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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number:
December 31, 1996 0-26482
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TRIKON TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
California 95-4054321
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9255 Deering Avenue, Chatsworth, California 91311
(Address of principal executive offices)
(818) 886-8000
(Registrant's telephone number, including area code)
PLASMA & MATERIALS TECHNOLOGIES, INC.
(Former name, if changed since last report)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value
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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 such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant on March 31, 1997, based on the closing price of the Common Stock as
reported by the Nasdaq National Market on such date, was approximately
$86,920,484. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 31, 1997, the Registrant had outstanding 14,368,045 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TRIKON TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
Page
PART I
Item 1. Business........................................................... 1
Item 2. Properties.........................................................12
Item 3. Legal Proceedings..................................................12
Item 4. Submission of Matters to a Vote of Security Holders................12
PART II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters........................................14
Item 6. Selected Consolidated Financial Data of Trikon.....................16
Selected Combined Financial Data of Electrotech....................24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Trikon...............................................18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Electrotech..........................................25
Item 8. Financial Statements and Supplementary Data........................31
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................31
PART III
Item 10. Directors and Executive Officers of Trikon.........................32
Item 11. Executive Compensation.............................................34
Item 12. Security Ownership of Certain Beneficial
Owners and Management..............................................39
Item 13. Certain Relationships and Related Transactions.....................40
PART IV
Item 14. Exhibits, Financial Statement......................................42
Schedules, and Reports on Form 8-K.................................45
PART I
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). These statements are in "Item 1. Business" in
paragraph 4 under "--Products--Planar 200 Flowfill(TM)," paragraph 3 under "--
Customers," paragraph 8 under "--Research, Development and Engineering,"
paragraph 4 under "--Joint Development Agreements," and the paragraph
under "--Environmental Matters." Such statements can also be found under "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations of Trikon" in paragraphs 3 and 4 under "--Overview," paragraphs 2, 3,
5, 8 and 9 under "--Results of Operations" and paragraphs 7, 10 and 12 under "--
Liquidity and Capital Resources." In addition, such statements can be found in
paragraph 2 under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations of Electrotech--Administrative Expenses."
Forward-looking statements may also be found in various sections of this Annual
Report on Form 10-K that are not specifically set forth above. Actual results
could differ materially from those projected in the forward-looking statements
as a result of a number of factors, including those set forth herein.
ITEM 1. BUSINESS
Introduction
Trikon Technologies, Inc., formerly Plasma & Materials Technologies, Inc.
(together with its subsidiaries, "Trikon" or the "Company"), designs,
manufactures and markets advanced high density, low pressure plasma sources,
process modules and plasma processing systems, and develops, manufactures,
markets and services semiconductor fabrication equipment for the worldwide
semiconductor manufacturing industry. These products are used for etch, physical
vapor deposition (PVD, which is commonly referred to as "sputtering") and
chemical vapor deposition (CVD) applications and are sold to semiconductor
manufacturers worldwide. Trikon currently offers a modular line of etch
equipment which utilizes the Company's patented MORI(TM) source technology for
polysilicon and metal etch applications in the fabrication of semiconductor
devices and other products for the etch market, including its Omega(TM)
Inductively Coupled Plasma (ICP) system. In addition, semiconductor
manufacturers use the Company's patented MORI(TM) source technology for plasma
CVD of silicon dioxide films and photoresist stripping. Certain other
manufacturers also use the MORI(TM) source for the plasma etching of films in
the fabrication of large area active matrix liquid crystal displays. Some of the
customers that have purchased or have placed orders for the Company's plasma
processing systems include Texas Instruments, Dallas Semiconductor, LG Semicon,
Hyundai, Samsung, Toshiba and Canon Sales. Trikon also offers new leading-edge
products including the Sigma sputter system for PVD, with optional Forcefill(TM)
module, and the Planar 200 Flowfill(TM) system for inter-metal dielectric CVD.
Forcefill(TM) technology allows manufacturers to eliminate the use of multistep
CVD tungsten-plug based metallization processes and to utilize an entirely
aluminum-based PVD multi-level metal scheme in sub-0.5 micron Integrated Circuit
(IC) manufacturing. Trikon's new CVD process technology, Flowfill(TM), forms
high quality silicon dioxide layers which possess the properties of both gap
fill and planarization.
Recent Developments
Electrotech Acquisition. On November 15, 1996, Trikon acquired all the
issued and outstanding shares (the "Acquisition") of Electrotech Limited and
Electrotech Equipments Limited (collectively, "Electrotech"). Electrotech
develops, manufactures, markets and services semiconductor fabrication equipment
for the worldwide semiconductor manufacturing industry. The aggregate purchase
price paid by the Company in the Acquisition, excluding $7,976,995 in
acquisition costs, was $145,700,000 consisting of $75,000,000 paid in cash and
the issuance of 5,600,000 shares of common stock of the Company ("Common Stock")
with an estimated fair market value of $70,700,000, based on the last sales
price for the Common Stock on the day prior to the public announcement of the
parties agreement to the terms of the Acquisition. Following consummation of
the Acquisition, Christopher D. Dobson, former majority owner of Electrotech,
and Nigel Wheeler, former President of Electrotech, became the Chairman of the
Board of Directors, and President and Chief Operating Officer, respectively, of
the Company. Unless the context otherwise requires, all references herein to
"Trikon" or the "Company" include Electrotech with respect to all periods on and
after November 15, 1996.
Name Change. On March 31, 1997, the Company changed its name to Trikon
Technologies, Inc. The Company believes that the Trikon name better suits a
company with a multi-continent presence and a number of non-plasma based
products.
Products
Trikon offers a line of modular solutions which are designed to meet the
varying requirements of its customers for etching of polysilicon, metal and
oxide films, stripping of photoresist, metal deposition and CVD of oxide films.
Trikon's line of equipment includes the MORI(TM) plasma source, the MORI(TM)
stand-alone process module for etch, strip or CVD applications, the PINNACLE
8000/*/system and the PINNACLE 8000R(TM) system. In addition, the Electrotech-
originated product line includes the Sigma Forcefill(TM) system, the Delta 201
system, the Planar 200 Flowfill(TM) system and the Omega(TM) 201-2 system.
Etch
PINNACLE 8000/*/ and PINNACLE 8000R(TM)
In December 1995, Trikon introduced its PINNACLE 8000R(TM) cluster tool
platform, a more compact version of its existing PINNACLE 8000/*/system, that
includes certain additional features that enable increased ease in operation.
Each of Trikon's PINNACLE 8000/*/and PINNACLE 8000R(TM) systems is a dual wafer
cassette, vacuum loadlocked cluster tool which can incorporate up to four MESC-
compatible process modules. The dual wafer cassette loadlock configuration
enables the system to continuously process wafers. System throughput varies, and
is primarily dependent on the film application, the operating configuration and
the number of process modules attached to the system. For a typical polysilicon
etch process, with each process module performing the same process, throughput
varies from 40-60 wafers per hour for a two module configuration, to 70-90
wafers per hour for a four module configuration. This compares to a throughput
of 30-40 wafers per hour for competitive two module systems. Floorspace required
for a PINNACLE 8000R(TM) is approximately 44 square feet with two process
modules and 65 square feet with four process modules. By comparison, floorspace
required for a Pinnacle 8000/*/ is approximately 88 square feet with four
process modules. List prices for the PINNACLE 8000/*/ and PINNACLE 8000R(TM)
currently range from $1,800,000 for a standard two module system to $2,800,000
for a four module system, and from $1,900,000 for a standard two module system
to $3,400,000 for a four module system, respectively.
MORI(TM)
Trikon's MORI(TM) plasma source is also sold as a subsystem on a limited
geographic and application basis to OEM licensees of Trikon's MORI(TM)
technology. Trikon currently sells the MORI(TM) source to Leybold of Germany for
incorporation into Leybold's systems that are sold worldwide for etching large
area, active matrix liquid crystal displays. Trikon sells its MORI(TM) source to
Canon Sales for incorporation into Canon Sales' systems for photoresist
stripping that are sold in the Japanese and Korean markets, and to NEC Anelva
for incorporation into NEC Anelva's systems for metal and oxide etching that are
sold in the Japanese market. Trikon's stand-alone process module, common to
Trikon's PINNACLE 8000/*/ and PINNACLE 8000R(TM) systems, incorporates the
MORI(TM) plasma source and can be configured for etch, strip or CVD
applications. The process module can be sold to customers either to increase the
capacity of existing system platforms, or to provide additional process
capability. List price for a standard process module configured for etch
applications is currently $500,000.
Omega(TM) 201-2
Trikon's Omega(TM) 201-2 metal etch system integrates the field-proven 200-
series hardware as used on other current Trikon products with Trikon's ICP
technology. Although mainly targeted at metal interconnect, the technology is
also able to address oxide and polysilicon etch and is compatible with all etch
applications. The Omega(TM) 201-2 metal etch system has been designed to address
the special requirements of metal etch while minimizing the space utilized in
the clean room. The system has a passivation unit which minimizes post-etch
corrosion by combining the use of a downstream plasma with radiant heating of
the wafer backside to maximize photoresist strip rates and drive off involatile
chlorine-containing materials. The Omega(TM) 201-2 also has a wafer temperature
control system which ensures that etch residues are minimized and often
eliminates the need to harden the photoresist using a deep UV process. The price
for Trikon's Omega(TM) etch system ranges from approximately $700,000 to
approximately $1,400,000, depending on the configuration of the system.
Physical Vapor Deposition
Sigma
Layers of metal alloys can be deposited by Trikon's Sigma product line, a
sputtering machine with multiple process chambers. This product deposits a very
thin uniform layer of interconnect metal on the whole surface of the
semiconductor wafer. Subsequent lithography and etching turns this layer into
an intricate pattern of interconnect wiring on the many individual semiconductor
devices, each a complex and integrated functioning circuit. Sigma is designed
to be one of the cleanest PVD systems on the market, with particular application
in multi-layer metallization. Trikon's strategy is to offer semiconductor
manufacturers, who are currently using 0.8 micron to 1.0 micron design rules, a
way to avoid the adoption of CVD tungsten, a relatively difficult, dirty and
expensive process. Trikon offers system configurations which bridge the gap
from non-hole-fill technology, at approximately 1.0 micron, to the adoption of
Trikon's Forcefill(TM) technology onto the Sigma platform, which is capable of
filling holes smaller than 0.25 micron. The selling price for the Sigma system
ranges from approximately $1.5 million to approximately $2.5 million, depending
on the configuration of the system.
Sigma Forcefill(TM)
The Sigma Forcefill(TM) system is being developed to extend Trikon's
standard Sigma metallization product capability into the sub-0.5 micron market.
The Forcefill(TM) technology is used with traditional aluminum techniques and
eliminates the relatively complicated and difficult use of tungsten. The process
can be carried out on a standard Sigma series system with an attached
Forcefill(TM) module, which involves depositing a layer of aluminum such that it
forms a bridge over the holes. When adequate bridging is achieved, the wafer is
transferred under vacuum to the Forcefill(TM) module where the aluminum is
heated and forced under very high pressure into the hole, thus achieving a void-
free fill. Forcefill(TM) allows manufacturers to eliminate the use of CVD
tungsten and to utilize an entirely aluminum-based multi-level metal scheme.
DRAM and logic applications are both target markets for Forcefill(TM), since the
cost saving per layer is substantial, and the interconnect speed is improved.
The average selling price of the Sigma Forcefill(TM) system ranges from
approximately $3.5 million to approximately $4.0 million, depending on the
configuration of the system. Sigma Forcefill(TM) products continue to be subject
to customer review and evaluation and Trikon is presently applying considerable
efforts to attain functionality and reliability levels acceptable to Trikon's
target markets.
Chemical Vapor Deposition
Planar 200 Flowfill(TM)
The planarized intermetal dielectric market requires a suitable insulating
material to protect the microscopic wiring in a chip, a number of which have
various undesirable characteristics. The most common insulating material is
silicon dioxide, which, when deposited by conventional techniques, is unable to
fill the increasingly small gap spacing required by next generation ICs. Trikon
has developed a new CVD process technology, Flowfill(TM), to form high quality
silicon dioxide layers which possess the properties of both gap fill and
planarization. In the Planar 200 Flowfill(TM) multi-chambered cluster system,
the advanced planarization layer consists of three films which are deposited
sequentially. The plasma CVD films are deposited in one module and the CVD
planarizing flow layer is deposited in the Flowfill(TM) module with no vacuum
breaks between the process steps. The flow layer has the ability to fill sub-
micron features less than 0.2 micron wide, with a 5 to 1 height to width ratio,
and achieve typical planarization of 80% for gaps up to 20 microns.
Alternative technologies to Trikon's Flowfill(TM) system include spin on
glass (SOG) and high density plasma (HDP) combined with chemical mechanical
polishing (CMP). SOG is deposited in single or multiple spins. This technique is
complex and slow due to the number of steps involved. In addition, although each
individual step may be clean, the combination can lead to a high number of added
particles, which can decrease yield. HDP gap fills a wafer with silicon dioxide
in one system, but the rough spots on the wafer must be planarized using a CMP
process in a second system.
For a number of reasons, Trikon's initial shipments of the Planar 200
Flowfill(TM) have targeted the DRAM market. First, due to the competitive nature
of the DRAM market, cost is a primary concern to DRAM manufacturers. Certain
DRAM manufacturers have indicated that Flowfill(TM) will offer significant cost
advantages for next generation DRAMs relative to both the SOG and HDP processes.
Second, due to the circuit designs of a DRAM, the maximum distance between metal
lines is 80 to 100 microns; Flowfill(TM) provides a high level of planarity for
gaps of this size. The selling price for the Planar 200 Flowfill(TM) system
ranges from approximately $1.4 million to approximately $2.5 million, depending
on the configuration of the system. Flowfill(TM) systems continue to be subject
to customer review and evaluation and Trikon is presently applying considerable
efforts to attain functionality and reliability levels acceptable to Trikon's
target market.
In February 1997, the Company announced an advance in the depositing of low
dielectric constant (low-k) materials used in IC layering and production using
the Flowfill(TM) technologies (the "Flowfill(TM) CVD Development"). By lowering
the dielectric constant, the speed of an IC increases. Trikon has tested a low-k
material for use in its Flowfill(TM) system that mixes methylsilane gas with
hydrogen peroxide to produce a high quality insulatory layer that is self -
planarizing. While management believes that this low-k process is a significant
advancement in the intermetal dielectric market, additional testing is
necessary. There can be no assurance that this process will result in the
successful manufacture and production of ICs. See Note 12 of Notes to
Consolidated Financial Statements.
Delta 201
Trikon's Delta 201 is a versatile, single-chamber production system for
producing films, including silicon dioxide or silicon nitride. The films
deposited by this system are used to insulate the interconnect wiring of a
semiconductor wafer. The Delta 201 is a relatively low-cost system and its
small dimensions make it attractive to customers, who are often short of
cleanroom space. The Delta 201 also addresses the gallium arsenide
semiconductor market and incorporates a wafer handling mechanism that is suited
to handle fragile and high-cost gallium arsenide wafers. The average selling
price for the Delta 201 system is approximately $600,000.
Customers
The Company sells its systems to semiconductor manufacturers located
throughout the United States, Europe, Asia/Pacific, Korea and Japan. The
following is a list of customers who have purchased, leased or have current
orders for Trikon products either directly with the Company or through its
distribution and OEM relationships:
AT&T LSI Logic Philips
Daewoo Matsushita Ricoh
Dallas Semiconductor Micron Technology Samsung
Fujitsu Mitsubishi Sharp
GEC Plessey Motorola Siemens
Hitachi National Semiconductor Sony
Hyundai NEC TEMIC
IBM OKI Texas Instruments
IC Works Olivetti Toshiba
LG Semicon Orbit Semiconductor TriQuint
Leybold Tower Semiconductor
Trikon's total revenue includes amounts from certain individual customers
that exceed 10% of total revenue. Revenue from Hyundai and Siemens represents
19% and 12% of total revenue, respectively, for the year ended December 31,
1996. Revenue from five customers represented 19%, 15%, 12%, 11% and 11% each
of total revenue for the year ended December 31, 1995 and revenue from six
customers represented 19%, 17%, 17%, 15%, 15% and 12% each of total revenue for
the ten months ended December 31, 1994. During the year ended December 31,
1995, sales to Alcan-Tech, Canon Sales and NEC Anelva in Japan, and to LG
Semicon and Hyundai in Korea, accounted for 25% and 18% of the Company's total
revenue, respectively, for that period. During the ten months ended December
31, 1994, sales to Canon Sales and NEC Anelva in Japan, and to Samsung and
Hyundai in Korea, accounted for 31% and 32% of the Company's total revenue,
respectively, for that period. The Company's operating results could be
materially adversely affected by the loss of business from or the cancellation
of orders by or decreases in the prices of products sold to these or other
customers located in Germany, Japan and Korea. See Note 1 of Notes to
Consolidated Financial Statements.
Sales other than in the United States accounted for approximately 77%, 47%
and 66% of total revenue in the years ended December 31, 1996 and 1995, and the
ten months ended December 31, 1994, respectively. The Company anticipates that
sales outside the United States will continue to account for a significant
portion of its total revenue. In addition, with the acquisition of Electrotech,
which sells primarily to international locations including Germany, Japan and
Israel, the Company expects that sales to Japanese, Korean, and European
semiconductor manufacturers will continue to represent a significant percentage
of the Company's product sales through at least 1997.
All export sales by the Company must be licensed by the Office of Export
Administration of the U.S. Department of Commerce and related U.K. and other
foreign agencies performing similar functions. Although Trikon has experienced
no difficulty in obtaining these licenses, the Company's failure to obtain these
licenses in the future could have a material adverse effect on Trikon's results
of operations. A number of other risks arise in the international market place,
including unexpected changes in regulatory requirements, exchange rates, tariffs
and other barriers, political and economic instability, difficulties in accounts
receivable collections, extended payment terms, the challenges of maintaining a
readily available supply of spare parts, difficulties in managing distributors
or representatives, difficulties in staffing and managing foreign subsidiary
operations, potentially adverse tax consequences, and the fluctuation of foreign
currency exchange rates. Wherever possible, international sales of Trikon's
products are denominated in U.S. dollars in order to reduce the risks associated
with such currency
fluctuation. There can be no assurance that the Company will be able to avoid
these and other risks relating to the conduct of business internationally.
Marketing, Sales and Customer Support
Trikon's long range goal is to market its products and services directly to
all end use customers to the extent it is efficient and cost effective. In the
current stage of Trikon's growth, it is not efficient or cost effective to
market products and services through a direct sales force in all regions.
Consequently, Trikon has established multiple sales channels to market products
and services to match Trikon's efforts in each region. Trikon currently markets
and sells its products primarily through three separate sales channels, direct
sales, distributor arrangements and OEM agreements. In selected regions and
countries, Trikon uses a combination of direct sales, distributor arrangements,
OEM agreements and sales representatives.
As a result of the Acquisition, Trikon expanded its field sales and support
organizations worldwide, focusing on marketing within each product division.
The Company now has sales and marketing offices located in the United States,
United Kingdom, Europe and Asia to enable sales and service personnel to provide
dedicated worldwide support to new and existing customers. The field based
sales, service, and applications personnel now report into a unified management
structure based on country geography. This gains efficiency through cross
training and critical mass for support. Sales staff now represent the full
Trikon product line to its customers, gaining leverage in the selling cycle. In
select international countries, Trikon will continue to use distributor or
representative organizations for sales, but is moving to full direct support
organizations for customer control and satisfaction.
In the United States, Trikon markets and sells its products principally
through its direct sales organization. In Korea, Trikon markets and sells its
products direct through the sales staff of its wholly owned Korean subsidiary.
The Korean market is served by a direct sales group in order to meet Korean
semiconductor manufacturers' requirements of having direct local representation
for sales, customer support and spare parts. In Hong Kong, Taiwan, Singapore
and China, the Company has sales agents which has increased flexibility and
responsiveness to customer needs in those areas. The European market is served
by a direct sales group in the United Kingdom which offers sales, customer
support and spare parts.
Trikon currently believes that the most efficient strategy for penetrating
the Japanese market is to have a distribution agreement with a well established
and experienced sales organization. Trikon has appointed Canon Sales as its
exclusive etch system distributor in Japan, and in July 1995 entered into a
definitive agreement for such appointment. The agreement is year-to-year,
renewable automatically unless either party terminates at least 90 days before
the end of the year, and establishes the price to Canon as a specified
percentage discount from Trikon's then-current published U.S. list price.
Although management believes that it maintains a good relationship with Canon
Sales, there can be no assurance that the relationship will continue. In
addition, PVD and CVD sales in Japan are distributed through Innotech
Corporation. Trikon has also set up a sales staff located at its wholly owned
Japanese subsidiary to help establish its own experienced sales organization.
In addition, Trikon has established a distributor relationship with
Techlink for the Taiwan market. Trikon maintains active OEM agreements in Japan
and Europe. Trikon currently sells the MORI(TM) source to Leybold of Germany for
incorporation into Leybold's systems that are sold worldwide for etching large
area, active matrix liquid crystal displays. Trikon sells its MORI(TM) source to
NEC Anelva for incorporation into NEC Anelva's systems for metal and oxide
etching which are sold in the Japanese market, and to Canon Sales for
incorporation into Canon Sales' systems for photoresist stripping that are sold
in the Japanese and Korean markets.
Trikon believes that providing its customers with evaluation systems of its
equipment products is critical to its sales efforts. The ability to evaluate
Trikon's systems on a trial basis is expected by the semiconductor manufacturing
customers to whom Trikon markets. The average duration of a trial period for
systems is
approximately one year. Consequently, as Trikon expands its sales efforts, it
believes that it will need to significantly increase its investment in
demonstration and evaluation systems. The failure or inability of Trikon to
convert a demonstration system placed with a customer to a final sale could have
a material adverse effect on the Company.
Trikon believes that high quality customer support, customer training, and
field consultation are key components in a customer's decision in selecting a
semiconductor equipment supplier. The ability to provide a processing system
with a high degree of reliability, low cost, high yield, high uptime and high
mean time between failure greatly influences a customer's purchase decision.
This requires experienced, responsive local support with quality personnel and
the ready availability of spare parts. Trikon believes that a focused field
support organization that works closely with its customers provides invaluable
feedback from customers with respect to system cost effectiveness, and typically
results in technical advances through continuous design improvement. To further
ensure customer satisfaction, Trikon also provides service and maintenance
training as well as process application training for its customers' personnel on
a fee basis. Trikon maintains an extensive inventory of spare parts which
allows Trikon to provide overnight delivery for many parts.
Research, Development and Engineering
Trikon believes that its future success will depend, in part, upon its
ability to continue to improve its systems and its process technologies and to
develop new technologies and systems that compete effectively on the basis of
total cost of ownership and performance. These technologies and systems will
also need to meet customer requirements and emerging industry standards.
Accordingly, Trikon devotes a significant portion of its personnel and the
financial resources to research and development programs and seeks to maintain
close relationships with its customers in order to remain responsive to their
product needs.
As of December 31, 1996, the Company employed 159 professional and
technical personnel in research, development and engineering. These employees
are organized in the following departments: research and development, hardware
engineering, software engineering, customer specials engineering, systems
engineering, documentation and manufacturing engineering, and customer
applications.
The research and development group is responsible for identifying new
technology applications and developing processes to meet customer requirements.
Major research and development programs currently address PVD and CVD
applications, polysilicon and integrated stack etch applications, metal etch
applications, including aluminum, and oxide etch applications.
Research and development activities for the Company is run by a general
manager of each of the two product divisions. The etch division, which is
managed by a U.S. based general manager, conducts most its development
activities in Chatsworth, California. There are approximately 55 individuals
currently engaged in research and development activities for the etch division,
46 of which work in the U.S. and nine of which work in the UK.
The deposition division is managed by a United Kingdom based General
Manager. Research and development activities for the deposition division are
conducted in the United Kingdom with peripheral support by U.S. personnel.
There are 104 individuals in the U.K. engaged in research in the deposition
division. Coordination of research and development activities for both the etch
and deposition product divisions is managed by Nigel Wheeler, the President and
Chief Operating Officer of Trikon, who resides in the United Kingdom. In
addition, the etch and deposition divisions are run as separate profit centers
with each General Manager having profit and loss responsibility for their
respective operations.
Trikon's research, development and engineering expenses were $10.1 million,
$4.6 million and $3.6 million for the years ended December 31, 1996 and 1995,
and the ten months ended December 31, 1994, respectively, and
represented 24.0%, 21.5% and 41.2% of total revenue for these three periods,
respectively. In addition to direct research and development expenses, the
Company recognized a one-time charge of $86.0 million for acquisition related
in-process research and development, in the year ended December 31, 1996, due to
the Acquisition.
In addition to the Company's direct research, development and engineering
expenses, significant expenditures in research, development and engineering have
been made by Leybold, Canon Sales and NEC Anelva, with whom the Company has
entered into OEM agreements. These arrangements provide the Company with
expanded resources and knowledge to broaden the use of Trikon's MORI(TM) plasma
technology in the etch, PVD and CVD markets. No information on the amount of
these expenditures has been disclosed to the Company, however, the Company
believes that total expenditures exceed the Company's direct expenditures for
the same applications over the same periods identified above.
Although Trikon believes that it has allocated sufficient resources to its
research, development and engineering efforts, the success of new system
introductions is dependent on a number of factors, including timely completion
of new system designs and market acceptance. There can be no assurance that the
Company will be able to improve its existing systems and process technologies or
develop new technologies or systems. In addition, the Company may incur
substantial unanticipated costs to establish the functionality and reliability
of its future product introductions early in the product's life cycle.
Joint Development Arrangements
In April 1996, Trikon entered into an agreement with NEC Anelva to jointly
develop a high density plasma dielectric CVD system. Pursuant to the agreement,
the two companies intended to jointly develop, market, and manufacture such CVD
system based upon Trikon's MORI(TM) source. As a result of the Flowfill(TM) CVD
Development, the Company and NEC Anelva have jointly determined to discontinue
their joint development effort in this area.
On March 29, 1996, Trikon entered into a number of agreements with PMT CVD
Partners, L.P. (the "CVD Partnership") and the limited partners thereof (the
"Limited Partners"). The CVD Partnership was sponsored by Trikon to fund
research and development costs and expenses relating to CVD technology and
applications using MORI(TM) source technology. An aggregate of approximately
$5,350,000 was invested by the Limited Partners in the CVD Partnership to fund
such research and development efforts, which were performed by Trikon under an
agreement with the CVD Partnership. Trikon has been paid for such services in
an amount equal to its actual direct costs, as defined, plus a stated percentage
of such costs. During the year ended December 31, 1996, the amount of such
research and development payments to Trikon by the CVD Partnership was
$2,841,427. Under the applicable agreement, Trikon is obligated to pay stated
royalties to the CVD Partnership on sales of developed CVD products, and the
royalty percentage will vary based on the geographic location of the sale.
In connection with the Flowfill(TM) CVD Development, the Company announced
that it would henceforth focus all of its CVD resources to further evaluate and
develop products based on the Flowfill(TM) technology. In that regard, Trikon
advised the Limited Partners that it had decided to discontinue the research and
development efforts of the CVD Partnership. One of the Limited Partners has
indicated that it believes such action was inconsistent with the terms of the
research and development agreement entered into between the Company and the CVD
Partnership, and that, accordingly, a settlement of any and all claims that the
Limited Partners may have in connection with such discontinuance is appropriate.
The parties have had only preliminary discussions regarding the resolution of
this dispute, though all funding by the CVD Partnership of MORI(TM) source-based
CVD research and development has been discontinued. See Notes 6 and 12 to
Consolidated Financial Statements.
Trikon and LG Semicon have agreed to jointly develop an oxide etch process
utilizing Trikon's PINNACLE 8000R(TM) cluster tool. Trikon's wholly owned Korean
subsidiary will manage the process development work, which will be conducted at
LG Semicon's Cheong-Ju research and development facility in South Korea and at
Trikon's
headquarters in California. Trikon believes that this joint development project
will help Trikon's PINNACLE 8000R(TM) system achieve acceptance in the oxide
etch market. Although management believes that it maintains a good relationship
with LG Semicon, there can be no assurance that the relationship will remain
positive, or that the joint development project will be successfully completed.
In the event of a termination of Trikon's agreement with LG Semicon, or the
failure by the parties to successfully develop an oxide etch process based on
Trikon's PINNACLE 8000R(TM) cluster tool, Trikon's ability to penetrate the
oxide etch market would be adversely affected.
