selling expenses for the three months ended December 31, 1996 was due
principally to reduced spending on sales commissions on a lower revenue base, an
increasing proportion of which were sales generated by the Company's direct
sales force whose commission rates are lower than those earned by outside sales
representatives.
General and administrative. General and administrative expenses consist
primarily of compensation for general management, accounting and finance, human
resources and management information systems functions and for legal, consulting
and accounting fees of the Company. General and administrative expenses were
$1.3 million and $1.2 million for the three months and $4.7 million and $3.6
million for the nine months ended December 31, 1996 and 1995, respectively,
representing 9.7%, 7.0%, 10.7% and 8.1% of revenue, respectively. Included in
the general and administrative expenses for the nine month period ended December
31, 1996 was an approximately $0.3 million expense associated with completing an
upgrade to the Company's business system begun in late fiscal 1996 and
approximately $0.7 million additional expenses incurred in connection with being
a public company which was not the case in the comparable period in the prior
year.
Other income (expenses), net. Other income (expense), net, consists of
interest income on the unused proceeds of the Company's initial public offering
(IPO) completed in October 1995, interest expense on bank borrowings, and
interest accretion on the Motorola term loan.
7
Income tax expense. Income taxes as a percentage of income before income
taxes were 25.0% and 10.0% for the three months and 25.0% and 10.2% for the nine
months ended December 31, 1996 and 1995, respectively. The effective tax rate in
1995 was substantially below the federal statutory rate due to utilization of
tax loss carryforwards and a reduction in the valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
For the nine month periods ended December 31, 1996 and 1995, the Company
has financed its operations through cash generated from operations, proceeds
from the IPO and bank borrowings.
Net cash provided by operations was $8.7 million during the nine months
ended December 31, 1996, due principally to a decrease in accounts receivable
and inventories, net income in the period, non-cash depreciation expenses,
offset, in part, by a decrease in accounts payable. Net cash provided by
operations during the nine month period ended December 31, 1995 was $0.1 million
and was primarily attributable to net income in the period and non-cash
depreciation expenses.
Net capital expenditures totaled $1.4 million and $2.0 million in the nine
months ended December 31, 1996 and 1995, respectively. Capital expenditures in
both periods were incurred principally to acquire design tools, analytical
equipment and computers.
Net cash provided by financing activities totaled $0.1 million and $24.1
million in the nine months ended December 31, 1996 and 1995, respectively. Net
cash provided by financing activities for the nine months ended December 31,
1996 was due principally to increased borrowings under the Company's two
Japanese promissory note borrowing facilities in advance of payment on accounts
receivable balances in Japan. Net cash provided by financing activities for the
comparable period in 1995 were derived from approximately $34.2 million of net
proceeds raised in the Company's IPO in October 1995, offset, in part, by a net
repayment of $10.1 million of bank borrowings under the Company's domestic lines
of credit.
As of December 31, 1996, the Company had approximately $30.6 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, 1996, the Company had an
aggregate of $13.0 million available under two domestic lines of credit, secured
by substantially all of the Company's assets. Both facilities are available
until August 15, 1997. In addition to the foregoing facilities, as of December
31, 1996, the Company's Japanese subsidiary had available a 566 million Yen
(approximately $4.9 million at exchange rates prevailing on December 31, 1996)
unused portion of two Japanese bank lines of credit totaling 600 million Yen
(approximately $5.2 million at exchange rates prevailing December 31, 1996)
secured by Japanese customer promissory notes held by such subsidiary in advance
of payment on customers' accounts receivable.
The Company believes that anticipated cash flow from operations, funds
available under its lines of credit and existing cash and cash equivalent
balances will be sufficient to meet the Company's cash requirements for at least
the next twelve months.
8
PART II. OTHER INFORMATION
ITEM 3. 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, 1996.
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Exhibit 11 -- Computation of Net Income Per Share [Exhibit
27 -- Financial Data Schedule (Edgarized Version Only)]
(b) Reports on Form 8-K On December 18, 1996, a current report on Form 8-K was
filed with the SEC in connection with the Company's
decision to replace KPMG Peat Marwick, LLP, its independent
accountants with Price Waterhouse LLP.
9
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: January 23, 1997
TEGAL CORPORATION
(Registrant)
/s/ DAVID CURTIS
--------------------------------------
David Curtis
Chief Financial Officer, Treasurer and
Secretary (Principal Financial
Officer)
10
TEGAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NAME DESCRIPTION PAGE
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Exhibit 11 Computation of Net Income Per Share....................................... 12
[Exhibit 27 Financial Data Schedule................................................... 14]*
* (Edgarized Version Only)
11