Manufacturing
In order to maintain close control of its manufacturing processes, Trikon's
deposition division operates in a vertically integrated manner at the Company's
South Wales facility, taking full responsibility for the manufacturing of
virtually all components for Trikon's systems. This approach has enabled the
Company to ensure quality control and reduce dependence on third party suppliers
for its PVD and CVD products. On the other hand, the manufacturing operations
of Trikon's etch division, located in Chatsworth, California, is a horizontally
integrated structure consisting of materials planning and procurement, assembly,
system integration and final test.
Trikon's modular product line, which is designed around the SEMI MESC
industry standard, enables the Company to use a large number of components and
sub-assemblies which are common not only to the Company's product line but also
to systems manufactured by other companies in the industry, both competitive and
non-competitive. Examples of common sub-assemblies are wafer aligners and
vacuum cassette elevators obtained from Brooks Automation in Massachusetts, and
RF power supplies obtained from RF Power Products in New Jersey. Examples of
sub-assemblies obtained from outside suppliers that are unique to the Company's
systems products include gas box assemblies and fabricated vacuum chambers.
Trikon's Chatsworth, California operations rely on outside suppliers to
manufacture substantially all of the components and a portion of sub-assemblies
used in their plasma processing systems. Certain of these are obtained from a
sole supplier or a limited group of suppliers. For example, the wafer cassette
elevator load locks used in the Company's PINNACLE 8000/*/ and PINNACLE
8000R(TM) plasma processing systems are sole sourced from Brooks Automation. The
Company relies on outside suppliers generally, and a sole or limited group of
suppliers an adequate supply of required components, as well as reduced control
over pricing and timely delivery of components. Because the manufacture of
certain of these components and sub-assemblies is a complex process and can
require long lead times, there can be no assurance that delays or shortages
caused by suppliers will not occur. Any inability to obtain adequate deliveries
or any other circumstance that would require the Company to seek alternate
sources of supply or to manufacture such components internally could delay the
Company's ability to ship its systems and could have a materially adverse effect
on the Company.
Competition
The markets served by Trikon's products are highly competitive and subject
to rapid technological change. Significant competitive factors include system
performance, cost of ownership (which is dependent upon yield, throughput and
reliability), size of installed base, depth and breadth of product line and
customer support.
Trikon faces significant competition from various suppliers of systems that
utilize alternative technologies, including other manufactures of HDP systems.
In the etch market, the Company faces competition from suppliers of reactive ion
etch (RIE) systems, including Applied Materials, Lam Research and Tokyo
Electron. Trikon's MORI(TM) based etch systems also face competition from ICP
based etch systems marketed by Applied Materials and Lam Research, as well as
the electron cyclotron resonance (ECR) based etch system marketed by Hitachi.
In the high density plasma CVD market, Trikon's primary competitors are Applied
Materials, Novellus and Lam Research. In the PVD market, Trikon's Forcefill(TM)
technology faces competition from suppliers of aluminum and tungsten-plug PVD
systems, such as Applied Materials, and a number of other competitors, including
NEC Anelva, MRC,
Novellus, Varian and Ulvac. Trikon's Flowfill(TM) technology faces competition
from other CVD manufacturers, including Applied Materials, Lam Research,
Novellus and Watkins-Johnson.
Virtually all of the Company's primary competitors are substantially larger
companies with broader product lines, and have well established reputations in
the etch, PVD, CVD and SOG markets, longer operating histories, greater
experience with high volume manufacturing, broader name recognition,
substantially larger customer bases, and substantially greater financial,
technical, manufacturing and marketing resources than the Company. Trikon also
faces potential competition from new entrants in the market, including
established manufacturers in other segments of the semiconductor capital
equipment market, who may decide to diversify into the Company's market segment.
There can be no assurance that Trikon's competitors will not develop
enhancements to or future generations of competitive products that will offer
price and performance features that are superior to those offered by the
Company's systems.
Intellectual Property
Trikon relies on a variety of types of intellectual property protection to
protect its proprietary technology, including patent, copyright, trademark and
trade secret laws, non-disclosure agreements, and other intellectual property
protection methods. Although the Company believes that its patents and
trademarks may have value, the Company believes that its future success will
also depend on the innovation, technical expertise and marketing abilities of
its personnel. The Company currently holds eleven patents in the United States,
two patents in the United Kingdom, two patents in Taiwan, one patent in each of
Germany, France, Italy and the Netherlands. The Company currently has
approximately 49 patent applications pending worldwide and intends to file
additional patent applications, as appropriate. The Company's patents and patent
applications pending are all in the field of semiconductor manufacture and are
predominantly concerned with inductively coupled plasma etching (ICP),
deposition of dielectric layers by plasma and thermal means and in particular to
Trikon's MORI(TM) plasma source, the global planarization by a dielectric film
(Flowfill(TM)) and the process of filling semiconductor contact holes by
deformation of interconnect metal by high pressure (Forcefill(TM)) and the
equipment related to these processes. The Company also holds a copyright on its
MACSE(TM) proprietary software. The Company also has five trademarks that are
registered with the United States patent and trademark office, including
PINNACLE 8000/*/and PINNACLE 8000R(TM) and uses a number of trademarks that are
registered or for which an application for registration has been filed in the
United States and certain other countries, including Forcefill(TM) and
Flowfill(TM).
There can be no assurance that patents will be issued on the pending
applications or that competitors will not be able to legitimately ascertain
proprietary information embedded in the Company's products which is not covered
by patent or copyright. In such case, the Company may be precluded from
preventing the competitor from making use of such information. In addition,
should the Company wish to assert its patent rights against a particular
competitor's product, there can be no assurance that any claim in a Company
patent will be sufficiently broad nor, if sufficiently broad, any assurance that
the Company's patent will not be challenged, invalidated or circumvented, or
that the Company will have sufficient resources to prosecute its rights. The
Company's policy is to vigorously protect and defend its patents, trademarks and
trade secrets.
The Company has abandoned its ICP patent in Europe and does not intend to
renew the related patents in the United States. Trikon is opposing an issued
German patent held by a competitor which relates to a process similar to
Forcefill(TM). The Company's management and its advisors believe this patent is
too broadly worded and as presently worded there is some possibility that an
infringement by Trikon might be alleged. There can be no assurance as to the
outcome of these proceedings.
The Company's involvement in any patent or other intellectual property
dispute or in any action to protect trade secrets and know-how, even if
successful, could have a material adverse effect on the Company and its
business. Adverse determinations in any such action could subject the Company
to significant liabilities, require the Company to seek licenses from third
parties, which might not be available, and possibly prevent the Company
from manufacturing and selling its products, any of which could have a material
adverse effect on the Company and its business.
Environmental Matters
The Company is subject to a variety of federal, state and local laws, rules
and regulations relating to the use, storage, discharge and disposal of
hazardous chemicals and gases used during its customer demonstrations and in
research and development activities. Public attention has increasingly been
focused on the environmental impact of operations which use hazardous materials.
In 1995, the United Kingdom adopted a new and comprehensive environmental law
known as the Environmental Act of 1995 (the "Environmental Act"), which, among
other things, deals with the allocation of responsibility for the cleanup of
contaminated property and expands potential liability with respect to the
remediation of such contamination. Trikon owns or leases a number of facilities
in the United Kingdom, and compliance with the Environmental Act is anticipated
to result in certain expenses. A reserve of $435,000 for the estimated
potential liability of these expenses has been recorded in connection with the
Acquisition. There can be no assurance that such expenses will not exceed
present estimates. Failure to comply with present or future regulations could
result in substantial liability to the Company, suspension or cessation of the
Company's operations, restrictions on the Company's ability to expand at its
present locations, or requirements for the acquisition of significant equipment
or other significant expense. To date, compliance with environmental rules and
regulations has not had a material effect on the Company's operations. At the
present time, the Company believes that it is in material compliance with all
applicable environmental rules and regulations.
Backlog
As of December 31, 1996, the Company's backlog was $23.5 million, as
compared to $8.7 million at December 31, 1995. The Company's backlog at
December 31, 1996 consisted primarily of orders for its PVD, CVD and etch
products, a substantial majority of which consisted of Electrotech products.
The Company includes in its backlog all purchase orders that provide for
delivery within twelve months. The Company's business is characterized by large
purchase contracts for standard products with related customized options. All
orders are subject to cancellation or delay by the customer with limited or no
penalty. Because of possible changes in delivery schedules and cancellations of
orders, the Company's backlog at any particular date is not necessarily
representative of actual sales for any succeeding periods.
Employees
At December 31, 1996, the Company had 678 regular employees, including 159
engaged in research, development and 44 in sales and marketing, 171 in customer
support, 255 in manufacturing, and 49 in general administration and finance. In
March 1997, the Company announced an approximate 8% workforce reduction
affecting all such employee groups.
The Company believes its future success will depend in large part on its
ability to attract and retain highly skilled employees, particularly those
highly skilled design, process and test engineers involved in the manufacture of
existing systems and the development of new systems and processes. The
competition for such personnel is intense. The Company faces the task of
quickly identifying, recruiting, training and integrating new employees. There
can be no assurances that the Company will be successful in doing so or, if
successful, in retaining such employees.
None of the employees of the Company are covered by a collective bargaining
agreement, and the Company has not entered into employment agreements with any
of its employees, with the exception of a three-year employment agreement
entered into with Nigel Wheeler, the Company's President and Chief Operating
Officer, as of November 15, 1996. The Company considers its relationships with
its employees to be good.
Financial Information Relating to Foreign and Domestic Operations and Export
Sales
See Note 3 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
Certain information concerning the Company's principal properties at
December 31, 1996 is set forth below:
Location Type Principal Use Square Footage Ownership
- -------------- --------------- ------------------------ -------------- ---------
Chatsworth, CA Office, plant & Headquarters, Marketing, 34,000 leased
warehouse Manufacturing, Research 20,000 leased
and Engineering 2,540 leased
Newport, Gwent, Office, plant & European Headquarters, 102,000 leased
United Kingdom warehouse Manufacturing, Sales and
Customer Support
Bristol, United Office & Research and Engineering 55,700 owned
Kingdom laboratories
The Company has a number of smaller properties and field offices located in
the United States, the United Kingdom, Germany, Japan and Korea. The Company
believes that its properties adequately serve the Company's present needs.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company may be involved in
legal proceedings from time to time. As of the date hereof, there are no
material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 10, 1996, the Company held its 1996 Annual Meeting of
Shareholders (the "Annual Meeting"). The following proposals were submitted to
the shareholders at the Annual Meeting for them to:
1. Consider and vote to approve the Share Purchase Agreement dated as of
July 17, 1996, as amended (the "Share Purchase Agreement"), entered into among
the Company, Electrotech, Christopher D. Dobson and the other shareholders of
Electrotech, and all transactions contemplated thereby. Pursuant to the terms
of the Share Purchase Agreement, the Company acquired 100% of the outstanding
capital stock of Electrotech and, directly or indirectly, each subsidiary
thereof for an aggregate consideration of $145,700,000 consisting of $75,000,000
paid in cash and the issuance of 5,600,000 shares of Common Stock with an
estimated fair market value of $70,700,000, based on the last sales price for
the Common Stock on the day prior to the public announcement of the parties'
agreement to the terms of the Acquisition. This proposal was approved by the
shareholders with 5,678,048 shares voted in favor, 23,887 shares voted against,
10,185 shares withheld as abstentions and 1,966,892 broker non-vote and unvoted
shares.
2. Elect each of Dr. Gregor A. Campbell, John A. Rollwagen, Brian D.
Jacobs, G. Bradford Jones, Charles Thompson and Dr. Hiroyuki Mizuno as a
director of the Company to serve from such time through the
following year until their respective successor is duly elected and qualified.
Each of Dr. Campbell, Dr. Mizuno and Messrs. Rollwagen, Jones and Jacobs was
reelected as director with 7,625,387 shares voted in favor and 53,625 shares
withheld. Mr. Thompson was reelected as director with 7,625,387 shares voted in
favor and 53,625 shares withheld.
3. Consider and vote to approve the amendment of the Company's 1991 Stock
Option Plan (the "Option Plan") to increase the number of shares of Common Stock
which may be issued thereunder from 900,000 to 1,300,000 (and to 2,400,000 if
the Acquisition occurs). This proposal was approved by the shareholders with
7,030563 shares voted in favor, 286,240 shares voted against, 30,376 shares
withheld as abstentions and 331,833 broker non-vote and unvoted shares. Because
the Acquisition was consummated, the number of shares of Common Stock reserved
for issuance under the Option Plan was increased to 2,400,000.
4. Consider and vote to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending December 31, 1996.
This proposal passed with 7,670,127 shares voted in favor, 3,850 shares voted
against, and 5,035 shares withheld as abstentions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Market for the Registrant's Common Equity
The Company's Common Stock began trading in the over-the-counter market on
August 23, 1995 upon effectiveness of the registration statement relating to the
Company's initial public offering (the "Initial Public Offering"), and is quoted
on the Nasdaq National Market ("Nasdaq") under the symbol "TRKN". The quarterly
high and low sale prices for the Company's Common Stock as reported on Nasdaq
for each full quarterly period since August 23, 1995 are as follows:
High Low
------ ------
1995
Fourth quarter.................................. $17.50 $ 9.00
1996
First quarter................................... 16.00 8.10
Second quarter.................................. 20.00 11.00
Third quarter................................... 15.50 10.50
Fourth quarter.................................. 16.75 11.25
As of March 31, 1997, there were 132 shareholders of record of the
Company's Common Stock.
The Company has not declared or paid cash dividends to its shareholders.
The Company anticipates that all of its earnings in the near future will be
retained for the development and expansion of its business and, therefore, does
not anticipate paying dividends on its Common Stock in the foreseeable future.
Declaration of dividends on the Common Stock will depend, among other things,
upon levels of indebtedness, future earnings, the operating and financial
condition of the Company, its capital requirements and general business
conditions. The agreements governing the Company's indebtedness contain
provisions which prohibit the Company from paying dividends on its Common Stock.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations of Trikon--Liquidity and Capital Resources."
Unregistered Sales of the Registrant's Equity Securities During Last Fiscal Year
Convertible Notes. On October 7, 1996, in connection with the Acquisition,
the Company issued and sold $86,250,000 in principal amount of 7-1/8%
Convertible Subordinated Notes Due 2001 (the "Convertible Notes"), in reliance
upon the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), and Regulations D and S thereunder, as
transactions exempt from the registration requirements of the Securities Act to
persons reasonably believed by Salomon Brothers Inc and Unterberg Harris, as the
initial purchasers (the "Initial Purchasers") of the Convertible Notes, to be
"qualified institutional buyers" (as defined by Rule 144A under the Securities
Act), other institutional "accredited investors" (as defined in Rule 501(a)(1),
(2), (3) or (7) under the Securities Act) or in transactions complying with the
provisions of Regulation S under the Securities Act. The Convertible Notes were
sold by the Company at a discount of 3.75% to the Initial Purchasers. The
Convertible Notes are traded in the Private Offerings, Resales and Trading
through Automated Linkages ("PORTAL") Market. See Note 5 to the Notes to
Consolidated Financial Statements.
The Convertible Notes are convertible, at the option of the holder, at any
time prior to maturity, unless previously redeemed or repurchased, into a
maximum of 5,516,470 shares of Common Stock at a conversion price of $15.635 per
share, subject to adjustment in certain events. This conversion price was
determined by arms-length negotiation between the Company and the Initial
Purchasers based upon current conversion premiums then in effect for similar
transactions by similar issuers.
Pursuant to its agreement with the purchasers of the Convertible Notes, the
Company filed with the Commission a registration statement covering resales by
such purchasers of the Convertible Notes and the Common stock issuable upon
conversion thereof (the "Shelf Registration Statement"). The Shelf Registration
Statement has not yet become effective pending the filing of this Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 and subsequent
Commission examination and comment, if applicable. The Convertible Notes
provide that, because the Shelf Registration Statement did not become effective
on or prior to January 15, 1997, the Convertible Notes have since that date
borne additional interest at the rate of 0.5% per annum and will continue to
bear such additional interest until the Shelf Registration Statement becomes
effective.
Warrants. On March 29, 1996, Trikon entered into a number of agreements
with PMT CVD Partners, L.P. (the "CVD Partnership") and the limited partners
thereof (the "Limited Partners"). The CVD Partnership was sponsored by Trikon
to fund research and development costs and expenses relating to CVD technology
and applications using MORI(TM) source technology. See "Item 1. Business--Joint
Development Agreements." In connection with the formation of the CVD
Partnership, the Limited Partners received warrants to purchase an aggregate of
277,662 shares of Trikon's Common Stock at an exercise price of $12.75 per
share. The warrants become exercisable for a one-year period following exercise
of the option (the "Option") held by Trikon to purchase all of the Limited
Partners' interests in the CVD Partnership, but only if the Option is actually
exercised by Trikon. No value has been assigned to the warrants because they
only become exercisable upon the exercise by the Company of the Option. Upon
the exercise of the Option, the warrants would be valued and recorded as part of
the purchase price of the technology. The Company issued such warrants in
reliance on the exemption provided by Section 4(2) of the Securities Act in
reliance upon representations by each such investor that it was an "accredited
investor" as defined in Rule 501(a) under the Securities Act and otherwise in
reliance on Regulation D under the Securities Act.
The Note Purchase Agreement. On December 16, 1996, the Company entered
into an agreement with five investors, confirming a commitment to provide an
unsecured subordinated debt in the amount of $6,250,000 (the "Note Purchase
Agreement"). See "Item 13. Certain Relationships and Related Transactions." On
the date of execution of the Note Purchase Agreement, each investor received a
warrant to acquire up to 49,020 shares of Common Stock with an exercise price of
$12.75. Each such warrant became exercisable with respect to 50% of such shares
on the commitment by such investors to provide financing to the Company under
the Note Purchase Agreement. Any advances made under the Note Purchase
Agreement will trigger the exercisability of the warrants with respect to the
remaining shares covered by such warrants. At December 31, 1996, warrants with
respect to an aggregate of 122,550 shares of Common Stock at an exercise price
of $12.75 were exercisable by such investors. All such warrants expire on
December 16, 2001. The Company issued such warrants in reliance on the
exemption provided by Section 4(2) of the Securities Act in reliance upon
representations by each such investor that it was an "accredited investor" as
defined in Rule 501(a) under the Securities Act and otherwise in reliance on
Regulation D under the Securities Act.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA OF TRIKON
The following selected consolidated financial data of the Company is
qualified by reference to and should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K. The selected consolidated financial data set forth below for the ten
months ended December 31, 1994, and as of and for the years ended December 31,
1995 and 1996, has been derived from the audited financial statements of the
Company included elsewhere in this Form 10-K. The selected consolidated
financial data set forth below as of and for the fiscal year ended February 28,
1993, 1994, and as of December 31, 1994 have been derived from audited financial
statements of the Company not included in this Form 10-K. The selected
consolidated financial data for the ten months ended December 31, 1993 and for
the twelve months ended December 31, 1994 have been derived from unaudited
consolidated financial statements of the Company, but include all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the results of operations for the periods
presented.
Year Ended Ten Months ended Year ended
December 31 Twelve months December 31 February 28
----------- ended ---------------- --------------
December 31,
1996(1) 1995(2) 1994(3) 1994 1993(3) 1994 1993
------- ------- ----------- ---- ------- ---- ----
(in thousands, except per share amounts)
Statements of Operations:
Revenues:
Product sales.............................. $ 39,386 $20,890 $ 9,813 $ 8,005 $ 4,435 $ 6,244 $ 4,215
Contract revenue........................... 2,841 -- -- -- -- -- --
License revenue............................ -- 400 700 700 1,900 1,900 --
-------- ------- ------- ------- ------- ------- -------
Total revenues........................... 42,227 21,290 10,513 8,705 6,335 8,144 4,215
Costs and expenses:
Cost of goods sold......................... 24,596 11,144 6,444 5,404 3,218 4,259 2,442
Research and development................... 10,145 4,567 4,210 3,584 2,186 2,812 2,218
Selling, general andadministrative......... 16,592 5,943 3,917 3,382 1,688 2,224 1,806
Amortization of intangibles................ 482 -- -- -- -- -- --
In-process technology...................... 86,029 -- -- -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Total costs and expenses:................ 137,844 21,654 14,571 12,370 7,092 9,295 6,466
-------- ------- ------- ------- ------- ------- -------
Loss before interest and income tax
provision (benefit)........................ (95,617) (364) (4,058) (3,665) (757) (1,151) (2,251)
Interest:
Interest expense........................... (1,821) (294) (159) (146) (213) (227) (94)
Interest income............................ 1,628 777 143 125 15 32 26
-------- ------- ------- ------- ------- ------- -------
Income (loss) before income tax provision
(benefit).................................. (95,810) 119 (4,074) (3,686) (955) (1,346) (2,319)
Income tax provision (benefit).............. (1,335) 1 54 54 51 51 --
-------- ------- ------- ------- ------- ------- -------
Net income (loss)........................... $(94,475) $ 118 $(4,128) $(3,740) $(1,006) $(1,397) $(2,319)
======== ======= ======= ======= ======= ======= =======
Net income (loss) per share (4)............. $(10.03) $0.02 $(0.82) $(0.75)
======== ======= ======= =======
Number of shares used in per share
computation (4)........................... 9,420 6,593 5,013 5,013
======== ======= ======= =======
December 31 February 28
------------------------------- --------------
1996(1) 1995(2) 1994(3) 1994 1993
------- ------- ------- ---- ----
(in thousands)
Balance Sheet Data:
Working capital........................................................ $ 56,515 $47,670 $ 6,171 $ 5,926 $ 609
Total assets........................................................... 183,180 59,293 16,631 12,080 5,032
Long-term obligations (including long-term debt and capital lease
obligations, less current portion, income taxes payable and pension
obligation)........................................................... 5,095 686 733 145 387
Convertible subordinated notes......................................... 86,250 -- -- -- --
Redeemable convertible preferred stock.................................
-- -- 14,205 8,705 1,250
Shareholders' equity (deficit), excluding redeemable convertible
preferred stock....................................................... 31,248 53,413 (4,419) (646) 820
____________________
(1) Includes the assets and liabilities, as of December 31, 1996, and the
results of operation from November 15, 1996 to December 31, 1996 of
Electrotech Equipments Limited and Electrotech Limited (collectively,
"Electrotech") acquired on November 15, 1996 (see Note 2 of the Notes to the
Consolidated Financial Statements).
(2) On August 29, 1995, the Company completed its Initial Public Offering,
resulting in $40,093,235 of net proceeds to the Company. These funds have
been used to cover the Company's working capital needs, its investment in
demonstration systems and capital expenditures, and to pay a portion of the
cash paid in the Acquisition.
(3) During 1994, the Company changed its fiscal year end from the last day of
February to December 31. Information for the twelve months ended December
31, 1994 (unaudited) is provided for comparison to the information for the
year ended December 31, 1995. Information for the ten months ended December
31, 1993 (unaudited) is provided for comparison to the information for the
ten months ended December 31, 1994.
(4) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute per
share amounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF TRIKON
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto and "Selected Consolidated
Financial Data of Trikon" included elsewhere in this Form 10-K. This discussion
contains forward looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. These statements are subject
to certain risks and uncertainties, including slowing growth in the demand for
semiconductors and challenges from the Company's competition that could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof.
Overview
The Company develops, manufactures, markets and services semiconductor
equipment for the worldwide semiconductor manufacturing industry. These products
are used for etch, CVD, and PVD applications. The etch systems consist of the
PINNACLE 8000(R) and PINNACLE 8000R(TM) systems (selling price between
$1,800,000 for a standard two-module system to $3,400,000 for a four-module
system), the Omega(TM) 201-2 system (selling price between $700,000 and
$1,400,000, depending on the configuration of the system), and a stand-alone
MORI(TM) plasma source process module which lists for approximately $500,000.
The Company's CVD products consist of the Delta 201 (selling price approximately
$600,000), and the Planar 200 Flowfill (TM) system, selling price ranging
between $1,400,000 and $2,500,000, depending on the configuration of the system.
The Company's PVD products are the Sigma system (selling price ranges from
$1,500,000 to $2,500,000) and the Sigma Forcefill(TM) whose selling price ranges
from $3,500,000 to $4,000,000, depending on the configuration of the system.
The Omega(TM) 201-2 system, the Delta 201, the Planar 200 Flowfill(TM)
and the Sigma and Sigma Forcefill(TM) products were obtained with the
acquisition of Electrotech on November 15, 1996.
Electrotech Acquisition. On November 15, 1996, the Company acquired
Electrotech Limited and Electrotech Equipments Limited, privately-owned United
Kingdom companies founded in 1968, for an aggregate consideration of $75.0
million in cash and 5,600,000 shares of Common Stock, with an estimated fair
market value of $70.7 million, based on the closing sales price of a share of
Common Stock on Nasdaq on the last day prior to the public announcement of the
parties' agreement to the terms of the Acquisition. Electrotech develops,
manufactures, markets and services semiconductor fabrication equipment with
products and technologies for etch, CVD and PVD applications. The Acquisition
expanded the Company's product lines and its sales and service organization
which will enable the Company to have a greater presence throughout the United
States, Europe and Asia.
Semiconductor Industry Downturn. The semiconductor industry is highly
cyclical and has historically experienced periodic downturns, which have been
characterized by diminished product demand and production overcapacity. During
1996, the semiconductor industry experienced a downturn which created a volatile
market that resulted in the semiconductor manufacturers rescheduling and pushing
out orders due to diminished product demand and production overcapacity. The
Company believes that such downturn will continue through at least the third
quarter of 1997. As a result, the Company anticipates reporting lower sales for
the first quarter of 1997 than the fourth quarter of 1996 and anticipates
incurring a significant loss during the quarter. In certain instances, industry
downturns have lasted for extended periods of time. Each of Trikon's operations
have been and will continue to be dependent on the current and anticipated
market demand for integrate circuits (IC's) and products utilizing IC's that are
produced by semiconductor manufacturers. The current weakness in demand in the
semiconductor industry, and any continuation of this weakness in the future, is
likely to materially and adversely affect the Company's business and results of
operations.
Results of Operations
The following table sets forth certain consolidated operating data as a
percentage of total revenue for the periods indicated:
Twelve months
Year ended December 31 ended
---------------------- December 31,
1996(1) 1995(2) 1994(3)
------- ------- -------
Revenues:
Product sales............................................. 93.3% 98.1% 93.3%
Contract revenue.......................................... 6.7 -- --
License revenue........................................... -- 1.9 6.7
----- ----- -----
Total revenues........................................... 100.0 100.0 100.0
Costs and Expenses:
Cost of goods sold....................................... 58.2 52.3 61.3
Research and development................................. 24.0 21.5 40.0
Selling, general and administrative...................... 39.4 27.9 37.3
Amortization of intangibles.............................. 1.1 -- --
In-process technology.................................... 203.7 -- --
----- ----- -----
Total costs and expenses................................ 326.4 101.7 138.6
----- ----- -----
Loss before interest and income tax provision (benefit)... (226.4) (1.7) (38.6)
Interest income (expense), net............................ (0.5) 2.3 (0.2)
----- ----- -----
Income (loss) before income tax provision (benefit)....... (226.9) 0.6 (38.8)
Income tax provision (benefit)............................ (3.2) -- 0.5
----- ----- -----
Net income (loss)......................................... (223.7)% 0.6% (39.3)%
===== ===== =====
Gross margin on product sales............................. 37.5% 46.7% 34.3%
____________________
(1) Includes the results of operations from November 15, 1996 to December 31,
1996 of Electrotech, acquired on November 15, 1996. See Note 2 of the Notes
to the Consolidated Financial Statements.
(2) On August 29, 1995, the Company completed its Initial Public Offering,
resulting in $40,093,235 of net proceeds to the Company. The funds have
been used to cover the Company's working capital needs, its investment in
demonstration systems and capital expenditures, and to pay a portion of the
cash paid in the acquisition of Electrotech.
(3) During 1994, the Company changed its fiscal year end from the last day of
February to December 31. Information for the twelve months ended December
31, 1994 (unaudited) is provided for comparison to the information for the
year ended December 31, 1995.
Product Sales. Product sales increased to approximately $39.4 million for
fiscal 1996 from approximately $20.9 million for 1995, an increase of 89%.
Product sales in 1994 were $8.0 million. The increase in 1996 product sales was
attributable to the increased sales of the Company's PINNACLE 8000R(TM) systems
and the six week revenues achieved following the Company's acquisition of
Electrotech on November 15, 1996. Shipments increased to twelve PINNACLE
8000R(TM) systems, one PINNACLE 8000(R) system, six process modules and eight
MORI(TM) sources in fiscal 1996 compared to eight PINNACLE 8000(R) systems, one
PINNACLE 8000R(TM) system, five process modules, and
twenty MORI(TM) sources shipped in fiscal 1995, and three PINNACLE 8000(R)
systems and three APEX 7000(R) systems during the twelve months ended December
31, 1994. Included in the 1996 sales figures is $8.8 million in product sales
from Electrotech from the sales of three Omega(TM) 201-2 etch systems, two Sigma
Forcefill(TM) systems, and spare parts for the six week period from November 15,
1996 to December 31, 1996. The Company had no sales of Apex systems during 1995
and 1996, and expects that most of its product sales in the near term will be
derived primarily from sales of its Flowfill(TM) and Forcefill(TM) products and
its advanced PINNACLE 8000R(TM) systems.
Sales outside of the United States accounted for approximately 77%, 47% and
66% of total revenue in the years ended December 31, 1996 and 1995, and for the
twelve months ended December 31, 1994. The Company anticipates that sales
outside of the United States will continue to account for a significant portion
of its total revenue. In addition, with the acquisition of Electrotech, which
sells primarily to international locations including Germany, Japan and Israel,
the Company expects that sales to Japanese, Korean and European semiconductor
manufacturers will continue to represent a significant percentage of the
Company's product sales through at least 1997. In addition, because of the
large unit price associated with the Company's systems, the Company anticipates
that its product sales will continue to be made to a small number of customers
in any given quarter. See Note 1 of Notes to Consolidated Financial Statements.
Contract Revenue. For fiscal 1996, the Company received $2.8 million in
contract revenue as compared to no contract revenue for fiscal 1995 and the
twelve months ended December 31, 1994. This increase was due to the March 1996
agreement between Trikon and PMT CVD Partners, L.P. See Notes 1 and 6 to Notes
to Consolidated Financial Statements.
License Revenue. The Company has entered into licensing agreements with
Leybold, Canon Sales, NEC, Anelva and Watkins-Johnson which grant certain rights
for the use of the Company's MORI(TM) technology. These agreements provide for
an initial lump-sum license payment and generally provide the licensee with the
right, upon making further payments, to expand the scope of the license. For
fiscal 1996, the Company received no license revenue, as all these licenses were
fully paid. In fiscal 1995, license revenue was $0.4 million compared to $0.7
million for the twelve months ended December 31, 1994. The Company does not
anticipate the receipt of any additional license revenue from its licensing
agreements for at least the next twelve months. However, the Company may enter
into additional license agreements as it deems appropriate in order to broaden
the applications of its technologies, or to improve the Company's market
penetration.
Gross Margin on Product Sales. The Company's gross margin on product sales
for the year ended December 31, 1996, was 37.5%, as compared to 46.7% and 34.3%
for fiscal 1995 and the twelve months ended December 31, 1994, respectively.
The decrease in gross margin from 1995 to 1996 was primarily due to a low gross
margin of 14% on Electrotech's products shipped for the period from November 15,
1996 to December 31, 1996. The low gross margin was due to the write-up of
Electrotech's inventory on hand to the fair market value of such inventory as of
November 15, 1996, resulting from the allocation of the Electrotech purchase
price as required under Accounting Principles Board Opinion No. 16 ("APB No.
16"). The write-up increased cost of goods sold by approximately $3.0 million
for the period from November 15, 1996 to December 31, 1996, as the related
products were shipped. There is approximately $7.6 million in inventory that,
as of December 31, 1996, relates to the write-up of inventory to the fair market
value at the Acquisition date, based on APB No. 16. The $7.6 million write-up
will affect cost of goods sold as products are shipped from Electrotech in
fiscal year 1997. Gross margins have also been negatively impacted due to
issues related to the slower industry conditions noted above, and will continue
to be adversely affected in 1997.
Research and Development Expenses. Research and development expenses were
$10.1 million or 24.0% of total revenue for fiscal year 1996. This compared to
$4.6 million or 21.5% of total revenue on research and development related
activities in fiscal 1995, and $4.2 million or 40.0% of total revenue in the
twelve months ended December 31, 1994. Electrotech incurred $1.7 million in
research and development expenses for the period from
November 15, 1996 to December 31, 1996, which is included in research and
development expenses of $10.1 million noted above. The major focus of the
Company's research and development efforts during fiscal 1996 was in the
development of new processes and advancing its proprietary plasma source
technology, as well as adding enhancements to its existing products. In
addition, expenses in 1996 included reimbursed costs incurred associated with
the contract revenue from PMT CVD Partners, L.P. with respect to CVD
applications of the Company's technology. See Note 6 of Notes to Consolidated
Financial Statements. Electrotech's research and development efforts were
focused on increasing the development of its Forcefill(TM) and Flowfill(TM)
technologies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $16.6 million or 39.4% of total revenue in fiscal
1996, as compared to $5.9 million or 27.9% of total revenue in fiscal 1995 and
$3.9 million or 37.3% of total revenue in the twelve months ended December 31,
1994. Included in fiscal 1996 expenses is $3.1 million in selling, general and
administrative expenses related to Electrotech for the period from November 15,
1996 to December 31, 1996. The year-to-year dollar increases were primarily due
to the continued expansion of the Company's foreign operations. In addition,
the Company recorded additional expenses in 1996, including the establishment of
a $3.4 million reserve for doubtful accounts related to two shipments recorded
during 1996 to a distributor whose ability to pay is in question. The Company
has also added employees over the past two years to its sales and administration
and customer support areas to accommodate increased sales. The Company
anticipates that selling, general and administration expenses will continue to
grow in relation to the growth in revenue.
Loss From Operations. The Company realized a $95.6 million loss from
operations in fiscal 1996 as compared to a $0.4 million loss from operations in
fiscal 1995 and a $4.1 million loss from operations for the twelve months ended
December 31, 1994. The loss from operations in fiscal 1996 was due primarily to
a one-time acquisition related in-process research and development charge of
$86.0 million, a charge for the allowance for doubtful accounts of $3.4 million
and lower margins on Electrotech sales due to the $3.0 million charge resulting
from the allocation of the purchase price to write-up inventory values, in
accordance with APB No. 16 which was recorded in cost of goods sold as the
related inventory was shipped. The Company anticipates that operating results
will also be unfavorably impacted by approximately $7.6 million in fiscal 1997,
due to the write-up of Electrotech's inventory upon consummation of the
Acquisition to its fair market value.
Interest Income/Expense. Interest income increased to $1.6 million in
fiscal 1996 from $0.8 million in fiscal 1995 and $0.1 million in the twelve
months ended December 31, 1994. This was due to income derived from the
Company's short and long-term investments of the proceeds from the Convertible
Notes issued and sold during 1996, until such proceeds were spent in connection
with the Acquisition, and the proceeds of the public offering of the Company's
Common Stock, completed in the third quarter of fiscal 1995. Interest income in
1995 resulted in the Company's profitability in fiscal 1995, notwithstanding a
$0.4 million loss from operations.
Interest expense increased to $1.8 million in fiscal 1996 from $0.3 million
in fiscal 1995 and $0.2 million in the twelve months ended December 31, 1994.
This was due to the accrual of interest payable to the bondholders of the
convertible debt raised to fund part of the Acquisition. In addition, interest
expense was recorded for the utilization of the Company's $35.0 million working
capital facility from November 15, 1996 through December 31, 1996.
Income Taxes. The Company recorded a $1.3 million income tax benefit in
fiscal 1996 in comparison to accruing only the minimum state requirements in
fiscal 1995 and the minimum state requirements along with certain foreign
withholding taxes for the twelve months ended December 31, 1994. The $1.3
million benefit represents the combination of a foreign tax benefit associated
with the Electrotech operating loss and the reversal of deferred tax credits
established at November 15, 1996 for the difference in the tax basis and
financial reporting basis of the Electrotech assets acquired. The effective tax
rate differs from the statutory tax rate due to certain one-time non-deductible
charges (i.e., primarily the write-off of the in-process technology) and losses
for which no benefit has been provided. The Company's utilization of its
domestic and foreign net operating losses and credit carryforwards depends
upon future income and may be subject to an annual limitation, required by the
Internal Revenue Code of 1986 and similar state provisions. See Note 7 of Notes
to Consolidated Financial Statements.
The Company has operating subsidiaries in several countries, and each
subsidiary is taxed based on the laws of the jurisdiction in which it operates.
Because taxes are incurred at the subsidiary level, and one subsidiary's tax
losses cannot be used to offset the taxable income of subsidiaries in other
jurisdictions, the Company's consolidated effective tax rate may increase to the
extent it reports tax losses in some subsidiaries and taxable income in others.
The subsidiaries are subject to taxation in countries where they operate, and
such operations generally are taxed at rates similar to or higher than tax rates
in the United States. The payment of dividends or distributions by the
subsidiaries to the United States would be subject to withholding taxes in the
country of domicile and may be mitigated under the terms of relevant double tax
treaties.
Liquidity and Capital Resources
At December 31, 1996 the Company had $21.7 million in cash, cash
equivalents and short-term investments, compared to $38.7 million at December
31, 1995. The decrease in cash, cash equivalents and short-term investments
resulted from the use of cash in operating activities of $9.4 million and use of
cash in investing activities of $74.5 which was offset by cash provided by
financing activities of $78.0 million. The use of cash in operating activities
primarily represents investments in operating assets and liabilities amounting
to approximately $5.7 million related to sales volume increases and cash
operating losses of approximately $3.7 million.
Cash provided by financing activities resulted primarily from the offering
of Convertible Subordinated Notes (the "Convertible Notes") completed on October
7, 1996. The Convertible Notes raised gross proceeds of $86,250,000, which
amount was used in the acquisition of Electrotech. The Convertible Notes carry
interest that is payable semi-annually at an annual interest rate of 7-1/8%. The
Convertible Notes have a maturity date of October 15, 2001 and are convertible
at any time at the option of the holder into Common Stock at the conversion rate
of $15.635 per share.
On November 15, 1996, the Company entered into a three-year senior secured
credit facility with certain domestic and U.K. lenders (the "Working Capital
Facility") that permits the Company and its subsidiaries to borrow an aggregate
of up to $35.0 million, subject to borrowing base limitations, based upon
eligible accounts receivable. As of December 31, 1996, the Company had $17.1
million available under the Working Capital Facility, of which $14.5 million in
borrowings was outstanding. The Working Capital Facility places certain
restrictions on the Company, which among other things prohibit the Company from
paying cash dividends, limits the amount of capital expenditures and require the
Company to comply with certain financial ratios and covenants.
On November 14, 1996, the Company received a commitment of terms from five
investors for an unsecured subordinated debt commitment. On December 16, 1996,
the Company entered into a Note Purchase Agreement (the "Note Purchase
Agreement") with the five investors confirming such commitment for unsecured
subordinated debt in the amount of $6,250,000. The interest rate on amounts
drawn under the Note Purchase Agreement will be the bank's prime rate plus 4%.
Interest is payable quarterly. The ability to borrow under the Note Purchase
Agreement expires January 1, 1998 and amounts borrowed under the Note Purchase
Agreement plus accrued but unpaid interest is due on January 1, 2000.
Amounts drawn under the Note Purchase Agreement are unsecured obligations
of the Company. No amounts were outstanding under the Note Purchase Agreement as
of December 31, 1996. The Note Purchase Agreement contains covenants that are
comparable to those contained in the Convertible Notes.
On November 15, 1996, Trikon consummated the acquisition of Electrotech for
an aggregate consideration, excluding acquisition costs of $8.0 million, of
$145.7 million consisting of $75.0 million in cash and 5.6 million shares of
newly-issued Common Stock having a fair market value of $70.7 million, based on
the $12.625 per share closing
price of Common Stock on July 17, 1996, the last day prior to the public
announcement of the acquisition of Electrotech. The net proceeds from the sale
of the Convertible Notes, borrowings under the Working Capital Facility, and
cash and short term investments were used to fund the acquisition of Electrotech
and to pay off $17.6 million of short-term debt assumed as part of such
acquisition.
At December 31, 1996 and March 31, 1997, the Company was out of compliance
with the covenants established under the Working Capital Facility. Its lenders
have granted the Company a waiver of such covenant violations as of December 31,
1996 and as of March 31, 1997. The Company is negotiating with its lenders to
make various amendments to the loan agreement, including revising its covenants
for the duration of the Working Capital Facility such that the Company will be
able to remain in compliance with such amended covenants during the coming year.
Company management anticipates completing the amendment and executing such
agreement in the second quarter of 1997. The Company anticipates the amended
Working Capital Facility to contain terms similar to those currently in place.
The Convertible Notes contain certain provisions which provide that, upon
the occurrence of an "Event of Default", as defined, could cause the
Convertible Notes to become due and payable immediately. Such an Event of
Default would occur if, among other things, the Company were to default on the
Working Capital Facility or any other secured indebtedness, as defined, caused
by the failure to pay principal and interest payments when due or resulting in
the acceleration of such indebtedness prior to its express maturity in excess of
$10.0 million. The Convertible Notes and the Working Capital Facility have been
classified as long-term debt under the presumption that the Working Capital
Facility will be amended such that the Company will be able to comply with the
applicable financial covenants over the coming year.
During 1996, $10.0 million was invested in capital equipment, as the
Company used funds to expand its applications laboratory to support process
development and customer demonstrations and Electrotech finalized development of
a new corporate facility in South Wales.
The Company anticipates that it will spend approximately $16 million for
capital expenditures during fiscal 1997. This is expected to include
investments in demonstration and test equipment, information systems, leasehold
improvements and other capital items that should enable the Company to expand
its ability to support and develop new products and services. In addition, the
Company expects to increase its investment in inventory of demonstration systems
at customer sites.
In March 1996, Trikon sponsored a partnership with certain third-party
investors to fund research and development costs and expenses relating to CVD
technology and applications. Third-party investors invested an aggregate of
approximately $5,350,000 in the partnership, which aggregate amount was
available to fund such costs and expenses. At December 31, 1996, approximately
$2,133,038 remained available for future funding of such research and
development. As noted above, the Company does not anticipate that any of such
remaining funds will be made available for such research and development. See
Notes 6 and 12 to Notes to Consolidated Financial Statements.
The Company believes that cash provided or available from operations, the
Working Capital Facility, borrowings under the Note Purchase Agreement and other
sources of cash available to the Company, including cash, cash equivalents and
short-term investments on hand, will be sufficient to support the Company's
liquidity needs over the next 12 months. However, if the Company is unable to
amend the Working Capital Facility under similar terms as currently exists, the
Company's ability to generate adequate cash may be substantially affected.
Impact of Inflation
Although the Company cannot accurately anticipate the effect of inflation
on its operations, to date inflation has not had a material effect on the
Company's product sales or results of operations.
ITEM 6. (continued) SELECTED COMBINED FINANCIAL DATA OF ELECTROTECH
The selected combined financial data presented below for the fiscal year
ended June 30, 1993, and as of and for each of the three fiscal years ended June
30, 1994, 1995, and 1996 are derived from audited combined financial statements
of Electrotech, which have been audited by Ernst & Young Chartered Accountants,
independent auditors, and, except with respect to the June 30, 1993 financial
statements, are contained elsewhere herein. The selected combined financial
data presented below as of June 30, 1993 and as of and for the year ended June
30, 1992 and as of September 30, 1996 and for the three months ended September
30, 1996 and 1995 are derived from unaudited combined financial statements of
Electrotech, which are not contained herein. The combined financial statements
below are presented in British pounds sterling. For reference purpose, the Noon
Buying Rate was U.S. $1.65 = (Pounds)1 on December 12, 1996. All of the
selected combined financial data below is prepared under accounting principles
generally accepted in the United Kingdom ("UK GAAP"), which differ in certain
respects from United States generally accepted accounting principles ("US
GAAP"). The selected combined financial data set forth below is qualified in
its entirety by, and should be read in conjunction with, Electrotech's combined
financial statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Electrotech," which
are included in this Form 10-K.
Three Months
Ended
September 30 Year Ended June 30
------------------------------ ---------------------------------------------
1996 1995 1996 1995 1994
-------------- -------------- ------------- -------------- -------------
(in thousands of British pounds)
Combined Profit and Loss Accounts Data:
Sales.......................................... (Pounds)10,197 (Pounds)7,761 (Pounds)49,012 (Pounds)34,496 (Pounds)23,807
Cost of sales.................................. 5,218 3,760 23,406 17,014 11,496
-------------- ------------- -------------- -------------- --------------
Gross profit................................... 4,979 4,001 25,606 17,482 12,311
Operating expenses:
Research and development costs................. 1,702 1,239 6,674 4,421 3,332
Administrative expenses........................ 2,321 1,861 8,295 8,615 7,161
-------------- ------------- -------------- -------------- --------------
Total operating expenses....................... 4,023 3,100 14,969 13,036 10,493
-------------- ------------- -------------- -------------- --------------
Operating profit (loss)........................ 956 901 10,637 4,446 1,818)
Profit on disposal of businesses(1)............ -- -- -- 5,040 --
-------------- ------------- -------------- -------------- --------------
Profit on ordinary activities before interest.. 956 901 10,637 9,486 1,818
Interest payable, net.......................... (211) (146) (609) (438) (255)
-------------- ------------- -------------- -------------- --------------
Profit on ordinary activities before taxation.. 745 755 10,028 9,048 1,563
Tax on profit on ordinary activities........... 332 344 3,721 3,530 574
-------------- ------------- -------------- -------------- --------------
Profit for the period.......................... (Pounds)413 (Pounds)411 (Pounds)6,307 (Pounds)5,518 (Pounds)989
============== ============= ============== ============== ==============
1993 1992
-------------- -------------
Combined Profit and Loss Accounts Data:
Sales.......................................... (Pounds)16,547 (Pounds)13,919
Cost of sales.................................. 7,967 6,790
------------- --------------
Gross profit................................... 8,580 7,129
Operating expenses:
Research and development costs................. 2,365 2,207
Administrative expenses........................ 4,659 6,764
------------- --------------
Total operating expenses....................... 7,024 8,971
------------- --------------
Operating profit (loss)........................ 1,556 (1,842)
Profit on disposal of businesses(1)............ -- 4,652
------------- --------------
Profit on ordinary activities before interest.. 1,556 2,810
Interest payable, net.......................... (95) (376)
------------- --------------
Profit on ordinary activities before taxation.. 1,461 2,434
Tax on profit on ordinary activities........... 627 1,110
------------- --------------
Profit for the period.......................... (Pounds)834 (Pounds)1,324
============= ==============
As of As of June 30
September 30, ---------------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- -------------- --------------
Combined Balance Sheet Data:
Working capital................. (Pounds)15,847 (Pounds)16,422 (Pounds)14,035 (Pounds)10,547 (Pounds)10,075 (Pounds) 8,173
Total assets.................... 47,427 51,030 38,339 28,005 22,093 18,173
Long-term obligations........... 977 948 1,339 1,932 2,559 1,097
Total shareholder's equity...... 27,013 26,621 20,401 14,844 13,836 12,884
- ----------------------------
(1) Represents the profits, before taxes, recognized on the sales of Surface
Technology Systems Limited during the fiscal year ended June 30, 1995 and
the sale of the business of Plasma Products Limited during the fiscal year
ended June 30, 1992.
ITEM 7. (continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ELECTROTECH
The following discussion should be read in conjunction with the combined
financial statements of Electrotech and notes thereto and "Selected Combined
Financial Data of Electrotech" included elsewhere in this Form 10-K. The
combined financial statements of Electrotech combine the consolidated financial
statements of each of Electrotech Equipments Limited (ETE) and Electrotech
Limited (ET), which are subject to common control. The financial information
for Electrotech has been prepared in accordance with UK GAAP and in British
pounds. See Note 29 of the notes to the Electrotech combined financial
statements for a reconciliation to US GAAP for selected financial information
Background
A privately-owned company, Electrotech was founded in 1968 by three
scientists from the European research division of ITT as a small manufacturer of
vacuum accessories. By 1980, the core technologies of Electrotech had been
developed to address plasma etch (1975), plasma enhanced CVD (1978) and PVD
(1980). Electrotech opened sales offices in the U.S. and continental Europe
markets in the 1970's, appointed its first sales agents in Japan in 1983 and,
thereafter, expanded into other areas of the Asia/Pacific region.
In 1995, Electrotech sold its Surface Technology Systems Limited ("STS")
subsidiary to Sumitomo Precision Products Co. Limited, resulting in a gain of
(Pounds)5.0 million, before taxes, in the fiscal year ended June 30, 1995. The
proceeds from the sale of STS were used to fund a portion of a major expansion
program which included a move in 1996 into new corporate and manufacturing
headquarters in Newport, South Wales.
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain line items in the combined profit and loss
accounts related to the operations of Electrotech:
Three Months
Ended
September 30 Year Ended June 30
--------------- ------------------------
1996 1995 1996 1995 1994
------- ------ ----- ------- -----
Sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................... 51.2 48.4 47.8 49.3 48.3
------- ------ ----- ------- -----
Gross margin.................................... 48.8 51.6 52.2 50.7 51.7
Research and development expenses............... 16.7 16.0 13.6 12.8 14.0
Administrative expenses......................... 22.8 24.0 16.9 25.0 30.1
------- ------ ----- ------- -----
Total operating expenses........................ 39.5 40.0 30.5 37.8 44.1
Profit on disposal of business.................. -- -- -- 14.6 --
------- ------ ----- ------- -----
Profit on ordinary activities before interest... 9.3 11.6 21.7 27.5 7.6
Interest payable, net........................... (2.0) (1.9) (1.2) (1.3) (1.1)
------- ------ ----- ------- -----
Profit on ordinary activities before taxation... 7.3 9.7 20.5 26.2 6.5
Tax charge on profit on ordinary activities..... 3.3 4.4 7.6 10.2 2.4
------- ------ ----- ------- -----
Profit for the period........................... 4.0% 5.3% 12.9% 16.0% 4.1%
======= ====== ===== ======= =====
Comparison Of The Three Months Ended September 30, 1996 To The Three Months
Ended September 30, 1995
Revenues
Total revenues were (Pounds)10.2 million for the three months ended
September 30, 1996 compared to (Pounds)7.8 million for the three months ended
September 30, 1995, an increase of 30.8%. Notwithstanding such period-to-period
increase, revenues for the quarter ended September 30, 1996 decreased from
(Pounds)15.2 million, or 33%, as compared to revenues for the quarter ended June
30, 1996.
The period-to-period increase in revenues is primarily due to increased
sales of PVD products (Forcefill(TM) and Sigma). Units shipped increased to four
Sigma systems and two Forcefill(TM) modules in the three months ended September
30, 1996, compared to two Sigma systems and one Forcefill(TM) module in the
three months ended September 30, 1995. Revenues from these products were
(Pounds)7.8 million, representing 76.6% of total revenues in the three months
ended September 30, 1996 compared to revenues of (Pounds)2.9 million,
representing 37.1% of total revenues in the three months ended September 30,
1995. Revenues from the sales of PVD products increased by 169% between the two
quarters. The increase in revenues from the sale of Sigma products from quarter
to quarter was primarily due to higher unit selling prices and a reduction in
the number of sales made through distributors.
There were no sales of CVD products (Flowfill(TM), Delta and ND) during the
quarter ended September 30, 1996. During the quarter ended September 30, 1995,
there were sales of one Flowfill(TM), one Delta and one ND system, resulting in
total revenues of (Pounds)1.4 million.
Revenues from sales of Omega(TM) etch products were (Pounds)600,000 for the
three months ended September 30, 1996 and (Pounds)1.5 million for the three
months ended September 30, 1995, a decrease of 60% between the two periods.
During the three months ended September 30, 1996, two Omega(TM) etch systems
were shipped, compared to three Omega(TM) systems, during the three months ended
September 30, 1995.
Gross Margin
Electrotech's gross margin was 48.8% in the three months ended September
30, 1996 and 51.6% in the three months ended September 30, 1995. The decrease
in gross margin is primarily due to the effect of exchange rate fluctuations on
conversion to pounds sterling of revenues earned in other currencies.
Research and Development Expenses
Research and development expenses include costs associated with the
definition, design and development of new products. Research and development
expenses were (Pounds)1.7 million for the three months ended September 30, 1996,
compared to (Pounds)1.2 million for the three months ended September 30, 1995,
an increase of 41.7%. This increase is primarily due to increased development
costs on Forcefill(TM) and Flowfill(TM) technologies.
Electrotech considers its research and development activities to be crucial
to its future success and, therefore, expects its research and development
expenditures to continue to rise in monetary terms, although not necessarily as
a percentage of sales.
Administrative Expenses
Administrative expenses consist of personnel costs and overhead for
administration, finance, sales and marketing, information systems, human
resources and general management. Administrative expenses were (Pounds)2.3
million during the three months ended September 30, 1996 compared to (Pounds)1.9
million during the three months ended September 30, 1995, an increase of 21.0%
over such periods. Significant variations in expenditure between the two
periods were in payroll costs, which increased to (Pounds)945,000 from
(Pounds)827,000, an increase of 14.3%, and automobile and
travel costs which increased to (Pounds)580,000 from (Pounds)365,000, an
increase of 58.9%. Included in administrative expenses for the three months
ended September 30, 1996 were currency exchange gains of (Pounds)303,000
compared to currency exchange gains of (Pounds)150,000 for the three months
ended September 30, 1995.
In January 1996, Electrotech commenced partial occupation of new leased
premises in Newport, South Wales. Electrotech anticipates that the property
will be fully occupied by early 1997. Following full occupation of the property
the rental charge and depreciation of improvements will increase administrative
expenses by approximately (Pounds)1.2 million per annum. Management anticipates
that general and administrative expenses will continue to increase in support of
planned business expansion in markets outside the United Kingdom.
Interest Expense, Net
Net interest expense was (Pounds)211,000 in the three months ended
September 30, 1996 compared to (Pounds)146,000 in the three months ended
September 30, 1995, an increase of 44.5% over such periods. The increase was
primarily due to increased working capital requirements necessary to fund the
expansion of the business.
Income Tax Expense
Income tax expense was (Pounds)332,000 in the three months ended September
30, 1996 compared to (Pounds)344,000 in the three months ended September 30,
1995, a decrease of 3.5% over such periods. The effective tax rates were 44.6%
and 45.5%, respectively. The high effective tax rate for both periods was
primarily due to a larger portion of earnings arising in countries with a higher
effective tax rate than the U.K.
Worldwide Tax Expense
ET and ETE each operate as a holding company. ET and its subsidiaries
operate in the United Kingdom. ETE has operating subsidiaries in several
countries, and each subsidiary is taxed based on the laws of the jurisdiction in
which it operates. Because taxes are incurred at the subsidiary level, and one
subsidiary's tax losses cannot be used to offset the taxable income of
subsidiaries in other jurisdictions, ETE's consolidated effective tax rate may
increase to the extent it reports tax losses in some subsidiaries and taxable
income in others. The subsidiaries are subject to taxation in countries where
they operate, and such operations generally are taxed at rates similar to or
higher than tax rates in the United Kingdom. The payment of dividends or
distributions by the subsidiaries to ETE would be subject to withholding taxes
in the country of domicile and may be mitigated under the terms of relevant
double tax treaties with the United Kingdom.
Comparison Of The Year Ended June 30, 1996 To The Year Ended June 30, 1995
Revenues
Total revenues were (Pounds)49.0 million for the year ended June 30, 1996
compared to (Pounds)34.5 million for the year ended June 30, 1995, an increase
of 42.0%. Total revenues included sales of (Pounds)3.8 million for the year
ended June 30, 1995 and no sales in the comparable period in fiscal 1996 related
to STS.
The increase in revenues is primarily due to sales of Sigma products.
Units shipped increased to 17 Sigma systems and five Forcefill(TM) modules in
the year ended June 30, 1996, compared to 15 Sigma systems and four
Forcefill(TM) modules in the year ended June 30, 1995. Revenues from these
products were (Pounds)26.5 million, representing 54.2% of total revenues in the
year ended June 30, 1996 compared to revenues of (Pounds)18.0 million,
representing 57.9% of total revenues (less STS revenues) in the year ended June
30, 1995. Revenues from the sales of Sigma products increased by 47.2% between
the two years. The increase in revenues of approximately 47% from the sale of
Sigma
products from year to year was primarily due to higher unit selling prices and a
reduction in the number of sales made through distributors.
Revenues from sales of Planar 200 Flowfill(TM) products were (Pounds)4.6
million for the year ended June 30, 1996 and (Pounds)1.5 million for the year
ended June 30, 1995, an increase of 206%. Six Planar 200 Flowfill(TM) systems
were shipped during the year ended June 30, 1996, compared to the shipment of
two such systems during the year ended June 30, 1995.
Revenues from sales of Omega(TM) and Delta products were (Pounds)7.3
million and (Pounds)2.1 million for the year ended June 30, 1996 and were
(Pounds)2.0 million and (Pounds)1.1, respectively, for the year ended June 30,
1995, an increase of 265% and 91%, respectively, between the two periods. During
the year ended June 30, 1996, 14 Omega(TM) etch systems and five Delta systems
were shipped, compared to four Omega(TM) systems and four Delta systems,
respectively, during the year ended June 30, 1995. Unit prices on Delta systems
have significantly improved from year to year.
Gross Margin
Electrotech's gross margin was 52.2% in the year ended June 30, 1996 and
50.7% in the year ended June 30, 1995. Excluding sales and related costs of
sales of STS, the gross margin for the year ended June 30, 1995 was 51.9%. The
gross margins achieved by Electrotech were influenced primarily by changes in
product mix. Overall gross margins are also influenced by the portion of total
sales which are sold through distributors at reduced sales prices and the impact
of currency exchange rates on sales denominated in currencies other than pounds
sterling.
Research and Development Expenses
Research and development expenses include costs associated with the
definition, design and development of new products. Research and development
expenses were (Pounds)6.7 million for the year ended June 30, 1996, compared to
(Pounds)4.4 million for the year ended June 30, 1995 (including (Pounds)0.3
million of STS expenses), an increase of 63.4% (excluding STS expenses). This
increase is primarily due to increased development costs on Forcefill(TM) and
Flowfill(TM) technologies, including an expenditure of (Pounds)1.0 million on
machines dedicated to research and development having an estimated useful life
of less than one year.
Electrotech considers its research and development activities to be crucial
to its future success and, therefore, expects its research and development
expenditures to continue to rise in monetary terms, although not necessarily as
a percentage of sales.
Administrative Expenses
Administrative expenses consist of personnel costs and overhead for
administration, finance, sales and marketing, information systems, human
resources and general management. Administrative expenses were (Pounds)8.3
million during the year ended June 30, 1996 compared to (Pounds)8.6 million
during the year ended June 30, 1995, a decrease of 3.7% over such periods.
Excluding administrative expenses and non-recurring expenditures associated with
the sale of STS, administrative expenses were (Pounds)7.1 million during the
year ended June 30, 1995. Significant variations in expenditure between the two
periods were in payroll costs, which increased to (Pounds)3.4 million from
(Pounds)2.8 million, an increase of 21.4%, and travel costs which increased to
(Pounds)2.1 million from (Pounds)1.5 million, an increase of 40%. Included in
administrative expenses for the year ended June 30, 1996 were currency exchange
gains of (Pounds)604,000 compared to currency exchange losses of (Pounds)73,000
for the year ended June 30, 1995.
In January 1996, Electrotech commenced partial occupation of new leased
premises in Newport, South Wales. Electrotech anticipates that the property
will be fully occupied by early 1997. Following full occupation of the property
the rental charge and depreciation of improvements will increase administrative
expenses by approximately (Pounds)1.2 million
per annum. Management anticipates that general and administrative expenses will
continue to increase in support of planned business expansion in markets outside
the United Kingdom.
Interest Expense, Net
Net interest expense was (Pounds)609,000 in the year ended June 30, 1996
compared to (Pounds)438,000 in the year ended June 30, 1995, an increase of
39.0% over such periods. The increase was primarily due to increased working
capital requirements necessary to fund the expansion of the business.
Income Tax Expense
Income tax expense was (Pounds)3.7 million in the year ended June 30, 1996
compared to (Pounds)3.5 million in the year ended June 30, 1995, an increase of
5.7% over such periods. The effective tax rates were 37.1% and 39.0%,
respectively. The high effective tax rate for the year ended June 30, 1995 was
primarily due to a larger portion of earnings arising in countries with a higher
effective tax rate than the U.K.
Comparison Of The Year Ended June 30, 1995 To The Year Ended June 30, 1994
Revenues
Total revenues, exclusive of STS revenues, were (Pounds)30.7 million in the
fiscal year ended June 30, 1995 compared to (Pounds)18.4 million in the year
ended June 30, 1994, an increase of 66.9%. The increase in revenues was
primarily attributable to increased sales of Sigma products. Shipments
increased to 15 Sigma systems and four Forcefill(TM) modules in fiscal 1995,
compared to four Sigma systems and one Forcefill(TM) module in fiscal 1994.
Revenues from these products were (Pounds)18.0 million in fiscal 1995 compared
to (Pounds)5.2 million in fiscal 1994, an increase of 246.2%.
Revenues from sales of Planar 200 Flowfill(TM) products were (Pounds)1.5
million for the year ended June 30, 1995 and (Pounds)1.3 million for the year
ended June 30, 1994. Two Planar 200 Flowfill(TM) systems were shipped in each of
fiscal year 1995 and 1994.
Revenues from sales of Omega(TM) and Delta products in fiscal 1995 were
(Pounds)2.0 million and (Pounds)1.1 million, respectively, compared to
(Pounds)2.7 million and (Pounds)631,000, respectively, in fiscal 1994, a
decrease of 25.9% and an increase of 74.3%, respectively. During fiscal 1995
four Omega(TM) systems and four Delta systems were shipped, compared to five
Omega(TM) systems and two Delta systems in fiscal 1994.
Revenues from STS were (Pounds)3.8 million in fiscal 1995, compared to
(Pounds)5.4 million in fiscal 1994.
Gross Margin
Gross margin was 50.7% and 51.7% for the years ended June 30, 1995 and
1994, respectively. The gross margins achieved by Electrotech was influenced by
changes in product mix, the portion of total sales which are sold through
distributors at reduced sales prices and the impact of currency exchange rates
on sales denominated in currencies other than pounds sterling.
Research and Development Expenses
Research and development expenses, exclusive of expenses of STS, were
(Pounds)4.1 million in the year ended June 30, 1995, compared to (Pounds)2.8
million in the year ended June 30, 1994, an increase of 46.4%. The increased
expenditure was primarily attributable to research and development of the
Forcefill(TM) and Flowfill(TM) technologies.
Research and development expenses as a percentage of revenues were 12.8% in
fiscal 1995 compared with 14.0% in fiscal 1994.
Administrative Expenses
Administrative expenses, exclusive of expenses of STS, were (Pounds)7.5
million in the year ended June 30, 1995 compared to (Pounds)5.4 million in the
year ended June 30, 1994. Excluding a non-recurring expenditure associated with
the sale of STS, administrative expenses in fiscal 1995 amounted to (Pounds)7.1
million, an increase of 31.5% from fiscal 1994.
Interest Expense, Net
Net interest expense was (Pounds)438,000 and (Pounds)255,000 in the fiscal
years ended June 30, 1995 and 1994, respectively. The increases were primarily
due to increased working capital requirements due to the expansion of the
business.
Income Tax Expense
Worldwide income tax expense was (Pounds)3.5 million in the fiscal year
ended June 30, 1995. This amount included (Pounds)2.0 million in respect of the
gain on the sale of STS. The effective tax rate was 39.0% in the year ended
June 30, 1995. Income tax expense was (Pounds)574,000 in fiscal 1994, an
effective tax rate of 36.7%.
Worldwide Tax Expense
ET and ETE each operated as a holding company. ET and its subsidiaries
operate in the United Kingdom. ETE has operating subsidiaries in several
countries, and each subsidiary is taxed based on the laws of the jurisdiction in
which it operates. Because taxes are incurred at the subsidiary level, and one
subsidiary's tax losses cannot be used to offset the taxable income of
subsidiaries in other jurisdictions, ETE's consolidated effective tax rate may
increase to the extent it reports tax losses in some subsidiaries and taxable
income in others. The subsidiaries are subject to taxation in countries where
they operate, and such operations generally are taxed at rates similar to or
higher than tax rates in the United Kingdom. The payment of dividends or
distributions by the subsidiaries to ETE would be subject to withholding taxes
in the country of domicile and may be mitigated under the terms of relevant
double tax treaties with the United Kingdom.
Liquidity and Capital Resources
Net cash provided by operating activities was (Pounds)4.9 million for the
year ended June 30, 1996 against a net outflow from operating activities of
(Pounds)3.3 million in the year ended June 30, 1995. Net cash outflows from
operating activities were (Pounds)2.7 million in fiscal 1994. The net cash
inflows and outflows from operating activities reflect movements in the working
capital of Electrotech.
Net cash provided by operating activities was (Pounds)2.3 million for the
three months ended September 30, 1996 against a net inflow from operating
activities of (Pounds)147,000 in the three months ended September 30, 1995. The
net cash inflows from operating activities reflect movements in the working
capital of Electrotech.
Net cash used in investing activities was (Pounds)4.8 million in the year
ended June 30, 1996. This was primarily due to capital expenditure at the new
premises at Newport, South Wales. There was a net cash inflow from investing
activities of (Pounds)4.1 million in the year ended June 30, 1995, comprised of
an inflow of (Pounds)6.6 million from the sale of STS less capital expenditures
of (Pounds)2.5 million. The net cash used in investing activities was
(Pounds)745,000 in fiscal 1994. Net cash used in financing activities was
(Pounds)188,000 in the year ended June 30, 1996. Net cash used in financing
activities was (Pounds)400,000 in both fiscal 1995 and fiscal 1994. All cash
used in financing relates to repayments made against the medium-term bank loan.
Net cash used in investing activities was (Pounds)1.1 million in the three
months ended September 30, 1996 and (Pounds)1.2 million in the three months
ended September 30, 1995. In both periods, this was primarily due to capital
expenditure at the new premises at Newport, South Wales.
Due to recent growth in Electrotech's sales and its development of new
products, Electrotech's existing facilities have reached their capacity limit.
Electrotech has leased a 102,000 square foot facility into which it moved
certain of its sales, customer support and financing operations in January 1996.
Approximately 20,000 square feet of the facility are currently in use, and the
remaining space is being built out with a view to full occupancy later in 1997.
The rental of the new premises is (Pounds)500,000 per annum.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index included at "Item 14. Exhibits, Financial Statements
Schedules, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF TRIKON.
The following table sets forth certain information concerning Trikon's directors
and executive officers.
NAME AGE POSITION
- ----------------------------- ----- --------------------------------------------------------
Dr. Gregor A. Campbell...... 36 Director and Chief Executive Officer
Christopher D. Dobson....... 60 Director and Chairman of the Board
Nigel Wheeler............... 47 Director, President and Chief Operating Officer
John W. LaValle............. 39 Senior Vice President, Chief Financial Officer and Secretary
Harvey J. Frye.............. 44 Vice President, Sales & Marketing
Steve Rhoades............... 36 Vice President
Dr. David J. Hemker......... 34 Vice President, Technology
Robert J. Snyder............ 55 Vice President, Operations
Craig S. Montesanti......... 37 Director of Finance and Administration
John A. Rollwagen(1)........ 56 Director
Brian D. Jacobs(1).......... 35 Director
G. Bradford Jones(2)........ 42 Director
Charles Thompson(2)......... 67 Director
Dr. Hiroyuki Mizuno......... 67 Director
- --------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Dr. Campbell is a founder of Trikon, and has been a director since Trikon
was formed in 1985. Dr. Campbell has been the Chief Executive Officer of Trikon
since 1988. Dr. Campbell served as President of Trikon from 1988 until November
1996. Dr. Campbell also served as Trikon's Secretary from August to December
1994.
Mr. Dobson joined Trikon's board of directors as Chairman in November 1996
upon Trikon's acquisition of Electrotech. Mr. Dobson was a co-founder of
Electrotech and was the Chairman of Electrotech's board of directors from 1971
to November 1996.
Mr. Wheeler joined Trikon as a director and the President and Chief
Operating Officer in November 1996 upon Trikon's acquisition of Electrotech.
From July 1993 to November 1996, Mr. Wheeler served as Electrotech's Chief
Executive Officer. From July 1987 to July 1993, Mr. Wheeler was the General
Operations Director of Electrotech and had served in other capacities with
Electrotech since 1980.
Mr. LaValle joined Trikon in November 1994 as Vice President and Chief
Financial Officer, and became Secretary in December 1994. In November 1996, Mr.
LaValle became Senior Vice President. Before joining Trikon, Mr. LaValle served
from September 1989 to November 1994 as Vice President, Chief Financial Officer
and Secretary of Superconductor Technologies, Inc.
Mr. Frye joined Trikon in June 1994 as Vice President, Sales, and became
Vice President, Sales & Marketing in May 1995. Prior to joining Trikon, Mr.
Frye served as Vice President of Fab Product Sales for KLA Instruments Corp.
from March 1993 to June 1994, and was Vice President, Sales for KLA Instruments
Corp.'s Wafer Inspection Division from June 1986 to March 1993.
Mr. Rhoades joined Trikon in October 1993, became Vice President,
Engineering in April 1995 and became the Vice President and General Manager of
the CVD Partnership in July 1996. From March 1990 to October 1993, Mr. Rhoades
was employed by Applied Materials, where he managed metal etch process
development.
Dr. Hemker joined Trikon in August 1993, and became Vice President,
Technology in May 1995. From April 1989 to August 1993, Dr. Hemker was a member
of the technical staff at Applied Materials.
Mr. Snyder joined Trikon in March 1996 as Vice President of Operations.
Before joining Trikon, Mr. Snyder served from September 1992 to December 1995 as
Vice President and General Manager of two divisions of Joslyn Corporation, Air
Dry Corporation and ADK Pressure Equipment Corporation, and was President of
Ultranautics from December 1990 to September 1992.
Mr. Montesanti joined Trikon in February 1991 as Director of Finance and
Administration. Before joining Trikon, Mr. Montesanti served from February 1983
to February 1991 as Assistant Controller of Ioptex Research Inc.
Mr. Rollwagen joined Trikon's board of directors as Chairman in December
1993 and resigned as Chairman, but not as a director, in November 1996 upon
Trikon's acquisition of Electrotech. From August 1975 to January 1993, Mr.
Rollwagen served in various executive positions at Cray Research, Inc. Mr.
Rollwagen became President of Cray Research in 1977 and Chairman and Chief
Executive Officer in 1981. Mr. Rollwagen also currently serves as a senior
advisor to St. Paul Venture Capital, Inc. ("St. Paul Venture Capital") and as a
director of Computer Network Technology, Inc.
Mr. Jacobs has served as a director of Trikon since March 1993. Mr. Jacobs
is currently an executive vice president of St. Paul Venture Capital, which he
joined in June 1992. From June 1989 to June 1992, Mr. Jacobs was a senior
associate with the Security Pacific Venture Capital Group. Mr. Jacobs also
serves as a director of several private corporations.
Mr. Jones has served as a director of Trikon since August 1990. Mr. Jones
is currently a general partner in the firm of Brentwood Venture Capital, which
he joined in 1981. Mr. Jones also serves as a director of Interpore
International, ISOCOR, Onyx Acceptance Corp., Aastrom Biosciences and several
privately-held companies.
Mr. Thompson was elected as a director of Trikon in April 1996. Mr.
Thompson retired February 1, 1996 as Senior Vice President and Director of
Worldwide Marketing at Motorola Semiconductor, a position that he held for 20
years. Mr. Thompson joined Motorola in 1969. Prior to 1969, Mr. Thompson
worked for 18 years at General Electric Company in a variety of computer-related
executive positions.
Dr. Mizuno was elected as a director of Trikon in April 1996. Dr. Mizuno
is retired, having served as Distinguished Technology Advisor at Matsushita
Electric Industrial Co., Ltd. ("Matsushita") in Osaka, Japan from June 1994 to
June 1996. Dr. Mizuno joined the Matsushita group of companies in 1952 and has
served Matsushita and its related companies in a number of senior management
positions. Until June of 1994, Dr. Mizuno served as Executive Vice President
and as a Senior Member of the Board of Directors of Matsushita. Dr. Mizuno also
served as Director of the New Media Development Association in Japan from April
1991 to March 1993 and as Chairman of the Institute of Television Engineers of
Japan from June 1982 to May 1993.
Officers are appointed by the Board of Directors and serve at the
discretion of the Board. There are no family relationships among the directors
and executive officers of Trikon.
ITEM 11. EXECUTIVE COMPENSATION.
Summary of Cash and Certain Other Compensation
The following table sets forth all compensation received for services rendered
to Trikon in all capacities for the years ended December 31, 1996 and 1995 and
the ten months ended December 31, 1994, by (i) Trikon's Chief Executive Officer
and (ii) each of the other four most highly compensated executive officers of
Trikon who were serving as executive officers at December 31, 1996 and whose
total compensation exceeded $100,000 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
-----------------
COMPENSATION SECURITIES
FISCAL ---------------------- UNDERLYING STOCK ALL OTHER
NAME AND PRINCIPAL POSITION(1) YEAR(2) SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- ------------------------------------ ------- ---------------------- ----------------- ------------------
Dr. Gregor A. Campbell.............. 1996 $210,000 $ -- 43,000 $ 2,895(3)
Chief Executive Officer 1995 160,000 36,708 96,666 779(3)
1994 135,383 25,000 -- 185(3)
John A. Rollwagen(4)................ 1996 144,000 -- -- --
Director 1995 100,000 -- 73,333 --
1994 44,000 -- -- --
James F. Marshall(5)................ 1996 170,000 -- 12,000 4,691(3)
Executive Vice President and 1995 140,001 339 30,000 174(3)
Chief Operating Officer 1994 118,462 25,000 -- 119(3)
John W. LaValle..................... 1996 130,000 -- 32,000 320(3)
Senior Vice President, Chief 1995 120,000 173 20,000 66(3)
Financial Officer and Secretary 1994 11,538 -- 36,667 --
Harvey J. Frye...................... 1996 150,001 -- 7,000 6,278(6)
Vice President, Sales & 1995 140,000 256 30,000 35,802(7)
Marketing 1994 82,385 10,000 45,000 10,760(8)
_______________
(1) Each of Christopher D. Dobson, the Chairman of the Board, and Nigel Wheeler,
a director and the President and Chief Operating Officer of the Company,
joined Trikon in November 1996 upon the Company's acquisition of
Electrotech. Mr. Dobson currently receives cash compensation of
approximately $300,000 annually and Mr. Wheeler, pursuant to an employment
contract discussed below, is paid an annual base salary of $250,000 (net of
any U.S. taxes or other assessments so long as he is not a U.S. citizen) and
received in connection with the execution of such agreement an option to
purchase 200,000 shares of Common Stock. See Footnote 1 to the following
"Option Grants in Last Fiscal Year" table. Because neither of their total
compensation exceeded $100,000 for the fiscal year ended December 31, 1996,
they are not listed in the above table.
(2) During 1994, Trikon changed its fiscal year end from the last day of
February to December 31. Consequently, compensation information presented in
this table for 1994 is for a ten-month period only.
(3) This amount represents premiums paid by Trikon for life insurance of which
the officer's designee is the beneficiary.
(4) In June 1995, Mr. Rollwagen agreed to increase his duties as Chairman of the
Board to a half-time basis, and in exchange therefor, Trikon agreed to pay
him an annual salary of $144,000 as well as to pay for certain expenses.
Mr. Rollwagen resigned as Chairman of the Board, but not as a director, in
November 1996 upon Trikon's acquisition of Electrotech. In consideration of
the Board of Directors' desire that Mr. Rollwagen remain a member of the
Board following his resignation, the Board approved the extension of Mr.
Rollwagen's
annual salary through December 31, 1997, subject to his continued
participation as a director and senior advisor to the Company. The Board
also approved at such time the immediate vesting of all of Mr. Rollwagen's
outstanding, unvested options to purchase an aggregate of (i) 9,335 shares
of Common Stock at an exercise price of $1.05 per share and (ii) 53,333
shares of Common Stock at an exercise price of $6.30 per share.
(5) Mr. Marshall resigned from the Company effective December 31, 1996.
(6) Of this amount, (i) $5,904 represents a car allowance and (ii) $374
represents premiums paid by Trikon for life insurance of which the officer
is the beneficiary.
(7) Of this amount, (i) $30,000 represents reimbursement for relocation
expenses, (ii) $102 represents premiums paid by Trikon for life insurance of
which the officer is the beneficiary and (iii) $5,700 represents a car
allowance.
(8) Of this amount, (i) $7,170 represents reimbursement of relocation expenses,
(ii) $82 represents premiums paid by Trikon for life insurance of which the
officer is the beneficiary and (iii) $3,508 represents a car allowance.
Trikon currently has no employment contracts with any of the Named
Executive Officers. However, the Company does have an employment contract with
Nigel Wheeler, a director and the President and Chief Operating Officer of
Trikon, dated November 15, 1996, pursuant to which Mr. Wheeler is to be
nominated as a director and to act as the President and Chief Operating Officer
for the three-year term of the agreement. The agreement renews annually unless
terminated by either party. Under the agreement, Mr. Wheeler is paid a base
salary of $250,000 per year, net of any U.S. taxes or other assessments so long
as he is not a U.S. citizen. The base salary is subject to certain annual,
upward adjustments by the Company. In addition, Mr. Wheeler is eligible to
receive an annual performance bonus for each year of service. Mr. Wheeler was
also granted, in connection with entering into such agreement, options to
acquire 200,000 shares of Common Stock at an exercise price of $11.625 per
share, the fair market value of a share of Common Stock on the date of grant.
The employment agreement further provides certain customary insurance, vacation
benefits and termination provisions.
1991 STOCK OPTION PLAN
Trikon's 1991 Stock Option Plan (the "Option Plan") provides for the
granting of either incentive stock options or nonqualified stock options to
specified employees, directors, consultants and advisors of Trikon. The Option
Plan is administered by the Compensation Committee of the Board of Directors.
The exercise price of stock options granted under the Option Plan must be
equal to at least the fair market value of the stock subject to the option on
the date of the grant (or 110% with respect to holders of more than 10% of the
voting power of Trikon's outstanding Common Stock). Options granted under the
Option Plan are non-transferable and generally expire thirty days after the
termination of an optionee's service to Trikon. Upon the dissolution or
liquidation of Trikon or upon any reorganization, merger or consolidation in
which Trikon does not survive, the Option Plan, and each outstanding option
granted thereunder shall terminate, provided that each optionee to whom no
substitute option has been tendered by the surviving corporation in any such
transaction shall have the right to exercise in whole or in part any unexpired
option or options issued to him or her, without regard to the vesting provisions
thereof.
In connection with the Acquisition, Trikon established a Share Option and
Reimbursement Agreement solely for its U.K. employees pursuant to which a
maximum of 926,530 shares of Common Stock reserved for issuance under the Option
Plan have been set aside for issuance pursuant to the terms of a stock option
plan (the "Share Option Scheme") approved by the Board of Inland Revenue in the
United Kingdom. The Rules of the Share Option Scheme are similar to those in
the Option Plan and offer no benefits to share option holders that would not be
available in all material respects to participants of the Option Plan.
Accordingly, the Share Option Scheme essentially runs in parallel with the
Option Plan, but is limited to the United Kingdom employees of Trikon, and
926,530 shares out of a total of 2,400,000 shares available under the Option
Plan are allotted to the Share Option Scheme.
STOCK OPTION GRANTS
The following table sets forth each grant of stock options made during the
year ended December 31, 1996 to each of the Named Executive Officers. No stock
appreciation rights ("SARs") have ever been granted by Trikon.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION --------------------
NAME(1) GRANTED(#) PERIOD(%) (S/SH)(2) DATE 5% 10%
- ---------------------- ------------- ---------------- --------- ----------- --------- ---------
Dr. Gregor A. Campbell 18,000(4) 4.73% $ 8.87 01/17/06 $100,476 $254,646
25,000(5) 6.56 14.00 10/23/06 220,150 557,900
John A. Rollwagen(6).. -- -- -- -- -- --
James F. Marshall(7).. 12,000 3.15 8.87 04/30/97 66,984 169,764
John W. LaValle....... 7,000(4) 1.84 8.87 01/17/06 39,074 99,029
25,000(5) 6.56 14.00 10/23/06 220,150 557,900
Harvey J. Frye........ 7,000(4) 1.84 8.87 01/17/06 39,074 99,029
_____________
(1) Nigel Wheeler, a director and the President and Chief Operating Officer of
Trikon, was granted an option to purchase 200,000 shares of Common Stock at
an exercise price of $11.625 per share, representing the fair market value
of a share of Common Stock on the date of grant, in connection with his
assumption of such positions upon Trikon's acquisition of Electrotech in
November 1996. Such option vests in equal, annual increments of 25% over
the four-year period following its date of grant. Because Mr. Wheeler is not
a Named Executive Officer, his option holdings are not listed in this table.
See Footnote 1 to the preceding "Summary Compensation Table."
(2) Represents the fair market value of the underlying shares of Common Stock at
the time of grant.
(3) Represents the value of the shares of Common Stock issuable upon the
exercise of the option, assuming the stated rates of price appreciation for
ten years, compounded annually, with the aggregate exercise price deducted
from the final appreciated value. Such annual rates of appreciation are for
illustrative purposes only, are based on requirements of the Securities and
Exchange Commission and do not reflect Trikon's estimate of future stock
appreciation. No assurance can be given that such rates of appreciation, or
any appreciation, will be achieved.
(4) Represents stock options that vest in equal, annual increments of 25% over
the four-year period following their date of grant, January 17, 1996.
(5) Represents stock options that vest in equal, annual increments of 25% over
the four-year period following their date of grant, October 23, 1996.
(6) In November 1996, in connection with Mr. Rollwagen's resignation as
Chairman, the Board of Directors approved the acceleration of the vesting of
all of Mr. Rollwagen's outstanding, unvested options to purchase an
aggregate of 62,668 shares of Common Stock. See Footnote 4 to the preceding
"Summary Compensation Table."
(7) Mr. Marshall resigned from the Company effective December 31, 1996. All of
Mr. Marshall's unexercised options to purchase Common Stock will terminate
on April 30, 1997.
AGGREGATED STOCK OPTION EXERCISES IN FISCAL YEAR 1996 AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth the number and value of shares acquired by the
Named Executive Officers upon exercise of stock options during Trikon's fiscal
year ended December 31, 1996 and of the exercisable and unexercisable options
held by each of the Named Executive Officers at December 31, 1996.
NUMBER OF VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE FISCAL YEAR-END(#) FISCAL YEAR END($)(2)
NAME(1) EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- ------------- ----------- ------------------------- -------------------------
Dr. Gregor A. Campbell... -- $ -- 70,111/69,556 $245,855/332,730
John A. Rollwagen(3)..... -- -- 96,666/0 649,328/0
James F. Marshall(4)..... 10,000 147,000 43,332/43,333 413,449/402,867
John W. LaValle.......... 16,667 157,666 25,000/39,667 0/313,665
Harvey J. Frye........... -- -- 29,334/52,666 263,670/447,955
_____________
(1) See Footnote 1 to the preceding "Option Grants in Last Fiscal Year" table
concerning the grant of an option to purchase 200,000 shares of Common Stock
to Mr. Wheeler, a director and the President and Chief Operating Officer of
the Company.
(2) These values are calculated using the December 31, 1996 closing price of
Common Stock on Nasdaq of $11.75 per share, less the exercise price of the
options, multiplied by the number of shares to which the options relate.
(3) See Footnote 4 to the preceding "Summary Compensation Table" for information
concerning the acceleration of the vesting of all of Mr. Rollwagen's
outstanding, unvested options.
(4) Mr. Marshall resigned from the Company effective December 31, 1996. All of
Mr. Marshall's unexercised options to purchase Common Stock will terminate
on April 30, 1997.
DIRECTOR COMPENSATION
The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but outside
directors may be reimbursed for certain expenses in connection with attendance
at Board and committee meetings and may receive grants of options to purchase
Common Stock upon their initial joining of the Board and any reelection as a
director thereafter.
In April 1996, the Board, in connection with their election to the Board of
Directors, approved the grant to each of Charles Thompson and Dr. Hiroyuki
Mizuno of an option to purchase 12,500 shares of Common Stock at an exercise
price of $14.75 per share, which price represented the fair market value of a
share of Common Stock on the date of grant, which option vests in equal, annual
increments of 25% over the four-year period following their date of grant,
subject to such individual's continued service as a director of the Company.
In addition, in October 1996 the Compensation Committee, following their
reelection as directors, approved the grant to each of the outside directors,
Messrs. Jones, Jacobs and Thompson and Dr. Mizuno, of an option to purchase
2,500 shares of Common Stock at an exercise price of $14.00 per share, which
price represented the fair market value of a share of Common Stock on the date
of grant, which option vests in equal, annual increments of 25% over the four-
year period following their date of grant, subject to such individual's
continued service as a director of the Company.
In June 1995, Mr. Rollwagen agreed to increase his duties as the Chairman
of the Board of the Company to a half-time basis. In consideration therefor,
the Company agreed to pay Mr. Rollwagen an annual salary of $144,000, as well as
certain expenses. In November 1996, Mr. Rollwagen resigned as Chairman of the
Board, but not as a director, upon Trikon's acquisition of Electrotech. In
consideration of the Board of Directors' desire that Mr. Rollwagen remain a
member of the Board following his resignation, the Board approved the extension
of Mr. Rollwagen's annual salary through December 31, 1997, subject to his
continued participation as a director and senior advisor to the Company. The
Board also approved at such time the immediate vesting of all of
Mr. Rollwagen's outstanding, unvested options to purchase an aggregate of (i)
9,335 shares of Common Stock at an exercise price of $1.05 per share and (ii)
53,333 shares of Common Stock at an exercise price of $6.30 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of Trikon (the
"Compensation Committee") consisted of Messrs. Rollwagen, Jones and Robelen from
January 1, 1996 until April 24, 1996, at which time Mr. Robelen resigned as a
director of Trikon and a member of the Compensation Committee and Mr. Rollwagen
resigned from the Compensation Committee. Simultaneously with such resignations
from the Compensation Committee, the Board of Directors voted to reduce the
number of members of the Compensation Committee from three to two. On April 24,
1996, Charles Thompson was appointed by the Board to fill the remaining vacancy
on the Compensation Committee. From April 24, 1996 through the fiscal year
ended December 31, 1996, the Compensation Committee consisted of Messrs. Jones
and Thompson, who are the current members of such committee.
Other than Mr. Rollwagen, Trikon's Chairman of the Board until November
1996, none of these individuals was at any time during the fiscal year ended
December 31, 1996 or at any other time an officer or employee of Trikon. No
executive officer of Trikon serves as a member of the Board or the Compensation
Committee of any other entity which has one or more executive officers serving
as a member of Trikon's Board of Directors or Compensation Committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act ("Section 16(a)"), requires Trikon's
directors and certain of its officers, and persons who own more than 10% of a
registered class of Trikon's equity securities (collectively, "Insiders"), to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "Commission"). Insiders are required by Commission
regulations to furnish Trikon with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5s were
required for those persons, Trikon believes that its Insiders complied with all
applicable Section 16 filing requirements for 1996, on a timely basis, with the
exception of the following late filings by (i) Brian D. Jacobs, a director of
the Company, who filed a Form 5 in February 1997 to report his indirect
acquisition in November 1996 of a warrant to purchase 24,510 shares of Common
Stock that was acquired by St. Paul Fire and Marine Insurance Company ("St.
Paul"), (ii) St. Paul, which filed a Form 5 in February 1997 to report its
acquisition in November 1996 of a warrant to purchase 24,510 shares of Common
Stock, (iii) David W. Chonette, John L. Walecka and Roger C. Davisson, each of
whom is a general partner of Brentwood V Ventures, L.P., the sole general
partner of Brentwood Associates V, L.P. ("Brentwood"), and each of whom filed a
Form 5 in February 1997 to report each of their indirect disposition of 300,000
shares of Common Stock as a result of Brentwood's distribution (the "Brentwood
Distribution") to its partners of such shares in July 1996, (iv) Brentwood V
Ventures, L.P., which filed a Form 5 in February 1997 to report its indirect
disposition of 300,000 shares of Common Stock pursuant to the Brentwood
Distribution, (v) G. Bradford Jones, a director of the Company, who filed a Form
5 in February 1997 to report his indirect acquisition in November 1996 of a
warrant to purchase 49,020 shares of Common Stock that was acquired by
Brentwood, and (vi) Charles Thompson and Dr. Hiroyuki Mizuno, each of whom is a
director of the Company and each of whom filed an amended Form 3 in February
1997 to reflect each of their acquisition in April 1996 of an option to purchase
12,500 shares of Common Stock, which was subject to shareholder approval of an
amendment to the Option Plan at the Annual Meeting, which approval was obtained.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of March 31, 1997 by (i) each person (or group or
affiliated persons) who is known by Trikon to own beneficially more than 5% of
Trikon's outstanding Common Stock, (ii) each of Trikon's directors, (iii)
Trikon's Chief Executive Officer and each of the other Named Executive Officers
and (iv) Trikon's directors and executive officers as a group. Except as
indicated in the footnotes to this table, the persons named in the table, based
on information provided by such persons to the Company, have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws, where
applicable.
SHARES
BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PERCENT OF CLASS(1)
- ---------------------------------------------- ----------------- -------------------
Christopher D. Dobson......................... 4,853,334 34.0%
Ringland Way, Newport
Gwent, NP6 2TA, UK
St. Paul Fire & Marine Insurance Company(2)... 1,098,068 7.5
8500 Normandale Lake Boulevard, Suite 1940
Bloomington, MN 55437
Dr. Gregor A. Campbell(3)..................... 378,777 2.6
Nigel Wheeler................................. -- --
John A. Rollwagen(4).......................... 167,618 1.2
James F. Marshall(5).......................... 7,998 *
John W. LaValle(6)............................ 16,667 *
Harvey J. Frye(7)............................. 33,084 *
Brian D. Jacobs(2)............................ 1,098,068 7.4
G. Bradford Jones(8).......................... 589,306 3.9
Charles Thompson(7)........................... 3,125 *
Hiroyouki Mizuno, Ph.D.(7).................... 3,125 *
All current directors and executive officers as a group
(15 persons)(9)............................. 7,200,366 48.8%
* Less than 1%.
(1) Percent ownership is based on the number of shares of Common Stock
outstanding as of March 31, 1997, which number was 14,368,045 shares,
plus any shares issuable pursuant to options or warrants held by the person
in question which may be exercised within 60 days after March 31, 1997.
(2) Represents 1,027,448 shares held by St. Paul Fire & Marine Insurance Company
("St. Paul"), and also includes 68,954 shares issuable under warrants
held by St. Paul that are exercisable within 60 days of March 31, 1997. Also
includes 1,666 shares issuable under stock options, held by Brian D.
Jacobs, exercisable within 60 days of March 31, 1997. Pursuant to an
agreement between Mr. Jacobs and St. Paul, ownership of the shares
underlying such options will be transferred to St. Paul upon their exercise
by Mr. Jacobs. Mr. Jacobs, a director of Trikon, is an executive vice
president of St. Paul Venture Capital, Inc., an affiliate of St. Paul. Mr.
Jacobs disclaims beneficial ownership of the shares held by St. Paul, except
to the extent of his pecuniary interest therein.
(3) Includes 74,611 shares issuable under stock options exercisable within 60
days of March 31, 1997.
(4) Includes 96,666 shares issuable under stock options exercisable within 60
days of March 31, 1997.
(5) Represents shares issuable under stock options exercisable within 60 days of
March 31, 1997. Mr. Marshall resigned from the Company effective December
31, 1996.
(6) Includes 1,750 shares issuable under stock options exercisable within 60
days of March 31, 1997.
(7) Represents shares issuable under stock options exercisable within 60 days of
March 31, 1997.
(8) Represents 8,028 shares held by Mr. Jones and 519,547 shares held by
Brentwood V, L.P. ("Brentwood V"). Also includes 1,666 shares issuable under
stock options, held by Mr. Jones, and 60,065 shares issuable under warrants
held by Brentwood V, all of which are exercisable within 60 days of March
31, 1997. Mr. Jones, a director of Trikon, David W. Chonette, Roger S.
Davisson and John L. Walecka are each general partners of Brentwood V
Ventures, L.P., the general partner of Brentwood V. Each of Messrs. Jones,
Chonette, Davisson and Walecka disclaims beneficial ownership of the shares
held by Brentwood V, except to the extent of his pecuniary interest therein.
(9) Includes an aggregate of 390,624 shares held by all current directors and
executive officers that are subject to options and warrants that are
exercisable within 60 days of March 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CVD Partnership
On March 29, 1996, Trikon entered into a number of agreements with PMT CVD
Partners, L.P. (the "CVD Partnership") and the limited partners thereof (the
"Limited Partners"). The CVD Partnership was sponsored by Trikon to fund
research and development costs and expenses relating to CVD technology and
applications using MORI(TM) source technology. An aggregate of $5,350,000 was
invested by the Limited Partners in the CVD Partnership to fund such research
and development efforts, which were performed by Trikon under an agreement with
the CVD Partnership. Trikon has been paid for such services in an amount equal
to its actual direct costs, as defined, plus a stated percentage of such costs.
During the year ended December 31, 1996, the amount of such research and
development payments to Trikon by the CVD Partnership was $2,841,427. Under the
applicable agreement, Trikon is obligated to pay stated royalties to the CVD
Partnership on sales of developed CVD products, and the royalty percentage will
vary based on the geographic location of the sale.
In connection with the Flowfill(TM) CVD Development, the Company announced
that it would henceforth focus all of its CVD resources to further evaluate and
develop products based on the Flowfill(TM) technology. In that regard, Trikon
advised the Limited Partners that it had decided to discontinue the research and
development efforts of the CVD Partnership. One of the Limited Partners has
indicated that it believes such action was inconsistent with the terms of the
research and development agreement entered into between the Company and the CVD
Partnership and that, accordingly, a settlement of any and all claims that the
Limited Partners may have in connection with such discontinuation is
appropriate. The parties have had only preliminary discussions regarding the
resolution of this dispute, though all funding by the CVD Partnership of
MORI(TM) source-based CVD research and development has been discontinued. See
Notes 6 and 12 to Consolidated Financial Statements.
The Limited Partners of the CVD Partnership include SBIC Partners, L.P.
("SBIC Partners") and NorWest Equity Partners, V ("NorWest"). Each of SBIC
Partners and NorWest invested $2,500,000 in the CVD Partnership. As of March
31, 1996, SBIC Partners held 638,604 shares of Common Stock, or approximately
7.4% of the shares of Common Stock outstanding, and NorWest and its affiliates
held 603,898 shares of Common Stock, or approximately 7.0% of the shares of
Common Stock outstanding.
In connection with the formation of the CVD Partnership, Trikon entered
into option agreements (the "Option Agreements") with the Limited Partners.
Pursuant to the Option Agreements, Trikon has a presently exercisable option
(the "Option"), expiring March 29, 2001, to acquire all of the Limited Partners'
interest in the CVD Partnership and thereby effectively acquire full ownership
of the developed technology and terminate further royalty obligations. The
option price formula (the "Option Price") is determined by multiplying each
Limited Partner's invested capital in the CVD Partnership by a 40% compounded
annual rate of return, provided that, regardless of the date of exercise, the
minimum Option Price shall equal at least two times each Limited Partner's
invested capital. The Option Price may be paid in cash, shares of Trikon's
Common Stock (based on 90% of the fair market value of such shares) or any
combination thereof, in the sole discretion of Trikon. Trikon may exercise the
Option at its sole discretion.
In connection with the formation of the CVD Partnership, the Limited
Partners received warrants (the "Warrants") to purchase an aggregate of 277,662
shares of Trikon's Common Stock at a purchase price of $12.75 per share. The
Warrants become exercisable for a one-year period following exercise of the
Option, but only if the Option is actually exercised by Trikon. In connection
with their investment in the CVD Partnership, each of SBIC Partners and NorWest
received a Warrant to purchase 130,726 shares of Common Stock.
Note Purchase Agreement
On December 16, 1996, the Company entered into a Note Purchase Agreement
(the Note Purchase Agreement) with five investors, including Brentwood
Associates V, L.P. ("Brentwood"), St. Paul Fire & Marine Insurance Company ("St.
Paul"), and SBIC Partners, confirming their equal $1,250,000 commitments for
unsecured subordinated debt in the amount of $6,250,000, which commitments were
given prior to the Acquisition to satisfy a working capital closing condition
thereto. Prior to the Acquisition in November 1996, St. Paul, SBIC Partners and
Brentwood beneficially owned approximately 12.3%, 7.3%, and 6.5% of the Common
Stock outstanding, respectively.
The interest rate on amounts drawn under the Note Purchase Agreement is the
bank's prime rate plus 4%. Interest is only payable quarterly in arrears on
amounts then outstanding. The ability to borrow under the Note Purchase
Agreement expires January 1, 1998 and amounts borrowed under the Note Purchase
Agreement plus accrued but unpaid interest is due on January 1, 2000.
On the date of execution of the Note Purchase Agreement, each investor
received a warrant to acquire up to 49,020 shares of Common Stock with an
exercise price of $12.75. Each such warrant became exercisable with respect to
50% of such shares on the commitment by such investors to provide financing to
the Company under the Note Purchase Agreement. Any advances made under the Note
Purchase Agreement will trigger the exercisability of the remaining shares
covered by such warrants. At December 31, 1996, warrants with respect to an
aggregate of 122,550 shares of Common Stock at an exercise price of $12.75 were
exercisable by such investors. All such warrants expire on December 16, 2001.
--------------------------------
The following companies are mentioned in this Annual Report on Form 10-K:
Alcan-Tech Co., Inc. ("Alcan-Tech"), Anelva Corporation, a subsidiary of NEC
Corporation ("NEC Anelva"), Applied Materials, Inc. ("Applied Materials"), AT&T
Corp. ("AT&T"), Brooks Automation, Inc. ("Brooks Automation"), Canon Sales Co.,
Inc. ("Canon Sales"), Dallas Semiconductor Corporation ("Dallas Semiconductor"),
Fujitsu Ltd. ("Fujitsu"), GEC Plessey ("GEC Plessey"), Hitachi, Ltd.
("Hitachi"), Hyundai Corp. ("Hyundai"), Lam Research Corporation ("Lam
Research"), Leybold AG ("Leybold"), LG International America ("LG Semicon"),
Matsushita ("Matsushita"), Micron Technology ("Micron Technology"), Mitsubishi
("Mitsubishi"), Motorola ("Motorola"), NEC Corporation ("NEC"), Novellus
Systems, Inc. ("Novellus"), OKI Electric Industry Co., Ltd. ("OKI"), Olivetti
(Olivetti), Ricoh ("Ricoh"), Samsung Co. Ltd. ("Samsung"), Sharp Corp.
("Sharp"), Siemens ("Siemens"), Sony ("Sony"), Techlink Semiconductor Co., Ltd.
("Techlink"), TEMIC ("TEMIC"), Texas Instruments Incorporated ("Texas
Instruments"), Tokyo Electron Ltd. ("Tokyo Electron"), Toshiba Corporation
("Toshiba"), Tower Semiconductor ("Tower Semiconductor"), and Watkins-Johnson
Company ("Watkins-Johnson").
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
PAGE
----
Report of Independent Auditors F-1
Consolidated Balance Sheets -- December 31, 1996 and 1995 F-2
Consolidated Statements of Operations -- Years ended December 31, 1996 and 1995, and
the ten months ended December 31, 1994 F-4
Consolidated Statements of Shareholders' Equity (Deficit) -- Years ended December 31,
1996 and 1995 and the ten months ended December 31, 1994 F-5
Consolidated Statements of Cash Flows -- Years ended December 31, 1996 and 1995
and the ten months ended December 31, 1994 F-6
Notes to Consolidated Financial Statements F-8
Supplemental Financial Statements of Electrotech Equipments Limited and Electrotech
Limited:
Report of Independent Auditors F-26
Combined Profit and Loss Accounts -- Years ended June 30, 1996, 1995 and 1994 F-27
Combined Statements of Total Recognized Gains and Losses -- Years ended June 30,
1996, 1995 and 1994 F-28
Combined Balance Sheets -- June 30, 1996 and 1995 F-29
Combined Cash Flow Statements -- Years ended June 30, 1996, 1995 and 1994 F-30
Notes to the Combined Financial Statements F-31
(a) (2) Index to Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts F-47
All other schedules for which provision is made in the applicable accounting
requirements of the Securities and Exchange Commission are not required under
the related instructions or are not applicable and therefore have been omitted.
(a) (3) List of Exhibits
NUMBER DESCRIPTION
- ------ -----------
2.1# Share Purchase Agreement dated July 17, 1996 (the "Share Purchase Agreement") among the Company,
Electrotech and the Electrotech Shareholders
2.2# Amendment No. 1 to Share Purchase Agreement dated as of September 9, 1996
2.3# Amendment No. 2 to Share Purchase Agreement dated as of October 16, 1996
2.4# Amendment No. 3 to Share Purchase Agreement dated as of November 13, 1996
3.1 Seventh Restated Articles of Incorporation of the Company
3.2 Certificate of Ownership of Plasma & Materials Technologies, Inc. amending the Company's
Seventh Restated Articles of Incorporation to effect the change of its name to "Trikon
Technologies, Inc."
NUMBER DESCRIPTION
- ------ -----------
3.3 Bylaws of the Company, as amended and currently in effect
4.1# Indenture dated as of October 7, 1996 between the Company and U.S. Trust Company of
California, N.A.
4.2* Warrant to Purchase Common Stock issued to St. Paul Fire and Marine Insurance Company on
November 29, 1993
4.3* Warrant to Purchase Common Stock issued to Brentwood Associates V, L.P. on November 29, 1993
4.4+++ Form of Common Stock Purchase Warrant issued to certain of the Limited Partners (as hereinafter defined)
on March 29, 1996.
4.5 Form of Promissory Note issued to each investor under the Note Purchase Agreement (as hereinafter defined)
on December 16, 1996
4.6 Form of Common Stock Purchase Warrant issued to each investor under the Note Purchase
Agreement on December 16, 1996
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
- -----------------------------------
10.1 1991 Stock Option Plan of the Company, as amended to date, including the Company's Share
Option Scheme for its U.K. employees and the related Share Option and Reimbursement Agreement
Between the Company, Electrotech and certain of Electrotech's subsidiaries
10.2# Employment Agreement dated as of November 15, 1996 between the Company and Nigel Wheeler
10.3# Registration Agreement dated as of November 15, 1996 between the Company and Christopher D.
Dobson
OTHER MATERIAL CONTRACTS
- -----------------------------------
10.4***+ International Technology License and Sales Agreement between the Company and Alcan-Tech Co.,
Inc. dated November 15, 1991
10.5***+ International Technology License and Sales Agreement between the Company and Anelva
Corporation, dated February 7, 1992
10.6*+ Technology License and Sales Agreement between the Company and Leybold AG dated December 8,
1992
10.7***+ Technology License and Sales Agreement between the Company and Watkins-Johnson Company dated
December 23, 1993
10.8* Master Lease Agreement between Phoenix Leasing Inc. and the Company, effective December 16,
1993 and ending December 16, 1997
10.9* Royalty Agreement dated October 3, 1986 by and between the Company and Messrs. Conn, Campbell
and Goebel
10.10* Assignment of Royalty Rights dated June 8, 1990 executed by Messrs. Conn and Campbell in favor
of the Company
10.11* Agreement entered into the 25th day of June 1986 by and between the Company and
Leybold-Heraeus GmbH
10.12**+ Distribution Agreement dated July 1, 1995 by and between the Company and Canon Sales
NUMBER DESCRIPTION
- ------ -----------
10.13# Registration Agreement dated as of October 7, 1996 among the Company, Salomon Brothers
Inc and Unterberg Harris
10.14++ Agreement of Limited Partnership of PMT CVD Partners, L.P. (the "CVD Partnership") dated as of
March 29, 1996, entered into between CVD, Inc. (the "General Partner") and the limited
partners listed therein (the "Limited Partners")
10.15+++ Form of Option Agreement, dated as of March 29, 1996, entered into between the Company and
certain of the Limited Partners
10.16+++ Form of Partnership Subscription Agreement, dated as of March 29, 1996, entered into among the
Partnership, the General Partner and certain of the Limited Partners
10.17+++ Share Subscription and Shareholders Agreement, dated as of March 29, 1996, entered into
between the General Partner and the Limited Partners, as the shareholders of the General
Partner
10.18+++ Research & Development Agreement, dated as of March 29, 1996, entered into between the Company
and the CVD Partnership
10.19+++ Technology License Agreement, dated as of March 29, 1996, entered into between the Company and
the CVD Partnership
10.20 Credit Agreement dated as of November 15, 1996 between the Company, Electrotech, NationsBank
of Texas, N.A. and Lloyds Bank plc
10.21 Note Purchase and Loan Agreement dated as of December 16, 1996 (the "Note Purchase Agreement")
by and among the Company and the persons listed on Schedule 1 thereto
10.22 Lease dated July 5, 1985 concerning the Company's facilities at Newport, Gwent, United Kingdom,
as assigned to Electrotech Limited effective January 19, 1995
11 Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
23.2 Consent of Independent Auditors
24.## Power of Attorney
27 Financial Data Schedule
_____________
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-4450) on July 11, 1995.
** Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-94450) on July 28, 1995.
*** Filed as an exhibit to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-94450) on August 22, 1995.
+ Certain portions of this exhibit have been omitted from the copies filed as
part of Amendment No. 1 or Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-94450), as the case may be, and
are the subject of an order granting confidential treatment with respect
thereto.
++ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
Quarterly Period Ended March 31, 1996 (File No. 0-26482) on May 15, 1996.
+++ Filed as an exhibit to the Company's Amendment No. 1 to Quarterly Report on
Form 10-Q/A for the Quarterly Period Ended March 31, 1996 (File No. 0-
26482) on October 3, 1996.
# Filed as an exhibit to the Company's Current Report on Form 8-K (File No.
0-26482) on November 27, 1996.
## Set forth in the signature page hereto.
(b) REPORTS ON FORM 8-K
On November 27, 1996, the Company filed a Current Report on Form 8-K (File
No. 0-26482) (the "Form 8-K") under "Item 2. Acquisition or Disposition of
Assets," "Item 7. Financial Statements and Exhibits" and "Item 9. Sales of
Equity Securities Pursuant to Regulation S," in order to report its acquisition
of Electrotech and the issuance of 5,600,000 shares of its Common Stock in
reliance on the exemption provided by Regulation S under the Securities Act to
the shareholders of Electrotech in connection therewith. The financial
statements of Electrotech called for by Rule 3.05 of Regulation S-X under the
Securities Act and the pro forma financial information required by Article 11 of
Regulation S-X pursuant to Item 7 of the Form 8-K were incorporated by reference
from the Company's Proxy Statement dated September 11, 1996, as supplemented on
October 1, 1996.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: April 7, 1997 Trikon Technologies, Inc.
By: /s/ John W. LaValle
-------------------
John W. LaValle
Senior Vice President, Chief Financial
Officer and Secretary
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dr. Gregor A. Campbell and John W. LaValle, and
each of them his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Gregor A. Campbell Director and Chief Executive Officer April 7, 1997
- ----------------------------
Dr. Gregor A. Campbell
/s/ Nigel Wheeler Director, President and Chief Operating April 15, 1997
- ---------------------------- Officer
Nigel Wheeler
/s/ John W. LaValle Senior Vice President, Chief Financial April 7, 1997
- ---------------------------- Officer and Secretary (Principal Financial
John W. LaValle Accounting Officer)
/s/ Christopher D. Dobson Director and Chairman of the Board April 15, 1997
- ----------------------------
Christopher D. Dobson
/s/ John A. Rollwagen Director April 14, 1997
- ----------------------------
John A. Rollwagen
/s/ Brian D. Jacobs Director April 14, 1997
- ----------------------------
Brian D. Jacobs
/s/ G. Bradford Jones Director April 9, 1997
- ----------------------------
G. Bradford Jones
/s/ Hiroyuki Mizuno Director April 11, 1997
- ----------------------------
Dr. Hiroyuki Mizuno
/s/ Charles Thompson Director April 7, 1997
- ----------------------------
Charles Thompson
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Trikon Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Trikon
Technologies, Inc. (formerly Plasma & Materials Technologies, Inc.) and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for the
years ended December 31, 1996 and 1995, and the ten month period ended December
31, 1994. Our audits also included the financial statement schedule listed in
the index of Item 14 (a) (2). These financial statements and the schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Trikon
Technologies, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996 and 1995 and the ten month period ended December 31,
1994, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Woodland Hills, California
February 26, 1997, except for Note 12,
the first sentence of Note 1 and
the fourth paragraph of Note 5,
as to which the date is April 11, 1997
F-1
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
------------------------
1996 1995
-------- --------
Assets
Current assets:
Cash and cash equivalents.................................. $ 20,187,662 $24,770,363
Short-term investments..................................... 1,464,165 13,992,109
Accounts receivable, less allowance of $3,402,000 at
December 31, 1996 and none at December 31, 1995.......... 27,229,806 8,423,272
Inventories................................................ 53,837,131 5,453,835
Prepaid expenses........................................... 4,723,449 223,970
------------ -----------
Total current assets....................................... 107,442,213 52,863,549
Property, equipment and leasehold improvements:
Land....................................................... 2,290,232 --
Machinery and equipment.................................... 16,487,383 5,178,478
Furniture and fixtures..................................... 4,299,382 1,171,833
Leasehold improvements..................................... 10,992,630 1,383,191
------------ -----------
34,069,627 7,733,502
Less accumulated depreciation and amortization............. 5,325,741 3,157,459
------------ -----------
28,743,886 4,576,043
Demonstration inventory....................................... 6,080,431 1,367,233
Other assets.................................................. 429,596 356,171
Intangible assets:
Developed technology....................................... 29,741,777 --
Assembled workforce........................................ 5,564,985 --
Covenant not to compete.................................... 392,592 --
Financing costs............................................ 4,515,426 --
Other intangibles.......................................... 269,299 130,011
------------ -----------
40,484,079 130,011
------------ -----------
Total assets.................................................. $183,180,205 $59,293,007
============ ===========
F-2
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31
------------------------
1996 1995
------- --------
Liabilities and shareholders' equity
Current liabilities:
Bank credit line........................................ $ 14,151,000 $ --
Accounts payable........................................ 18,943,275 3,724,984
Accrued expenses........................................ 7,119,815 5,424
Warranty and related expenses........................... 2,552,856 556,497
Accrued salaries and related liabilities................ 1,211,481 415,093
Income tax payable...................................... 3,960,000 --
Convertible notes - interest payable.................... 1,431,099 --
Current portion of long-term debt and capital
lease obligations...................................... 1,557,810 491,561
------------- -----------
Total current liabilities............................... 50,927,336 5,193,559
Long-term debt and capital lease obligations,
less current portion.................................... 983,889 686,230
Deferred income taxes..................................... 9,659,832 --
Income tax payable........................................ 351,000 --
Pension obligation........................................ 3,760,000 --
Convertible subordinated notes............................ 86,250,000 --
Commitments and contingencies
Shareholders' equity:
Preferred Stock undesignated
Authorized shares - 20,000,000
Issued and outstanding - None......................... -- --
Common Stock, no par value:
Authorized shares - 16,666,666
Issued and outstanding - 14,310,410 at December 31,
1996 and 8,659,843 at December 31, 1995............... 131,873,023 60,975,483
Cumulative translation adjustments...................... 1,412,200 --
Accumulated deficit..................................... (102,037,075) (7,562,265)
------------- -----------
Total shareholders' equity................................ 31,248,148 53,413,218
------------- -----------
Total liabilities and shareholders' equity................ $ 183,180,205 $59,293,007
============= ===========
See accompanying notes to the consolidated financial statements.
F-3
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
TEN MONTHS
YEAR ENDED DECEMBER 31 ENDED
------------------------------ DECEMBER 31,
1996 1995 1994
-------------- ------------- -----------------
Revenues:
Product sales....................................... $ 39,385,818 $20,889,713 $ 8,004,646
Contract revenue.................................... 2,841,427 -- --
License revenue..................................... -- 400,000 700,000
------------ ----------- -----------
42,227,245 21,289,713 8,704,646
Costs and expenses:
Costs of goods sold................................. 24,596,756 11,143,716 5,403,614
Research and development............................ 10,145,185 4,566,853 3,583,371
Selling, general and administrative................. 16,591,811 5,943,702 3,382,246
Amortization of intangibles......................... 481,880 -- --
In-process technology............................... 86,028,748 -- --
------------ ----------- -----------
137,844,380 21,654,271 12,369,231
------------------------------------------------
Loss before interest and income tax
provision (benefit)................................. (95,617,135) (364,558) (3,664,585)
Interest:
Interest expense.................................... (1,820,692) (293,603) (146,343)
Interest income..................................... 1,627,907 776,846 125,630
------------ ----------- -----------
Income (loss) before income tax
provision (benefit)................................. (95,809,920) 118,685 (3,685,298)
Income tax provision (benefit)........................ (1,335,110) 800 54,400
------------ ----------- -----------
Net income (loss)..................................... $(94,474,810) $ 117,885 $(3,739,698)
============ =========== ===========
Net income (loss) per share........................... $ (10.03) $ 0.02 $ (0.75)
============ =========== ===========
Number of shares used in per share computation........ 9,420,020 6,593,311 5,013,127
============ =========== ===========
See accompanying notes to the consolidated financial statements.
F-4
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE PREFERRED
STOCK (SERIES A AND B) COMMON STOCK
----------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- --------- ---------
Balance at March 1,
1994.................................... 2,823,837 $ 3,035,903 923,990 $ 162,429
Exercise of options..................... -- -- 14,600 15,330
Sale of Common Stock
warrants............................... -- -- -- 1,500
Issue costs of (Series E)
Redeemable Convertible
Preferred Stock........................ -- -- -- --
Net loss................................. -- -- -- --
---------- ----------- ----------- ------------
Balance at December 31, 1994.............. 2,823,837 3,035,903 938,590 179,259
Exercise of options...................... -- -- 48,460 50,883
Issue costs of (Series F)
Redeemable Convertible
Preferred Stock........................ -- -- -- --
Conversion of warrants to
Common Stock........................... -- -- 64,553 --
Common Stock issued during
the Initial Public Offering............ -- -- 3,162,500 40,093,235
Conversion of Convertible
Preferred Stock (Series A and B)
to Common Stock........................ (2,823,837) (3,035,903) 941,279 3,035,903
Conversion of Redeemable
Convertible Preferred
Stock (Series C, D, E and
F) to Common Stock..................... -- -- 3,504,461 17,616,203
Net income............................... -- -- -- --
---------- ----------- ----------- ------------
Balance at December 31,
1995..................................... -- -- 8,659,843 60,975,483
Exercise of options...................... -- -- 45,567 127,540
Issuance of stock for bonuses............ -- -- 5,000 70,000
Issuance of Common Stock for
acquisition of Electrotech............. -- -- 5,600,000 70,700,000
Cumulative translation
adjustments............................ -- -- -- --
Net loss................................. -- -- -- --
---------- ----------- ----------- ------------
Balance at December 31,
1996.................................... -- $ -- 14,310,410 $131,873,023
========== =========== =========== ============
CUMULATIVE
ACCUMULATED TRANSLATION
DEFICIT ADJUSTMENTS TOTAL
----------- ----------- -----
Balance at March 1,
1994.................................... $ (3,844,048) $ -- $ (645,716)
Exercise of options..................... -- -- 15,330
Sale of Common Stock
warrants............................... -- -- 1,500
Issue costs of (Series E)
Redeemable Convertible
Preferred Stock........................ (50,394) -- (50,394)
Net loss................................. (3,739,698) -- (3,739,698)
------------- ----------- ------------
Balance at December 31, 1994.............. (7,634,140) -- (4,418,978)
Exercise of options...................... -- -- 50,883
Issue costs of (Series F)
Redeemable Convertible
Preferred Stock........................ (46,010) -- (46,010)
Conversion of warrants to
Common Stock........................... -- -- --
Common Stock issued during
the Initial Public Offering............ -- -- 40,093,235
Conversion of Convertible
Preferred Stock (Series A and B)
to Common Stock........................ -- -- --
Conversion of Redeemable
Convertible Preferred
Stock (Series C, D, E and
F) to Common Stock..................... -- -- 17,616,203
Net income............................... 117,885 -- 117,885
------------- ----------- ------------
Balance at December 31,
1995..................................... (7,562,265) -- 53,413,218
Exercise of options...................... -- -- 127,540
Issuance of stock for bonuses............ -- -- 70,000
Issuance of Common Stock for
acquisition of Electrotech............. -- -- 70,700,000
Cumulative translation
adjustments............................ -- 1,412,200 1,412,200
Net loss................................. (94,474,810) -- (94,474,810)
------------- ----------- ------------
Balance at December 31,
1996.................................... $(102,037,075) $1,412,200 $ 31,248,148
============= ========== ============
See accompanying notes to the consolidated financial statements.
F-5
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEN MONTHS
YEAR ENDED DECEMBER 31 ENDED
------------------------------- DECEMBER 31,
1996 1995 1994
-------------- --------------- --------------
OPERATING ACTIVITIES
Net income (loss).......................................... $(94,474,810) $ 117,885 $(3,739,698)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization........................... 1,937,287 1,242,681 773,617
Provision for loss on accounts receivable............... 3,402,000 -- --
Write-off of purchased in-process technology............ 86,028,748 -- --
Amortization of intangibles............................. 481,880 -- --
Deferred income taxes................................... (1,145,248) -- --
Advances to employees/officer/shareholder............... -- 55,145 23,624
Changes in operating assets and liabilities:
Accounts receivable.................................... (5,492,534) (7,334,660) 231,089
Inventories............................................ (10,442,494) 564,534 (3,978,006)
Prepaid expenses....................................... 312,521 (34,356) (154,898)
Accounts payable and other accrued expenses............ 9,949,108 1,087,919 1,003,799
Deferred revenue....................................... -- -- (1,025,000)
------------ ------------ -----------
Net cash used in operating activities...................... (9,443,542) (4,300,852) (6,865,473)
INVESTING ACTIVITIES
Purchases of property, equipment and
leasehold improvements.................................... (10,032,037) (1,099,100) (1,644,143)
Proceeds from sales of short-term investments.............. 33,426,654 3,000,000 --
Purchases of short-term investments........................ (20,898,710) (16,992,109) --
Purchase of Electrotech, net of cash
acquired of $4,444,000................................... (76,831,575) -- --
Other assets............................................... (185,713) (329,627) 17,749
------------ ------------ -----------
Net cash used in investing activities...................... (74,521,381) (15,420,836) (1,626,394)
FINANCING ACTIVITIES
Net borrowings (repayments) under bank
credit lines............................................. 14,151,000 (2,000,000) 2,000,000
Repayment of debt acquired in acquisition
of Electrotech........................................... (17,631,000) -- --
Proceeds from issuance of convertible
subordinated notes....................................... 86,250,000 -- --
Financing costs........................................... (4,515,426) -- --
Proceeds from sale of Preferred Stock
(net of issuance costs).................................. -- 3,365,193 5,449,606
Proceeds from Initial Public Offering
(Common Stock)........................................... -- 40,093,235 --
Proceeds from sale of Common Stock and
Warrants................................................. 197,540 50,883 16,830
Payments on capital lease obligations...................... (482,092) (581,013) (371,221)
------------ ------------ -----------
Net cash provided by financing activities.................. 77,970,022 40,928,298 7,095,215
Effect of exchange rate changes on cash.................... 1,412,200 -- --
------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents......................................... (4,582,701) 21,206,610 (1,396,652)
Cash and cash equivalents at beginning of year............ 24,770,363 3,563,753 4,960,405
------------ ------------ -----------
Cash and cash equivalents at end of year................... $ 20,187,662 $ 24,770,363 $ 3,563,753
============ ============ ===========
F-6
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
TEN MONTHS
YEAR ENDED DECEMBER 31 ENDED
--------------------------- DECEMBER 31,
1996 1995 1994
----------- ------------ ------------
SUPPLEMENTAL STATEMENT OF CASH FLOWS
INFORMATION:
Cash paid during the period for:
Interest.......................................... $ 496,000 $ 289,796 $ 134,230
Taxes (primarily foreign in 1996 and 1994)........ 221,000 800 50,000
Non-cash investing and financing
activities:
Equipment acquired under capital
lease........................................... $ -- $ 527,981 $1,216,653
Conversion of Series (C, D,
E and F) Preferred Stock to
Common Stock.................................... -- 17,616,203 --
--
Acquisition of Electrotech:
Fair market value of assets acquired.............. $206,936,075
Fair market value of liabilities assumed.......... (53,259,080)
Issuance of Common Stock.......................... (70,700,000)
Cash acquired..................................... (4,444,000)
Acquisition costs of $7,976,000, less
amounts paid through December 31, 1996........... (1,701,420)
------------
Cash paid to acquire Electrotech.................. $ 76,831,575
============
See accompanying notes to the consolidated financial statements.
F-7
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Background
On March 31, 1997, Plasma & Materials Technologies, Inc. changed its name
to Trikon Technologies, Inc. Trikon Technologies, Inc. and its subsidiaries (the
Company) designs, manufactures and markets advanced etch, physical vapor
deposition and chemical vapor deposition products and systems for the world-wide
semiconductor manufacturer market.
The consolidated financial statements of the Company include the accounts
of its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents represent short-term investments that are highly liquid,
are of limited credit risk and have original maturities of three months or less
when purchased.
Short-Term Investments
The Company accounts for investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115),
"Accounting for Certain Investments in Debt and Equity Securities." SFAS 115
requires investment securities to be classified as trading, available for sale,
or held to maturity. Management determines the appropriate classification of
its investments at the time of purchase and reevaluates the classification at
each balance sheet date. As of December 31, 1996 and 1995, all investments in
the short-term investment portfolio are classified as available for sale.
Investments classified as available for sale are required to be recorded at fair
value and any temporary difference between an investment's cost and its fair
value is recorded as a separate component of shareholders' equity.
Major Customers and Concentration of Credit Risk
Accounts receivable consists primarily of amounts due from original
equipment manufacturers, end use customers, and distributors within the
Company's industry. At December 31, 1996, three customers represented 19%, 12%
and 11%, respectively, of the Company's total accounts receivable. At December
31, 1995, five customers represented 26%, 25%, 15%, 14% and 12%, respectively,
of the Company's total accounts receivable.
The Company performs credit evaluations and analysis of amounts due from
its customers; however, the Company does not require collateral. An estimate of
uncollectible accounts has been provided for in the financial statements.
F-8
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Total revenue includes amounts from certain individual customers that
exceed 10% of total revenue. Revenue from two customers represented 19% and 12%
each of total revenue for the year ended December 31, 1996, revenue from five
customers represented 19%, 15%, 12%, 11% and 11% each of total revenue for the
year ended December 31, 1995, and revenue from six customers represented 19%,
17%, 17%, 15%, 15% and 12% each of total revenue for the ten months ended
December 31, 1994.
The Company's revenue was generated from sales to the following geographic
areas.:
TEN MONTHS ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31,
1996 1995 1994
------------ ------------ ----------------
United States.................... $ 9,854,278 $11,276,066 $2,929,896
Europe........................... 8,654,663 241,041 120,075
Asia Pacific (primarily Japan
and Korea)..................... 23,718,304 9,772,606 5,654,675
----------- ----------- ----------
Total............................ $42,227,245 $21,289,713 $8,704,646
=========== =========== ==========
Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consists of the following at December 31:
1996 1995
------------ -----------
Components......... $17,754,456 $3,774,458
Work-in-process.... 32,993,125 1,611,382
Finished goods..... 3,089,550 67,995
----------- ----------
$53,837,131 $5,453,835
=========== ==========
For certain of the Company's products, the Company relies on either a sole
supplier or a limited group of suppliers. The manufacture of certain of the
Company's products is a complex process and can require long lead times. Any
inability to obtain adequate deliveries or any other circumstance that would
require the Company to seek alternate sources of supply or to manufacture such
components internally could delay the Company's ability to ship its systems and
could have a materially adverse effect on the Company.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets (5 years for machinery and equipment
and furniture and fixtures) or the lease term, which ever is shorter. Owned
buildings are depreciated using the straight-line method over 50 years.
Demonstration Inventory
Demonstration or evaluation units represent completed systems located at
certain strategic customer sites or at the Company's facilities. The Company
provides these demonstration systems at no charge for a specified evaluation
period. All operating costs incurred during the evaluation period are paid by
the customer. At the conclusion of the agreed upon evaluation period, provided
that the equipment performs to required specifications, management expects that
the customer, while not obligated to do so, will purchase
F-9
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
the system. Demonstration inventory is stated at the lower of cost or estimated
net realizable value and is depreciated on a straight line method over four
years, if the product is not sold after one year.
Intangible Assets
Intangible assets arose primarily from the allocation of the purchase price
of the acquisition of Electrotech Equipments Limited and Electrotech Limited,
discussed in Note 2, to their estimated fair value. Intangible assets are
amortized on a straight-line basis over ten years for developed technology,
eight years for assembled workforce and three years for the covenant not to
compete.
Financing cost consists of costs incurred primarily related to the issuance
of the convertible subordinate notes and in obtaining the working capital
facility. Financing costs are amortized over the term of the related credit
facility using the effective interest method.
Other intangible assets consist primarily of patents and are amortized on a
straight line basis over 5 years.
The Company periodically reviews intangible assets for impairment in value.
Intangible assets are reflected net of accumulated amortization of $710,572 and
$38,967 at December 31, 1996 and 1995, respectively.
Accounting for Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting basis and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Revenue Recognition
Product sales consist primarily of system, component and spare parts sales.
Revenues related to system, component and spare parts sales are recognized upon
shipment and transfer of title or upon customer acceptance and transfer of title
in the case of demonstration inventory unit sales. Estimated costs to be
incurred by the Company related to product installation (which are not
significant) and warranty fulfillment are recorded at the date of shipment.
Contract revenue represents revenue earned under a contract to perform
research and development for a limited partnership in which the Company is the
general partner.
License fee revenue is derived from the grant of the non-exclusive rights
to use, sell and manufacture certain technologies developed by the Company.
Research and Development Costs
Research and development costs are expensed as incurred and include the
cost incurred under the contract to perform research and development for a
limited partnership.
F-10
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$214,243, $44,306, and $99,509 of advertising costs in the year ended December
31, 1996 and 1995, and the ten months ended December 31, 1994, respectively.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion (APB) No. 25 "Accounting for Stock Issued
to Employees" which generally measures compensation expense based on the excess
of the quoted market price over the option price on the measurement date. In
October 1995, Statement of Financial Accounting Standard (SFAS) No. 123
"Accounting for Stock Based Compensation" was issued. SFAS No. 123 provides
alternative accounting treatment to APB No. 25 with respect to stock-based
compensation and requires certain additional disclosures, including disclosures
if the Company elects not to adopt the accounting requirements of SFAS No. 123.
The Company has adopted the disclosure requirements of SFAS No. 123 and has
elected to continue to measure compensation costs following present accounting
rules under APB No. 25, and, accordingly, recognizes no compensation for the
stock option grants since the exercise price of stock options granted equals the
quoted market price of the underlying stock at the date of grant.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of shares of Common Stock outstanding. Common equivalent shares from stock
options and warrants (using the treasury stock method) have been included in the
computation when dilutive. Through August 29, 1995 (date of the Company's
initial public offering) common equivalent shares from the redeemable
convertible Preferred Stock and convertible Preferred Stock which converted into
Common Stock in connection with the Company's Initial Public Offering are
included as if converted at the original date of issuance, even though inclusion
is anti-dilutive. Pursuant to the Securities and Exchange Commission (SEC) Staff
Accounting Bulletins, all common and common equivalent shares issued by the
Company at an exercise price below the Initial Public Offering price of $14.00
per share during the twelve-month period prior to the offering (cheap stock)
have been included in the calculation as if they were outstanding (using the
treasury stock method at the Initial Public Offering price and the if-converted
method for redeemable convertible Preferred Stock and convertible Preferred
Stock) for the ten months ended December 31, 1994 and through the date of the
Initial Public Offering for the year ended December 31, 1995. The weighted
average number of shares used in the computation for the year ended December 31,
1996 excludes common equivalent shares from options and warrants because they
would be antidilutive.
Historical net loss per share is computed as described above, except that
it excludes the convertible preferred stock because it is anti-dilutive for
periods which incurred a net loss. Historical net loss per share is as follows:
YEAR ENDED TEN MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
Net income (loss) per share $ 0.02 $ (1.89)
Shares used in computing net loss per
share 6,593,311 1,981,848
F-11
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Foreign Currency Translation
The functional currency of most of the Company's foreign subsidiaries is
the local currency. The Company translates the assets and liabilities of its
foreign subsidiaries at the rate of exchange in effect at the balance sheet date
and translates the income statement items at the average exchange rate for the
year. Translation adjustments are recorded as a component of shareholders'
equity in the consolidated balance sheet. Transaction gains and losses other
than those that relate to transactions deemed to be of a long-term nature are
recognized in earnings. Exchange losses amounted to $951,000, in the year ended
December 31, 1996 and none in the year ended December 31, 1995 and the ten
months ended December 31, 1994.
Reclassifications
Certain amounts in 1995 and 1994 have been reclassified in the Consolidated
Financial Statements to be consistent with the 1996 presentation.
2. BUSINESS ACQUISITION
On November 15, 1996, the Company acquired all the issued and outstanding
shares of Electrotech Limited and Electrotech Equipments Limited (Electrotech).
Electrotech develops, manufactures, markets and services semiconductor
fabrication equipment for the worldwide semiconductor manufacturing industry.
The aggregate purchase price paid by the Company, excluding approximately
$7,976,000 in acquisition costs, was $145,700,000 consisting of $75,000,000 paid
in cash and the issuance of 5,600,000 shares of Common Stock of the Company with
an estimated fair market value of $70,700,000, based on the quoted market price
the last day prior to the public announcement of the parties agreement to the
acquisition terms.
The acquisition was accounted for as a purchase and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair market
values at the date of acquisition. The purchase price, plus costs directly
attributable to the completion of the acquisition, have been allocated to the
assets and liabilities acquired. Approximately $86,028,748 of the total
purchase price represented the value of the in-process research and development
that had not yet reached technological feasibility and was charged to the
Company's operations. The fair value of the in-process research and development
was estimated by an independent appraiser. Purchased in-process technology was
analyzed through interviews and analysis of data concerning each of
Electrotech's projects in development (i.e. Forcefill(TM) and Flowfill(TM)).
Expected future cash flows of the developmental projects were discounted to
present value taking into account risks associated with the inherent
difficulties and uncertainties in completing the projects, and thereby achieving
technological feasibility, and the risks related to potential changes in future
target markets. The Company's expected post-acquisition business strategies
were considered as they relate to Electrotech's current products and projects in
development. Considerable efforts are being applied by Electrotech to its
Forcefill(TM) and Flowfill(TM) projects to attain product functionality and
reliability levels acceptable to their intended target market.
The developed technology was appraised using the same methodology used for
the valuation of in-process technology for products which had reached
technological feasibility and were generating revenues. The risks related to
the characteristics and application of each product, existing and future
markets, and assessments of the stage in the product's life cycle were
considered. The assembled workforce value was determined based on an appraisal
utilizing a cost valuation methodology. To arrive at the estimate of the fair
value of the assembled workforce, the replacement cost was estimated based on
the costs to recruit and interview candidates, and to train new employees in
their positions. Search, interview, and training costs per employee were
totalled to arrive at an indication of total acquisition costs per employee, and
then multiplied by the number of employees being acquired to arrive at a total
cost.
F-12
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
The Company's consolidated results of operations include the operating
results of Electrotech from the acquisition date. The following unaudited pro
forma information combines the consolidated results of operations of the Company
and Electrotech as if the acquisition occurred on January 1, 1996 and 1995,
respectively. The pro forma information is presented for illustrative purposes
only, and is not necessarily indicative of what the actual results of operations
would have been during such periods or representative of future operations.
YEAR ENDED DECEMBER 31
------------------------------
1996 1995
-------------- -------------
(UNAUDITED)
Total revenues......... $109,280,000 $75,673,000
Gross profit........... 57,302,000 38,466,000
Net loss............... (10,306,000) (1,045,000)
Net loss per share..... (0.72) (0.09)
The pro forma information presented above does not reflect the write-off of
in-process research and development costs of $86,028,748 nor any portion of the
write-off of the write-up of inventory which at November 15, 1996 totalled $10.6
million and which will be charged to cost of goods sold as the acquired
inventory is sold. The in-process research and development charge and an
allocated portion of the inventory charge ($3,008,270) were included in the
actual operating results for the year ended December 31, 1996.
F-13
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
3. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
TEN MONTHS
YEAR ENDED DECEMBER 31 ENDED
----------------------------- DECEMBER 31,
1996 1995 1994
------------ --------- -------------
Sales
Unaffiliated Customers
North America $ 33,446,245 $21,289,713 $ 8,704,646
Europe 8,781,000 -- --
Inter-geographic
North America -- -- --
Europe 174,000 -- --
Eliminations (174,000) -- --
------------ ----------- -----------
$ 42,227,245 $21,289,713 $ 8,704,646
============ =========== ===========
Operating loss
North America $ (5,582,142) $ (364,558) $(3,664,585)
Europe/(1)/ (90,034,993) -- --
------------ ----------- -----------
$(95,617,135) $ (364,558) $(3,664,585)
============ =========== ===========
Identifiable assets:
United States $ 60,567,887 $59,293,007 $16,630,924
Europe 122,612,318 -- --
------------ ----------- -----------
$183,180,205 $59,293,007 $16,630,924
============ =========== ===========
Export Sales from the United States $ 23,585,431 $10,013,647 $ 5,774,750
============ =========== ===========
(1) Includes a $86,028,748 charge for in-process technology, and a $3,008,270
charge to cost of goods sold, representing a portion of the purchase price
of Electrotech allocated to inventory, which was sold subsequent to the
acquisition date.
4. FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash
equivalents, short-term investments, accounts receivable, accounts payable,
capital lease obligations, borrowings under the revolving line of credit and the
convertible subordinated notes. The carrying amounts at December 31, 1996 of
these financial instruments approximates their fair value, except for the
convertible subordinated notes for which the fair market value was approximately
$84,250,000, based on quoted market rates.
F-14
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Information about contractual maturities of short-term investments at
December 31, 1996 is as follows:
DUE AFTER ONE
DUE IN ONE YEAR YEAR THROUGH DUE AFTER THREE
OR LESS THREE YEARS YEARS
--------------- ------------- ---------------
U.S. Treasury Securities and obligations
of U.S. Government Agencies.......... $ -- $749,704 $ --
U.S. Corporate Securities............... -- -- 714,461
----------- -------- --------
$ -- $749,704 $714,461
=========== ======== ========
At December 31, 1996 and 1995, $248,933 and $12,006,158, respectively, of
investments in debt securities are included in cash and cash equivalents on the
accompanying balance sheet because their original maturity date is three months
or less when purchased.
Gross unrealized holding gains and losses on sales of short-term
investments were not significant as of or for the year ended December 31, 1996
or 1995. There were no realized gains and losses on sales of short-term
investments during the year ended December 31, 1996 or 1995. The Company
manages its cash equivalents and short-term investments as a single portfolio of
highly marketable securities, all of which are intended to be available to meet
the Company's current cash requirements.
The Company invests in a variety of financial instruments such as
commercial paper, commercial bonds, and municipal bonds. The Company, by
policy, limits the amount of credit exposure with any one financial institution
or commercial issuer.
5. REVOLVING LINES OF CREDIT AND LONG-TERM DEBT
On November 14, 1996 the Company entered into a senior secured credit
agreement with certain banks in the United States and United Kingdom (the
"Working Capital Facility") that permits the Company and its U.K. subsidiary to
borrow up to an aggregate of $35 million, subject to certain borrowing base
limitations based on eligible accounts receivable. The Working Capital Facility
consists of a "U.S. Facility" and a "U.K. Facility". Borrowings made based on
the borrowing base in the United States are made under the U.S. Facility and
borrowings made based on the borrowing base of the U.K. subsidiary are made
under the U.K. Facility. The total amount available for borrowing under the
Working Capital Facility at December 31, 1996 was $17.1 million of which $14.2
million was outstanding. The Working Capital Facility is secured by
substantially all the assets of the Company and expires November 15, 1999.
Borrowings under the U.S. Facility carry interest at the banks reference
rate plus the applicable margin or the federal funds rate plus 0.5% and the
applicable margin and borrowings under the U.K. Facility carry interest at the
LIBOR rate plus the applicable margin. Interest is payable on a quarterly
basis. The applicable margin is determined by the Company's debt to cash flow
ratio. The applicable margin for borrowings under the U.S. Facility and the
U.K. Facility was 0.5% and 2.5%, respectively, at December 31, 1996. The
weighted average interest rate on all borrowings outstanding at December 31,
1996 under the Working Capital Facility was 9.93%. The Company is charged a
commitment fee of 0.05% on the average unused portion of the U.S. and U.K.
facilities.
The Working Capital Facility contains sub-facilities which provide for the
issuance of letters of credit up to $4,000,000 ($3,000,000 in the U.K. and
$1,000,000 in the U.S.) and an overdraft line of credit up to 2.5 million Pounds
Sterling ($4.3 million at December 31, 1996). Amounts outstanding under these
sub-
F-15
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
facilities reduce the amounts available under the U.K. and U.S. Facilities.
No amounts were outstanding under these subfacilities as of December 31, 1996.
The Working Capital Facility places certain restrictions on the Company,
which among other things, prohibits the Company from paying cash dividends,
limits the amount of capital expenditures and requires the Company to comply
with certain financial ratios and covenants. At December 31, 1996 and March 31,
1997 the Company was not in compliance with certain financial ratio requirements
which were waived by its lenders as of December 31, 1996 and March 31, 1997.
The Company is negotiating with its lenders to make various amendments to the
Working Capital Facility revising the covenants for the duration of the Working
Capital Facility such that the Company will be able to remain in compliance with
such amended covenants during the coming year. The Company anticipates the
amended Working Capital facility will contain terms similar to those currently
in place. Although the Company believes it will be successful in amending the
Working Capital Facility, there can be no assurance that such amendments will be
received.
The Company's United Kingdom subsidiary has a term-loan from Lloyd's Bank
PLC which is secured by property in Bristol, United Kingdom. Interest is
payable monthly for borrowings at a fixed rate of 10.0025% per annum. At
December 31, 1996, the amount outstanding was $1,026,000 which is repayable by
three equal semi-annual installments ending May 23, 1998. This agreement places
no restrictions on the Company and does not require the Company to comply with
certain financial ratios or covenants.
In connection with the acquisition of Electrotech, the Company issued
$86,250,000 of Convertible Subordinated Notes (the Convertible Notes). The
Convertible Notes bear interest at 7 1/8% which is payable in semi-annual
installments beginning on April 15, 1997. The Convertible Notes mature on
October 15, 2001, and are unsecured obligations of the Company and are
subordinated in right of payment to all existing and future debt (as defined) of
the Company, including without limitation, all debt arising under the Working
Capital Facility. The Notes are convertible, at the option of the holder, into
shares of Common Stock at a conversion price of $15.635 per share, subject to
adjustment in certain events.
The Convertible Notes contain certain provisions which provide that, upon
the occurrence of an "Event of Default", as defined, could cause the Convertible
Notes to become due and payable immediately. Such an Event of Default would
occur if, among other things, the Company were to default on the working Capital
Facility or any other secured indebtedness, as defined, caused by the failure to
pay principal and interest payments when due or resulting in the acceleration of
such indebtedness prior to its express maturity in excess of $10.0 million. The
Convertible Notes and the Working Capital Facility have been classified as long-
term under the presumption that the Working Capital Facility will be amended
such that the Company will be able to comply with the applicable financial
covenants over the coming year.
On November 14, 1996, the Company received a commitment of terms from five
investors for an unsecured subordinated debt commitment. On December 16, 1996,
the Company entered into a Note Purchase Agreement (the Note Purchase Agreement)
with the five investors to provide a commitment for unsecured subordinated debt
in the amount of $6,250,000. The interest rate on amounts drawn under the Note
Purchase Agreement is the bank's prime rate plus 4%. Interest is payable
quarterly. The ability to borrow under the Note Purchase Agreement expires
January 1, 1998 and amounts borrowed under the Note Purchase Agreement plus
accrued but unpaid interest is due on January 1, 2000.
Amounts drawn under the Note Purchase Agreement are unsecured obligation of
the Company. No amounts were outstanding under the Note Purchase Agreement as
of December 31, 1996. The Note Purchase Agreement contains covenants that are
comparable to those contained in the Convertible Notes.
F-16
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
The principal amount of long-term debt maturing in each of the five years
following 1996 is as follows:
1997 $ 684,000
1998 342,000
1999 --
2000 --
2001 86,250,000
6. PMT CVD PARTNERS, L.P. AND OTHER JOINT DEVELOPMENT AGREEMENTS
In August 1994, the Company entered into an original equipment
manufacturing and joint development agreement with a customer. This arrangement
ended in March 1995. Under this agreement, the Company incurred costs on behalf
of the customer and received reimbursement of approximately $350,000 in 1995 and
$1,000,000 in 1994. Such costs were primarily for the customer's share of
supplies and prototype materials used under the agreement. The reimbursement of
costs incurred were netted against the related research and development expense.
Any technology developed under this agreement is jointly owned by the Company
and the customer.
On March 29, 1996, the Company entered into a number of agreements with PMT
CVD Partners, L.P. (the Limited Partnership) and the limited partners thereof
(the Limited Partners). The Limited Partnership was formed to fund research and
development costs and expenses relating to chemical vapor deposition (CVD)
technology and applications. An aggregate of approximately $5,350,000 was
invested in the Limited Partnership to fund such research and development
efforts. The Limited Partnership owns the rights to the technology developed.
The Company has entered into a license agreement with the Limited Partnership
whereby the Company is obligated to pay stated royalties to the Limited
Partnership, ranging from 2% to 5% of sales of related products depending on the
geographic location of the sale. There is no provision for royalty payments to
the Limited Partners in fiscal 1996. The Company has been granted an exclusive
option to purchase all of the Limited Partners' interest in the Limited
Partnership, based on an established purchase price formula which terminates the
Company's obligation under the license agreement, the Company may exercise such
option at its sole discretion and is under no obligation to repay the funds
received for research and development. (See Note 12 regarding the recent
termination of the Company's development efforts under the Limited Partnership).
The Company has agreed to provide certain personnel to the Limited
Partnership to perform such research and development activities. The Company
will be paid for such services at an amount equal to its actual direct costs, as
defined, plus a stated percentage of such costs. During the year ended December
31, 1996, the amount of research and development costs incurred, including the
stated percentage of 250% of direct costs, with respect to CVD technology and
applications was $2,841,427 and is reflected in contract revenue in the
accompanying statement of operations. The actual total cost incurred under the
arrangement approximated the amount of revenues recognized and was recorded in
research and development expense.
F-17
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
7. INCOME TAXES
The income tax provision (benefit) consists of the following:
1996 1995 1994
------------ ------------ ------------
Current:
Federal................ $ 7,086 $ -- $ --
State.................. 33,584 800 800
Foreign................ (230,532) -- 53,600
----------- ----- -------
(189,862) 800 54,400
Deferred:
Foreign................ (1,145,248) -- --
----------- ----- -------
(1,145,248) 800 --
----------- ----- -------
$(1,335,110) $ 800 $54,400
=========== ===== =======
The loss before income taxes of the Company's foreign subsidiaries for the
year ended December 31, 1996, excluding the $86,028,748 charge for in-process
technology and the $3,008,270 charge to cost of goods sold, related to the
allocation of the purchase price in the acquisition of Electrotech, was
approximately ($1,350,000). Income or loss before income taxes of the Company's
foreign subsidiaries was not significant in 1995 and prior years.
A reconciliation of the statutory federal income tax rate to the effective
tax rate, as a percentage of income(loss) before tax, is as follows:
TEN MONTHS
YEAR ENDED DECEMBER 31 ENDED
-------------------------- DECEMBER 31,
1996 1995 1994
---------- ---------- -------------
Statutory federal income tax rate -
provision (benefit).................................. (35)% 34% (34)%
Nondeductible in-process technology
charge............................................... 31 -- --
Change in valuation reserve
attributable to utilization of
operating loss carryforwards......................... -- (34)
Change in valuation reserve due to net
operating loss carryforwards not
utilized............................................. 3 -- 34
Foreign income taxes.................................. -- -- 2
--- --- ---
(1)% -- % 2%
=== === ===
F-18
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Significant components of the Company's deferred tax liabilities and assets
are as follows at December 31:
1996 1995
Deferred tax liabilities:
Domestic:
State taxes not benefited............................. $ 294,110 $ 132,081
Foreign:
Basis difference from acquisition of
Electrotech......................................... 9,691,832 --
Tax depreciation in excess of book.................... 1,360,000 --
----------- ----------
11,345,942 132,081
Deferred tax assets:
Domestic:
Allowances not currently deductible for
tax purposes........................................ 1,674,353 102,435
Accrued expenses not currently deductible
for tax purposes.................................... 460,340 321,542
Book depreciation in excess of tax depreciation....... 290,897 73,890
Net operating loss carryforwards...................... 2,374,831 2,075,098
Foreign tax credit carryforwards...................... 284,872 273,277
Research and development and other credits............ 1,462,578 1,123,346
Foreign:
Allowances and accruals not currently deductible
for tax purposes.................................... 1,392,000 --
----------- ----------
7,939,871 3,969,588
Less valuation reserve on domestic deferred
tax assets.......................................... 6,253,761 3,837,507
----------- ----------
Net deferred tax assets................................. 1,686,110 132,081
----------- ----------
Net deferred tax liabilities............................ $ 9,659,832 $ --
=========== ==========
The basis difference from the acquisition of Electrotech arises from the
purchase price allocation to certain assets with no corresponding change in the
tax basis of such assets. At the acquisition date the Company recorded a
deferred tax liability of $10,828,000 for this basis difference, of which
approximately $1,136,000 was reflected as a portion of the deferred tax benefit
recorded in the statement of operations for the year ended December 31, 1996.
At December 31, 1996, the Company had research and development credit
carryforwards of approximately $977,000 and $486,000 for federal and state tax
purposes, respectively, that expire at various dates through 2011. At December
31, 1996 the Company also had net operating loss carryforwards for federal and
state income tax purposes of approximately $6,109,000 and $3,203,000,
respectively, which expire at various dates through 2011. The Company's
utilization of its net operating loss and credit carryforwards depends upon
future income and is subject to an annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar state
provisions.
F-19
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
8. COMMITMENTS AND CONTINGENCIES
LEASES:
The Company leases certain equipment under capital leases. The Company also
leases its offices, manufacturing facilities and certain equipment under
noncancelable operating lease agreements. Certain leases are subject to
escalation clauses based on applicable inflation indexes.
Cost of equipment under capital leases included in property and equipment
at December 31, 1996 and 1995 was $3,135,000 and $2,832,531, and accumulated
amortization was $948,688 and $946,298, respectively. Amortization expense
under these leases is included in depreciation expense.
Future minimum lease payments under capital leases and noncancelable
operating leases with initial terms of one year or more consisted of the
following at December 31, 1996:
CAPITAL OPERATING
LEASES LEASES
----------- ------------
1997............................. $ 948,686 $1,988,338
1998............................. 603,456 1,687,414
1999............................. 133,875 1,227,910
2000............................. -- 1,142,170
2001............................. -- 1,142,170
---------- ----------
1,686,017 $7,188,002
==========
Less amounts representing imputed interest..... 170,318
----------
Present value of net minimum lease payments,
including classified as current.............. $1,515,699
==========
Rental expense for operating leases was $689,228, $338,834 and $288,524 for
the year ended December 31, 1996 and 1995 and the ten months ended December 31,
1994, respectively.
CONTINGENCIES:
The Company is opposing an issued German patent held by a competitor which
relates to a process similar to the Company's Forcefill product. The Company's
management and its advisors believe this patent is too broadly worded and as
presently worded there is some possibility that an infringement by the Company
might be alleged. The Company can not predict the outcome of this matter and
there can be no assurance as to the possible effects of this matter on the
financial statements of the Company.
9. PREFERRED STOCK AND WARRANTS
The Board of Directors has the authority to issue up to 20,000,000 shares
of Preferred Stock in one or more series with rights, preferences, privileges
and restrictions to be determined at the Board's discretion.
On August 24, 1995, the Company converted 2,823,837 shares of Preferred
Stock (Series A and B) into 941,279 shares of Common Stock and 10,513,382 shares
of Preferred Stock (Series C, D, E and F) into 3,504,461 shares of Common Stock
in connection with its Initial Public Offering.
In November 1991 and July 1992, the Company issued warrants to purchase an
aggregate of 21,940 shares of Common Stock (the 1992 Common Stock Warrants) at
an exercise price of $3.90 per share exercisable at any time through the date
which is five years following the closing of an initial public offering of the
Company's Common Stock. In September 1995, the warrants were exercised and the
F-20
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Company issued 17,470 shares of Common Stock, and the remaining warrants were
canceled in consideration of the exercise. In connection with the Company's
guaranty for its eligible inventory line of credit in June 1994, the Company
issued warrants to purchase an aggregate of 50,000 shares of Common Stock at an
exercise price of $1.05 per share exercisable at any time through June 5, 2000
(the 1994 Common Stock Warrants). In August 1995, the warrants were exercised
and the Company issued 47,083 shares of Common Stock, and the remaining warrants
were canceled in consideration of the exercise. In connection with the issuance
of the Series D Preferred Stock in November 1993, the Company issued warrants to
purchase an aggregate of 80,000 shares of Common Stock at an exercise price of
$4.50 per share exercisable at any time through December 31, 1998 (the 1993
Warrants). The fair market value of these warrants was deemed to be immaterial
on the date of issuance.
In connection with the formation of the Limited Partnership discussed in
Note 6, the Limited Partners received warrants (the CVD Warrants) to purchase an
aggregate of 277,662 shares of the Company's Common Stock at a purchase price of
$12.75 per share. The CVD Warrants become exercisable for a one-year period
following exercise of the option to purchase all of the Limited Partners'
interest in the Partnership (the Option), but only if the Option is actually
exercised by the Company. No value has been assigned to the CVD Warrants
because they only become exercisable upon the exercise by the Company of the
Option. Upon the exercise of the Option, the CVD Warrants would be valued and
recorded as part of the purchase price of the technology.
On the date of execution of the Note Purchase Agreement discussed in Note
5, each investor received a warrant (the Note Purchase Agreement Warrants) to
acquire up to 49,020 shares of Common Stock with an exercise price of $12.75.
Each such warrant became exercisable with respect to 50% of such shares on the
commitment by such investors to provide financing to the Company under the Note
Purchase Agreement. Any advances made under the Note Purchase Agreement will
trigger the exercisability of the remaining shares covered by such warrants. At
December 31, 1996, warrants with respect to an aggregate of 122,550 shares of
Common Stock at an exercise price of $12.75 were exercisable by such investors.
All such warrants expire on December 16, 2001. The Company has not assigned any
value to the 50% of the Warrants that are currently exercisable, as such amounts
are not significant to the financial statements.
At December 31, 1996, the following warrants were outstanding:
Number of Shares
Warrant Shares Exercisable Exercise Price Expiration Date
- -------------------- ---------- ----------- -------------- ---------------
1993 Common Warrants 80,000 80,000 $ 4.50 December 31, 1998
CVD Warrants 277,662 -- $12.75 One year from date
they become exercisable
Note Purchase Agreement -
Warrants 245,100 122,550 $12.75 October 7, 2001
10. STOCK OPTIONS
In October 1996, the Company changed its "Non-Qualified" Employee Option
Plan to an Incentive Stock Option Plan (the Option Plan) on a go forward basis.
The Option Plan provides options to purchase up to 2,400,000 shares, at December
31, 1996, of the Company's Common Stock for officers, directors, and key
employees, at an exercise price equal to the fair market value on the date of
grant as determined by the Board of Directors. The shares issued under the
Option Plan shall become vested over periods up to five
F-21
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
years and have a maximum term of ten years. A summary of the changes in the
status of options is as follows:
WEIGHTED
SHARES PRICE RANGE AVERAGE PRICE
OUTSTANDING PER SHARE PER SHARE
----------- -------------- ---------------
Outstanding at February 28, 1994... 302,366 $1.05 - $ 1.05 $ 1.05
Granted.......................... 128,834 1.05 - 1.05 1.05
Canceled......................... (37,800) 1.05 - 1.05 1.05
Exercised........................ (14,600) 1.05 - 1.05 1.05
------- ----- ------ ------
Outstanding at December 31, 1994... 378,800 1.05 - 1.05 1.05
Granted.......................... 392,807 1.65 - 13.63 6.45
Canceled......................... (60,868) 1.05 - 8.00 1.24
Exercised........................ (48,460) 1.05 - 1.05 1.05
------- ----- ------ ------
Outstanding at December 31, 1995... 662,279 1.05 - 13.63 4.23
Granted.......................... 416,336 8.88 - 14.75 12.14
Canceled......................... (79,149) 1.05 - 14.75 5.66
Exercised........................ (45,567) 1.05 - 6.30 2.81
------- ----- ------ ------
Outstanding at December 31, 1996... 953,899 $1.05 - $14.75 $ 7.63
======= ===== ====== ======
At December 31, 1996, 1995 and 1994, 369,896, 95,518, and 83,213 shares
were exercisable at weighted-average prices of $5.95, $1.20 and $1.05,
respectively.
Option shares available for grant at December 31, 1996 were 1,329,375. Of
the shares available for grant, approximately 932,100 option shares have been
set aside to be granted to certain employees of Electrotech.
Fair Value Disclosure
Statement of Financial Accounting Standards No. 123, Accounting for Awards
of Stock-Based Compensation to Employees (SFAS No. 123) requires the use of
option valuation models to provide supplemental information regarding options
granted after 1994. Pro forma information regarding net income and earnings per
share shown below was determined as if the Company had accounted for its
employee stock options under the fair value method of that statement.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: Risk-free interest rates of 5.9%
and 6.1%; a zero dividend yield in both years; volatility factors of the
expected market price of the Company's Common Stock of 65.7% and 65.7%; and an
expected life of the options of 5.5 years and 5.5 years. These assumptions
resulted in weighted-average fair values of $7.62 and $4.04 per share for stock
options granted in 1996 and 1995, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee stock
options have characteristics significantly different from those of traded
options such as vesting restrictions and extremely limited transferability. In
addition, the assumptions used in option valuation models (see above) are highly
subjective, particularly the expected stock price volatility of the underlying
stock. Because changes in these subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not provide a reliable single measure of the fair value of its employee stock
options.
F-22
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net income for 1996 and 1995 is not representative of the pro forma effect on
net income in future years, because it does not take into consideration pro
forma compensation expense related to grants made prior to 1995. Pro forma
information in future years will reflect the amortization of a larger number of
stock options granted in several succeeding years. The Company's pro forma
information is as follows:
Years ended December 31
1996 1995
Pro forma net loss.............. $(95,157,298) $(43,461)
Pro forma primary earnings
per share....................... $ (10.10) $ (0.01)
Information regarding stock options outstanding as of December 31, 1996 is as
follows:
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Price Range Shares Exercise Price Contractual Life Shares Exercise Price
- ----------- ------ --------------- ---------------- ------ ---------------
Under $5.00 254,237 $ 1.14 6.98 136,628 $ 1.08
$5.00 to $10.00 415,768 $ 7.23 8.63 158,204 $ 6.35
Over $10.00 283,894 $14.01 9.55 75,064 $13.97
11. EMPLOYEE BENEFIT PLANS
United States 401(k)
In November 1993, the Company established a 401(k) plan (the Plan) covering
substantially all of its employees. The Plan allows eligible employees to
contribute up to 15% of their compensation. Company contributions are voluntary
and at the discretion of the Board of Directors. There were no contributions
made by the Company for the years ended December 31, 1996 and 1995, and the ten
month period ended December 31, 1994.
United Kingdom Pension Plan
Electrotech operates a pension plan known as "The Electrotech Retirements
Benefits Scheme", (the Plan), which undertakes to provide retirement benefits to
participating employees based upon their final pensionable salary. The assets
of the Plan are administered by the Trustees and are separate from those of the
Company.
Employer contributions are made at rates recommended by a qualified actuary
following his triennial valuation of the fund. Contributions made during the six
week period from November 15, 1996 to December 31, 1996 amounted to $41,000.
The assumptions which have the most significant effect on the results of
the valuation are those relating to the rate of return on investments and the
rates of increase in salaries and pensions It has been assumed that the
investment return is 2% higher per annum than future salary and pension.
F-23
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
The group also makes contributions to a Group Personal Pension plan for
employees who are not members of the final salary plan. Total contributions to
the group plan and personal pension plan in the six week period from November
15, 1996 to December 31, 1996 amounted to $99,000.
The following table sets forth the plan and funded status and amounts
recognized in the Company's consolidated balance sheets at December 31, 1996.
Actuarial present value of benefit obligations:
Accumulated benefit obligations (including
vested benefits of $7,881,200)................... $ 7,881,200
============
Projected benefit obligation for service
rendered to date.................................. $(10,042,500)
Fair value of plan assets (consisting of
various cash funds)............................... 5,629,100
------------
Projected benefit obligation in excess of
plan assets....................................... (4,413,400)
Unrecognized net loss.............................. 653,400
------------
Net pension liability recognized in the
consolidated balance sheet........................ $ (3,760,000)
============
The unfunded project benefit obligation at the acquisition date was
approximately $3,742,000 and was recorded as the net pension liability at that
date.
Vested benefits are calculated by reference to that portion of the
accumulated benefit obligation which is not contingent upon an employee
remaining in the service of the employer. The discount rate and pensions
inflation used in determining the actuarial present value of the projected
benefit obligation were 7.25% and 6.25%, respectively, at December 31, 1996.
The expected long-term rate of return on plan assets were 9% at December 31,
1996.
The components of net pension expense for the year ended December 31, 1996 are
as follows:
Service cost................................... $ 34,700
Interest cost on projected benefit obligation.. 87,400
Return on plan assets.......................... (62,800)
Net amortization or deferral................... --
--------
Net periodic pension cost...................... $ 59,300
========
12. SUBSEQUENT EVENT
The Company has recently determined that certain characteristics of the CVD
technology of Electrotech known as "Flowfill" are superior to the high density
plasma CVD processes being pursued by the Limited Partnership pursuant to the
R&D Agreement (the R&D Agreement) entered into as of March 29, 1996 between the
Limited Partnership and the Company (under which the Company performs all
research and development work for the Limited Partnership). The Company has,
accordingly, decided to discontinue further research and development work under
the R&D Agreement and instead focus its consolidated efforts, on its own behalf
and not on behalf of the Limited Partnership, upon the Flowfill CVD technology
used in the Electrotech equipment. The Company has communicated this decision
to the limited partners of the Limited Partnership, and one of the limited
partners has communicated to the Company that the
F-24
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
discontinuation of the project is inconsistent with the R&D Agreement and
representations made by the Company in connection therewith and that,
accordingly, a settlement of any and all claims that the limited partners of the
Limited Partnership may have in connection with such discontinuation is
appropriate. The Company is presently preparing to formulate an offer to be
made to the limited partners of the Limited Partnership to terminate the R&D
Agreement and all related agreements, and obtain a release from the limited
partners of the Limited Partnership of all rights and claims in connection with
the Limited Partnership, the R&D Agreement and the ancillary agreements entered
into by the various parties in connection therewith. The amount of the possible
offer or range of the offer can not be reasonably estimated at this time;
however, it could be material to the future operating results of the Company.
F-25
REPORT OF INDEPENDENT AUDITORS
To the directors of Electrotech Equipments Limited and Electrotech Limited
We have audited the accompanying consolidated balance sheets of Eletrotech
Equipments Limited and Electrotech Limited as of June 30, 1996 and 1995 and the
related profit and loss accounts and statements of cash flows for each of the
three years ended June 30, 1996. These combined financial statements are the
responsibility of the companies' directors. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards which do not differ in any significant respect from United States
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurances about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Eletrotech
Equipments Limited and Electrotech Limited as of June 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1996 in conformity with accounting principles
generally accepted in the United Kingdom which differ in certain respects from
those followed in the United States (see Note 29 of the notes to the combined
Financial Statement).
Ernst & Young
Chartered Accountants
Registered Auditor
Cardiff, Wales
August 28, 1996
F-26
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
COMBINED PROFIT AND LOSS ACCOUNTS
YEAR ENDED JUNE 30
-------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
SALES(3)
Continuing operations..................... (Pounds) 49,012 (Pounds) 30,703 (Pounds) 18,402
Discontinued operations................... -- 3,793 5,405
---------------- ---------------- ----------------
49,012 34,496 23,807
COST OF SALES............................. 23,406 17,014 11,496
---------------- ---------------- ----------------
GROSS PROFIT.............................. 25,606 17,482 12,311
Research and development costs............ 6,674 4,421 3,332
Administrative expenses................... 8,295 8,615 7,161
---------------- ---------------- ----------------
OPERATING PROFIT(4)
Continuing operations..................... 10,637 4,322 1,798
Discontinued operations................... -- 124 20
---------------- ---------------- ----------------
10,637 4,446 1,818
PROFIT ON DISPOSAL OF DISCONTINUED
OPERATIONS(5)............................. -- 5,040 --
---------------- ---------------- ----------------
PROFIT ON ORDINARY ACTIVITIES
BEFORE INTEREST........................... 10,637 9,486 1,818
Interest receivable(8).................... 216 125 65
Interest payable(9)....................... 825 563 320
---------------- ---------------- ----------------
PROFIT ON ORDINARY ACTIVITIES
BEFORE TAXATION........................... 10,028 9,048 1,563
Tax on profit on ordinary activities(10).. 3,721 3,530 574
---------------- ---------------- ----------------
PROFIT FOR THE FINANCIAL YEAR............. 6,307 5,518 989
Retained profit brought forward........... 18,011 12,412 11,356
Exchange difference on opening balance.... (67) 30 16
Amortization of revaluation surplus....... 51 51 51
---------------- ---------------- ----------------
RETAINED PROFIT AT THE END OF THE
FINANCIAL YEAR............................ (Pounds) 24,302 (Pounds) 18,011 (Pounds) 12,412
================ ================ ================
A summary of the significant adjustments to profit for the financial year
(net income) which would be required if US Generally Accepted Accounting
Principles had been applied instead of UK Generally Accepted Accounting
Principles is set forth in Note 29 of the Notes to the Combined Financial
Statements.
The Notes to the Combined Financial Statements form part of these Combined
Financial Statements.
F-27
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
COMBINED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
YEAR ENDED JUNE 30
-------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
PROFIT FOR THE FINANCIAL YEAR............. (Pounds) 6,307 (Pounds) 5,518 (Pounds) 989
Exchange differences on foreign
currency translation..................... (87) 39 19
--------------- --------------- ---------------
Total recognized gains and losses for
the year................................. (Pounds) 6,220 (Pounds) 5,557 (Pounds) 1,008
=============== =============== ===============
NOTE OF HISTORICAL COST PROFITS
AND LOSSES
Reported profit on ordinary activities
before taxation.......................... (Pounds) 10,028 (Pounds) 9,048 (Pounds) 1,563
Difference between historical cost
depreciation charge and the actual
depreciation charge for the year
calculated on the revalued
amount................................... 51 51 51
--------------- --------------- ---------------
Historical cost profit on ordinary
activities before taxation............... (Pounds) 10,079 (Pounds) 9,099 (Pounds) 1,614
--------------- --------------- ---------------
Historical cost profit for the year....... (Pounds) 6,358 (Pounds) 5,569 (Pounds) 1,040
=============== =============== ===============
The Notes to the Combined Financial Statements form part of these Combined
Financial Statements.
F-28
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
COMBINED BALANCE SHEETS
AS OF JUNE 30
------------------------------------
1996 1995
---------------- -----------------
(IN THOUSANDS OF BRITISH POUNDS)
ASSETS
FIXED ASSETS
Intangible assets(11)................... (Pounds) 18 (Pounds) 27
Tangible assets(12)..................... 11,496 7,969
---------------- ----------------
11,514 7,996
CURRENT ASSETS
Inventories(13)......................... 17,438 12,741
Accounts receivable(14)................. 20,002 16,034
Cash.................................... 2,076 1,568
---------------- ----------------
39,516 30,343
---------------- ----------------
TOTAL ASSETS............................. (Pounds) 51,030 (Pounds) 38,339
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans and overdrafts............... (Pounds) 8,106 (Pounds) 2,591
Trade accounts payable.................. 4,669 4,078
Corporate tax........................... 3,353 3,810
Accruals and deferred income............ 1,672 1,196
Other current liabilities(15)........... 5,294 4,633
---------------- ----------------
23,094 16,308
NONCURRENT LIABILITIES
Long-term borrowings(16)................ 400 800
Corporate tax(16)....................... 203 406
Other noncurrent liabilities(16)........ 345 133
---------------- ----------------
948 1,339
PROVISION FOR LIABILITIES AND CHARGES
Deferred taxation(18)................... 367 291
---------------- ----------------
TOTAL LIABILITIES........................ 24,409 17,938
SHAREHOLDERS' EQUITY
Share capital(19)....................... 11 11
Revaluation reserve(20)................. 2,308 2,379
Profit and loss account................. 24,302 18,011
---------------- ----------------
26,621 20,401
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................. (Pounds) 51,030 (Pounds) 38,339
================ ================
A summary of the significant adjustments to shareholder's equity which
would be required if US generally accepted accounting principles had been
applied instead of UK generally accepted accounting principles is set forth in
Note 29 of the Notes to the Combined Financial Statements.
The Notes to the Combined Financial Statements form part of these Combined
Financial Statements.
F-29
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
COMBINED CASH FLOW STATEMENTS
YEAR ENDED JUNE 30
--------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
NET CASH INFLOW/(OUTFLOW) FROM
OPERATING ACTIVITIES(21)............... (Pounds) 4,918 (Pounds) (3,336) (Pounds) (2,712)
---------------- ---------------- ----------------
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE....................
Interest received.................... 216 125 65
Interest paid........................ (825) (563) (320)
---------------- ---------------- ----------------
NET CASH OUTFLOW FROM RETURNS ON
INVESTMENTS AND SERVICING OF FINANCE... (609) (438) (255)
TAXATION
UK corporate tax paid/(recovered).... (3,866) 244 (6)
Overseas tax paid.................... (439) (74) (277)
---------------- ---------------- ----------------
TAX (PAID)/RECOVERED.................... (4,305) 170 (283)
---------------- ---------------- ----------------
INVESTING ACTIVITIES
Payments to acquire tangible fixed
assets.............................. (4,849) (2,532) (771)
Receipts from sale of subsidiary
company(22)......................... -- 6,631 --
Receipts from sale of tangible fixed
assets.............................. 26 33 26
---------------- ---------------- ----------------
NET CASH (OUTFLOW)/INFLOW FROM
INVESTING ACTIVITIES................... (4,823) 4,132 (745)
---------------- ---------------- ----------------
NET CASH (OUTFLOW)/INFLOW BEFORE
FINANCING............................... (4,819) 528 (3,995)
---------------- ---------------- ----------------
FINANCING
Medium-term bank loan repayments(25). (400) (400) (400)
Increase in other noncurrent
liabilities......................... 212 -- --
---------------- ---------------- ----------------
NET CASH OUTFLOW FROM FINANCING......... (188) (400) (400)
---------------- ---------------- ----------------
(DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS(23)........................ (Pounds) (5,007) (Pounds) 128 (Pounds) (4,395)
================ ================ ================
A summary of the cash flow statement under US generally accepted accounting
principles is set forth in Note 29 of the Notes to the Combined Financial
Statements.
The Notes to the Combined Financial Statements form part of these Combined
Financial Statements.
F-30
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The combined financial statements combine the consolidated financial
statements of Electrotech Equipments Limited with those of Electrotech Limited,
which are not part of a UK group but are subject to common control.
During the year ended June 30, 1995 the investment in Surface Technology
Systems Limited was sold. The combined financial statements include the
unaudited results of this discontinued operation up to the date of sale.
The combined financial statements have been prepared in accordance with
applicable accounting standards in the United Kingdom. The principal accounting
policies adopted in the preparation of the combined financial statements are set
out below and have been consistently applied. The combined financial statements
have been prepared under the historical cost convention, modified to include the
revaluation of freehold buildings.
2. ACCOUNTING POLICIES
Depreciation
Depreciation has been calculated to write off the cost of tangible fixed
assets over their expected useful lives using the following rates:
a) Intangible assets
Licenses 10.0% of original cost
b) Tangible assets
Freehold land and buildings 2.0% of cost or valuation
Plant and machinery 20.0% of net book value
Training and demonstration machines 20.0% of cost
Fixtures and fittings 12.5% of net book value
Office equipment 20.0% of net book value
Motor vehicles 25.0% of net book value
Portable buildings 20.0% of net book value
Leasehold additions and improvements are depreciated over the remaining life
of the lease.
Inventories
Inventories have been valued at the lower of cost and net realizable value.
The cost of finished goods includes a relevant proportion of production
overheads.
Deferred taxation
Deferred taxation is provided on the liability method to take account of
timing differences between the treatment of certain items for accounts purposes
and their treatment for tax purposes. Tax deferred or accelerated is accounted
for in respect of all material timing differences to the extent that it is
considered that a net liability may crystallize.
F-31
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
2. ACCOUNTING POLICIES (CONTINUED)
Development expenditure
Expenditure on research and development is written off against profits in
the year in which it is incurred.
Foreign exchange
The profit and loss accounts and balance sheets of the overseas subsidiaries
have been translated into sterling at the average rates of exchange for the year
and the rates of exchange ruling at the balance sheet date respectively.
Exchange differences arising between the translation into sterling of the net
assets of these subsidiaries at rates ruling at the beginning and end of the
year are dealt with through retained earnings and reserves.
Leasing
Tangible fixed assets acquired under finance leases or hire purchase
contracts are capitalized and depreciated in the same manner as other tangible
assets. The related obligations, net of future finance charges, are included in
creditors.
Rentals payable under operating leases are charged to the profit and loss
account on a straight line basis over the period of the lease.
Government grants
Government grants are credited to the profit and loss account by
installments over the expected useful economic lives of the assets to which they
relate.
Pension costs
Electrotech Equipments Limited, Electrotech Limited and their subsidiary
companies operate a pension scheme known as "The Electrotech Retirement
Benefits Scheme" which undertakes to provide retirement benefits to
participating employees based upon their final pensionable salary. The assets of
the scheme are administered by the Trustees and are separate from those of
Electrotech Equipments Limited, Electrotech Limited and their subsidiaries.
Employer contributions to the scheme are made in accordance with the
recommendations of an independent qualified actuary based upon his triennial
valuations of scheme assets and calculations of funding requirements to meet
future benefits. These contributions are charged to profit and loss account when
incurred.
3. SALES
Sales represent the value, excluding UK value added tax, of goods and
services supplied to customers during the year.
F-32
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
4. OPERATING PROFIT
Operating profit is stated after charging:
YEAR ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
--------------- ---------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Auditor's remuneration.................. (Pounds) 88 (Pounds) 102 (Pounds) 98
Depreciation of owned assets............ 1,280 810 597
Hire of assets--operating leases........ 490 543 542
Loss on disposal of tangible fixed
assets................................. 44 -- 4
Net loss on currency translation........ -- 73 --
And after crediting:
Net gain on currency translation........ 604 -- 29
Profit on disposal of tangible fixed
assets................................. 20 12 15
Rental income........................... 46 93 109
5. PROFIT ON DISPOSAL OF DISCONTINUED OPERATIONS
The profit on disposal of discontinued operations is the net profit before
taxation on the sale of a subsidiary, Surface Technology Systems Limited, during
March 1995.
6. DIRECTORS' REMUNERATION
YEAR ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
--------------- ---------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Directors' emoluments.................... (Pounds) 264 (Pounds) 369 (Pounds) 200
Directors' pension contributions......... 8 33 26
--------------- ---------------- ---------------
Total directors' remuneration............ 272 402 226
=============== ================ ===============
The remuneration of the Chairman
and highest paid director was:
Electrotech Equipments Limited......... 176 270 134
Electrotech Limited.................... -- -- --
=============== ================ ===============
F-33
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
6. DIRECTORS' REMUNERATION (CONTINUED)
The remuneration of the directors, including the above, fell within the
following ranges:
YEAR ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
--------------- ---------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Nil-5,000................................ 2 1 2
10,001-15,000............................ -- 1 --
65,001-70,000............................ -- -- 1
70,001-75,000............................ -- 1 --
85,001-90,000............................ 1 -- --
130,001-135,000.......................... -- -- 1
175,001-180,000.......................... 1 -- --
265,001-270,000.......................... -- 1 --
7. STAFF COSTS
The average number of persons employed during the year was as follows:
YEAR ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
--------------- ---------------- ---------------
NO. NO. NO.
--------------- ---------------- ---------------
Management and administration............ 102 102 86
Production............................... 432 337 275
Sales and marketing...................... 24 30 28
--------------- ---------------- ---------------
558 469 389
=============== ================ ===============
The aggregate payroll costs of these persons were as follows:
YEAR ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
--------------- ---------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Wages and salaries....................... (Pounds) 11,775 (Pounds) 10,263 (Pounds) 7,729
Social security costs.................... 902 758 571
Pension costs............................ 298 242 124
--------------- ---------------- ---------------
(Pounds) 12,975 (Pounds) 11,263 (Pounds) 8,424
=============== ================ ===============
8. INTEREST RECEIVABLE AND SIMILAR INCOME
YEAR ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
--------------- ---------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Bank interest............................ (Pounds) 216 (Pounds) 125 (Pounds) 65
--------------- ---------------- ---------------
(Pounds) 216 (Pounds) 125 (Pounds) 65
=============== ================ ===============
F-34
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
9. INTEREST PAYABLE AND SIMILAR CHARGES
YEAR ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
--------------- ---------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Bank interest............................ (Pounds) 739 (Pounds) 402 (Pounds) 101
Overseas tax interest.................... 22 -- 18
Interest on amounts payable within
five years.............................. 64 161 201
--------------- ---------------- ---------------
(Pounds) 825 (Pounds) 563 (Pounds) 320
=============== ================ ===============
10. TAX ON PROFIT ON ORDINARY ACTIVITIES
The taxation charge is made up as follows:
YEAR ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
--------------- ---------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
UK corporate tax charge at 33%........... (Pounds) 2,467 (Pounds) 1,097 (Pounds) 348
UK corporate tax on profit on disposal of
discontinued operation.................. -- 1,964 --
Overseas tax............................. 1,178 389 74
Deferred tax............................. 76 80 152
--------------- ---------------- ---------------
(Pounds) 3,721 (Pounds) 3,530 (Pounds) 574
=============== ================ ===============
11. INTANGIBLE ASSETS
YEAR ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
--------------- ---------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
License transferred from associated
company:
Cost as at July 1 and June 30............ (Pounds) 90 (Pounds) 90 (Pounds) 90
--------------- ---------------- ---------------
Accumulated depreciation as at
July 1.................................. 63 54 45
Provided in year......................... 9 9 9
--------------- ---------------- ---------------
Accumulated depreciation as at
June 30................................. 72 63 54
--------------- ---------------- ---------------
Net book value at June 30, 1996,
1995 and 1994........................... (Pounds) 18 (Pounds) 27 (Pounds) 36
=============== ================ ===============
F-35
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
12. TANGIBLE FIXED ASSETS
PLANT,
MACHINERY FIXTURES,
FREEHOLD LEASEHOLD AND EQUIPMENT &
LAND AND LAND AND MOTOR &
BUILDINGS BUILDINGS VEHICLES FITTINGS TOTAL
-------------- -------------- -------------- -------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
COST
At July 1, 1993........ (Pounds) 4,522 (Pounds) 34 (Pounds) 5,175 (Pounds) 3,142 (Pounds) 12,873
Additions.............. -- -- 298 476 774
Disposals.............. -- -- (5) (116) (121)
Exchange differences... (2) -- (2) 1 (3)
-------------- -------------- -------------- -------------- ---------------
At June 30, 1994....... 4,520 34 5,466 3,503 13,523
-------------- -------------- -------------- -------------- ---------------
DEPRECIATION
At July 1, 1993........ 427 12 3,815 2,374 6,628
Charge for the year.... 106 2 320 163 591
Disposals.............. (1) -- (5) (94) (100)
Exchange differences... -- -- (1) 1 --
-------------- -------------- -------------- -------------- ---------------
At June 30, 1994....... 532 14 4,129 2,444 7,119
-------------- -------------- -------------- -------------- ---------------
NET BOOK VALUE
AT JUNE 30, 1994...... (Pounds) 3,988 (Pounds) 20 (Pounds) 1,337 (Pounds) 1,059 (Pounds) 6,404
============== ============== ============== ============== ===============
F-36
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
12. TANGIBLE FIXED ASSETS--(CONTINUED)
PLANT,
MACHINERY FIXTURES,
FREEHOLD LEASEHOLD AND EQUIPMENT &
LAND AND LAND AND MOTOR &
BUILDINGS BUILDINGS VEHICLES FITTINGS TOTAL
-------------- -------------- -------------- -------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
COST
At July 1, 1994........ (Pounds) 4,520 (Pounds) 34 (Pounds) 5,466 (Pounds) 3,503 (Pounds) 13,523
Additions.............. -- 139 2,006 398 2,543
Disposals.............. -- -- (460) (415) (875)
Exchange differences... (14) -- (2) 18 2
-------------- -------------- -------------- -------------- ---------------
At June 30, 1995....... 4,506 173 7,010 3,504 15,193
-------------- -------------- -------------- -------------- ---------------
DEPRECIATION
At July 1, 1994........ 532 14 4,129 2,444 7,119
Charge for the year.... 102 2 489 217 810
Disposals.............. -- -- (430) (273) (703)
Exchange differences... (4) -- (3) 5 (2)
-------------- -------------- -------------- -------------- ---------------
At June 30, 1995....... 630 16 4,185 2,393 7,224
-------------- -------------- -------------- -------------- ---------------
NET BOOK VALUE
AT JUNE 30, 1995....... (Pounds) 3,876 (Pounds) 157 (Pounds) 2,825 (Pounds) 1,111 (Pounds) 7,969
============== ============== ============== ============== ===============
COST
At July 1, 1995........ (Pounds) 4,506 (Pounds) 173 (Pounds) 7,010 (Pounds) 3,504 (Pounds) 15,193
Additions.............. 2,534 -- 1,763 552 4,849
Disposals.............. (107) -- (15) (109) (231)
Exchange differences... (3) -- (4) (5) (12)
-------------- -------------- -------------- -------------- ---------------
At June 30, 1996....... 6,930 173 8,754 3,942 19,799
-------------- -------------- -------------- -------------- ---------------
DEPRECIATION
At July 1, 1995........ 630 16 4,185 2,393 7,224
Charge for the year.... 96 54 862 259 1,271
Disposals.............. (66) -- (6) (109) (181)
Exchange differences... (2) -- (4) (5) (11)
-------------- -------------- -------------- -------------- ---------------
At June 30, 1996....... 658 70 5,037 2,538 8,303
-------------- -------------- -------------- -------------- ---------------
NET BOOK VALUE
AT JUNE 30, 1996....... (Pounds) 6,272 (Pounds) 103 (Pounds) 3,717 (Pounds) 1,404 (Pounds) 11,496
============== ============== ============== ============== ===============
The net book value of the freehold land and buildings on the historical
cost basis as at June 30, 1996 was (Pounds)3,970,000 (1995: (Pounds)1,543,000).
Included in the total net book value of tangible fixed assets at June 30, 1996
was (Pounds)688,000 (1995: (Pounds)372,000) in respect of assets held under hire
purchase agreements.
F-37
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
13. INVENTORIES
AS OF JUNE 30
-----------------------------------
1996 1995
---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
Raw materials and parts................. (Pounds) 10,627 (Pounds) 6,077
Work in progress........................ 5,552 5,377
Finished goods.......................... 1,259 1,287
---------------- ----------------
(Pounds) 17,438 (Pounds) 12,741
================ ================
The difference between the purchase price or production cost of inventories
and their replacement price is not material.
14. ACCOUNTS RECEIVABLE
AS OF JUNE 30
-----------------------------------
1996 1995
---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
Trade debtors........................... (Pounds) 17,406 (Pounds) 13,416
Other debtors........................... 1,492 2,172
Prepayments and accrued income.......... 1,024 328
Amounts owed by companies under common
control................................ 80 118
---------------- ----------------
(Pounds) 20,002 (Pounds) 16,034
================ ================
15. OTHER CURRENT LIABILITIES
AS OF JUNE 30
-----------------------------------
1996 1995
---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
Obligations under hire purchase
contracts(see note 17)................. (Pounds) 242 (Pounds) 180
Warranty provisions..................... 1,107 702
Payments received on account............ 2,779 1,886
Other creditors......................... 46 36
Other tax and social security........... 640 1,324
Amount owed to companies under common
control................................ 80 105
Current installment due on medium-term
loan................................... 400 400
---------------- ----------------
(Pounds) 5,294 (Pounds) 4,633
================ ================
F-38
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
16. NONCURRENT LIABILITIES
AS OF JUNE 30
-----------------------------------
1996 1995
---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
US mortgage loan........................ (Pounds) 38 (Pounds) 37
Hire purchase installments due within
five years............................. 287 66
Long term element of DTI grant
receivable............................. 20 30
---------------- ----------------
345 133
UK medium-term bank loan................ 400 800
UK corporation tax...................... 203 406
---------------- ----------------
(Pounds) 948 (Pounds) 1,339
================ ================
The UK bank loan is for a period of five years from May 20, 1993 and is
repayable by equal semi-annual installments of (Pounds)200,000 from that date.
The loan carries a fixed interest rate of 10.0025% per annum and is secured by a
debenture over the assets of Electrotech Equipments Limited, Electrotech Limited
and their subsidiaries.
The mortgage loan in the United States is to be repaid in installments
ending in 1998. Interest on the loan is charged at 9.75% per annum.
17. OBLIGATIONS UNDER HIRE PURCHASE CONTRACTS
The maturity of these amounts is as follows:
AS OF JUNE 30
-----------------------------------
1996 1995
---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
Amounts payable:
Within one year...................... (Pounds) 244 (Pounds) 195
In two to five years................. 287 71
---------------- ----------------
531 266
Less: finance charges allocated to
future periods....................... 2 20
---------------- ----------------
(Pounds) 529 (Pounds) 246
================ ================
Obligations under hire purchase contracts are analyzed as follows:
AS OF JUNE 30
-----------------------------------
1996 1995
---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
Current obligations..................... (Pounds) 242 (Pounds) 180
Noncurrent obligations.................. 287 66
---------------- ----------------
(Pounds) 529 (Pounds) 246
================ ================
F-39
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
18. DEFERRED TAXATION
AS OF JUNE 30
------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
At July 1............................... (Pounds) 291 (Pounds) 211 (Pounds) 59
Charge for the year..................... 76 80 152
---------------- ---------------- ----------------
At June 30.............................. (Pounds) 367 (Pounds) 291 (Pounds) 211
================ ================ ================
No provision has been made for the potential tax liability that would arise
on the disposal of the freehold land and buildings at the revalued amount shown
in the balance sheet. The potential tax liability at June 30, 1996 amounts to
(Pounds)500,000 (1995: (Pounds)500,000), but no provision for this is required
since the directors have no plans to dispose of the property in the foreseeable
future and, in the event of a disposal, it is considered that no tax liability
would arise after taking account of "rollover" relief.
In addition, no provision has been made for the potential tax liability
that would arise on the disposal of land and buildings on which Scientific
Research Allowances have been claimed. The potential liability at June 30, 1996
amounts to (Pounds)246,000 (1995: (Pounds)246,000).
Deferred taxation provided in the accounts and the amounts not provided are
as follows:
PROVIDED NOT PROVIDED
AS OF JUNE 30 AS OF JUNE 30
----------------------------------- -----------------------------------
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
Capital allowances in
advance of depreciation................ (Pounds) 367 (Pounds) 291 (Pounds) -- (Pounds) --
Other timing differences................ -- -- 246 246
---------------- ---------------- ---------------- ----------------
(Pounds) 367 (Pounds) 291 (Pounds) 246 (Pounds) 246
================ ================ ================ ================
19. SHARE CAPITAL
ELECTROTECH EQUIPMENTS LIMITED ELECTROTECH LIMITED
----------------------------------------------------- -----------------------------------
"A" "B"
VOTING NON-VOTING
ORDINARY ORDINARY ORDINARY
SHARES OF SHARES OF SHARES OF
(Pounds)1 EACH (Pounds)1 EACH TOTAL (Pounds)1 EACH COMBINED
-------------- -------------- ------- -------------- ----------
(IN BRITISH POUNDS)
Authorized at July 1, 1994,
June 30, 1995 and 1996...... 82 9,918 10,000 575 10,575
============== ============== ======= ============== ==========
Issued and fully paid at
July 1, 1994, June 30, 1995
and 1996.................... 82 9,918 10,000 575 10,575
============== ============== ======= ============== ==========
F-40
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
20. REVALUATION RESERVE
AS OF JUNE 30
-----------------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
At July 1......................................... (Pounds) 2,333 (Pounds) 2,384 (Pounds) 2,435
Less: amortization of revaluation surplus......... 51 51 51
--------------- --------------- ---------------
2,282 2,333 2,384
Exchange difference arising on consolidation...... 26 46 37
--------------- --------------- ---------------
At June 30........................................ (Pounds) 2,308 (Pounds) 2,379 (Pounds) 2,421
=============== =============== ===============
The revaluation reserve arises on the valuation of freehold properties
owned by a subsidiary company as valued by Chestertons on 6 June 1991. The
valuation was carried out in accordance with the Statement of Asset Valuation
Practice ("SAVP") notes issued by the Royal Institute of Chartered Surveyors
and in particular, SAVP note 2:1.
21. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW/(OUTFLOW)
AS OF JUNE 30
-----------------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Operating profit.................................. (Pounds) 10,637 (Pounds) 4,446 (Pounds) 1,818
Depreciation...................................... 1,280 806 597
Loss/(Profit) on sale of tangible fixed
assets........................................... 25 (12) (11)
Currency exchange differences..................... (87) 37 21
Increase in inventories........................... (4,697) (2,638) (5,387)
Increase in accounts receivable................... (3,968) (8,622) (1,967)
Increase in current liabilities................... 1,728 2,647 2,217
--------------- --------------- ----------------
Net cash inflow/(outflow) from
operating activities............................. (Pounds) 4,918 (Pounds) (3,336) (Pounds) (2,712)
=============== =============== ================
22. SALE OF SUBSIDIARY UNDERTAKING
AS OF JUNE 30
-----------------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Net book value of assets sold..................... (Pounds) -- (Pounds) 151 (Pounds) --
Tangible fixed assets............................. -- 1,440
Non-cash equivalent working capital............... (679) --
--------------- --------------- ---------------
Cash and cash equivalents......................... -- 912 --
Profit on disposal................................ -- 5,040 --
--------------- --------------- ---------------
Cash consideration (net of expenses).............. (Pounds) -- (Pounds) 5,952 (Pounds) --
=============== =============== ===============
F-41
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
22. SALE OF SUBSIDIARY UNDERTAKING (CONTINUED)
The net inflow of cash and cash equivalents in respect of the sale of the
subsidiary undertaking is as follows:
AS OF JUNE 30
-----------------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Cash consideration (net of expenses).............. (Pounds) -- (Pounds) 5,952 (Pounds) --
Cash balance of subsidiary undertaking............ -- 679 --
--------------- --------------- ---------------
(Pounds) -- (Pounds) 6,631 (Pounds) --
=============== =============== ===============
23. ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS DURING THE YEAR
AS OF JUNE 30
-----------------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Balance at July 1................................. (Pounds) (1,023) (Pounds) (1,151) (Pounds) 3,244
Net cash flow in the year......................... (5,007) 128 (4,395)
--------------- --------------- ---------------
Balance at June 30................................ (Pounds) (6,030) (Pounds) (1,023) (Pounds) (1,151)
=============== =============== ===============
F-42
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
24. ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS AS SHOWN IN THE
BALANCE SHEET
AS OF JUNE 30
---------------------------------------- CHANGE IN
1996 1995 YEAR
--------------- --------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Cash at bank and in hand........................... (Pounds) 2,076 (Pounds) 1,568 (Pounds) 508
Bank overdrafts.................................... (8,106) (2,591) (5,515)
--------------- --------------- ---------------
(Pounds) (6,030) (Pounds) (1,023) (Pounds) (5,007)
=============== =============== ===============
AS OF JUNE 30
---------------------------------------- CHANGE IN
1996 1995 YEAR
--------------- --------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Cash at bank and in hand........................... (Pounds) 1,568 (Pounds) 465 (Pounds) 1,103
Bank overdrafts.................................... (2,591) (1,616) (975)
--------------- --------------- ---------------
(Pounds) (1,023) (Pounds) (1,151) (Pounds) 128
=============== =============== ===============
AS OF JUNE 30
---------------------------------------- CHANGE IN
1996 1995 YEAR
--------------- --------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Cash at bank and in hand........................... (Pounds) 465 (Pounds) 3,436 (Pounds) (2,971)
Bank overdrafts.................................... (1,616) (192) (1,424)
--------------- --------------- ---------------
(Pounds) (1,151) (Pounds) 3,244 (Pounds) (4,395)
=============== =============== ===============
25. ANALYSIS OF CHANGES IN LOAN FINANCING DURING THE YEAR
YEAR ENDED JUNE 30
-----------------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Total financing at July 1............................ (Pounds) 1,200 (Pounds) 1,600 (Pounds) 2,000
Loan repayments...................................... (400) (400) (400)
--------------- --------------- ---------------
Total financing at June 30........................... (Pounds) 800 (Pounds) 1,200 (Pounds) 1,600
=============== =============== ===============
26. PENSIONS
Electrotech Equipments Limited, Electrotech Limited and their subsidiaries
operate a pension scheme known as "The Electrotech Retirements Benefits
Scheme" which undertakes to provide retirement benefits to participating
employees based upon their final pensionable salary. The assets of the scheme
are administered by the Trustees and are separate from those of the companies.
Employer contributions to the scheme are made at rates recommended by a
qualified actuary following his triennial valuation of the fund. At the date of
the latest actuarial valuation, April 6, 1993, the market value of the assets of
the scheme was (Pounds)4,562,000 which represented 145% of the benefits that had
accrued to members, after allowing for expected future increases in earnings.
F-43
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
26. PENSIONS (CONTINUED)
The assumptions which have the most significant effect on the results of the
valuation are those relating to the rate of return on investments and the rates
of increase in salaries and pensions. It has been assumed that the investment
return is 2% higher per annum than future salary and pension increases.
Employer contributions to the scheme from July 1, 1994 to April 30, 1995
were made at the rate of 6% of pensionable salaries, and from May 1, 1995 at the
rate of 8.8% of pensionable salaries.
The group also makes contributions to a Group Personal Pension plan for
employees who are not members of the final salary scheme. Total contributions to
the group scheme and personal pension plan in the year ended June 30, 1996
amounted to (Pounds)298,000 (1995: (Pounds)242,000).
27. LEASING COMMITMENTS
Electrotech had annual commitments under noncancelable operating leases as
detailed below:
AS OF JUNE 30
---------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------ -------------------------------
LAND & LAND & LAND &
BUILDING OTHER BUILDING OTHER BUILDING OTHER
------------- ------------- ------------- ------------- -------------- -------------
(IN THOUSANDS OF BRITISH POUNDS)
Leases which expire
In 1 year...................... (Pounds) 42 (Pounds) 57 (Pounds) -- (Pounds) 40 (Pounds) -- (Pounds) 8
In 2-5 years................... 35 180 -- 88 -- 67
In more than five years........ 617 -- 637 -- 167 --
------------- ------------- ------------- ------------ ------------- ------------
Total financing at June 30..... (Pounds) 694 (Pounds) 237 (Pounds) 637 (Pounds) 128 (Pounds) 167 (Pounds) 75
============= ============= ============= ============ ============= ============
28. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
YEAR ENDED JUNE 30
---------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(IN THOUSANDS OF BRITISH POUNDS)
Profit for the financial year................ (Pounds) 6,307 (Pounds) 5,518 (Pounds) 989
Shareholders' funds at beginning of year..... 20,401 14,844 13,836
Exchange difference on opening balance....... (87) 39 19
--------------- --------------- ---------------
Shareholders' funds at end of year........... (Pounds) 26,621 (Pounds) 20,401 (Pounds) 14,844
=============== =============== ===============
29. DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
KINGDOM AND THE UNITED STATES
The combined financial statements are prepared under accounting principles
generally accepted in the United Kingdom ("UK GAAP") which differ in certain
respects from United States generally accepted principles ("US GAAP").
Differences estimated to have a significant effect on combined net income and
shareholders' equity are set out below.
F-44
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
Revaluation of Land and Buildings
Certain land and buildings were revalued in 1991 on the basis of their
value to the business and they are included in these combined financial
statements at that valuation less subsequent depreciation. Under US GAAP, such
revaluations would not be reflected in the financial statements. Land and
buildings would be included at historical cost under US GAAP with depreciation
computed on such cost.
Deferred Taxation
Provision is made for deferred taxation using the liability method on all
material timing differences to the extent that it is probable that the
liabilities will crystallize in the foreseeable future. Under US GAAP, as set
out in Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes", deferred taxation is generally provided on a full liability
basis on all temporary differences.
Pensions
Under UK GAAP the cost of providing pensions is accounted for over the
working lives of the employees in the scheme. Under US GAAP, FAS 87 requires
that a specific actuarial approach is applied for measuring the pension cost,
the objective of which is to recognize in each accounting period the cost of
providing the pension benefits earned by employees in that period.
The following is a summary of the effect of the above differences on profit
for the financial year (net income) and equity shareholders' funds:
YEAR ENDED JUNE 30
---------------------------------------------------
1996 1995 1994
--------------- --------------- -------------
(IN THOUSANDS OF BRITISH POUNDS)
NET INCOME
Profit for the financial year............. (Pounds) 6,307 (Pounds) 5,518 (Pounds) 989
Adjustments
Depreciation adjustment as a result
of revaluation........................... 51 51 51
Pensions (net of tax effect)............ (189) (155) (67)
--------------- --------------- -------------
Net income as adjusted to accord with
US GAAP.................................. (Pounds) 6,169 (Pounds) 5,414 (Pounds) 973
=============== =============== =============
F-45
ELECTROTECH EQUIPMENTS LIMITED AND ELECTROTECH LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996
Environmental Cleanup
An environmental survey is in the process of being completed in respect of
all currently owned properties and previously and currently leased properties.
For US GAAP purposes, an accrual of (Pounds)281,000 has been recorded as an
adjustment in shareholders' equity, as reported.
YEAR ENDED JUNE 30
------------------------------------
1996 1995
---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
SHAREHOLDERS' EQUITY
Shareholders' equity as reported..... (Pounds) 26,621 (Pounds) 20,401
Adjustments
Revaluation..................... (2,542) (2,542)
Depreciation adjustment as a
result of revaluation.......... 250 199
Deferred taxation............... (246) (246)
Pensions (net of tax effect).... (1,287) (1,287)
Environmental reserve........... (281) (281)
---------------- ----------------
Shareholders' equity as adjusted
to accord with US GAAP.............. (Pounds) 22,515 (Pounds) 16,244
================ ================
Consolidated Cash Flow Statement
The consolidated statements of cash flows prepared in accordance with UK
GAAP present substantially the same information as that required under US GAAP.
UK GAAP and US GAAP differ, however, with regard to classification of items
within the statements and as regards the definition of cash and cash
equivalents.
Under US GAAP, cash and cash equivalents would not include bank overdrafts
and borrowings with initial maturities of less than three months. Under UK GAAP,
cash flows are presented separately for operating activities, servicing of
finance and returns on investments, taxation, investing activities and financing
activities. US GAAP, however, requires only three categories of cash flow
activity to be reported: operating, investing and financing. Cash flows from
taxation and servicing of finance and returns on investments shown under UK GAAP
would be included as operating activities under US GAAP.
The categories of cash flow activity under US GAAP can be summarized as
follows:
YEAR ENDED JUNE 30
--------------------------------------------------------
1996 1995 1994
----------------- ---------------- ----------------
(IN THOUSANDS OF BRITISH POUNDS)
Cash inflows/(outflows) from
operating activities................... (Pounds) 4 (Pounds) (3,604) (Pounds) (3,250)
Cash (outflows)/inflows on investing
activities............................. (4,823) 4,132 (745)
Cash outflows from financing
activities............................. (188) (400) (400)
---------------- ---------------- ----------------
(Decrease)/increase in cash and cash
equivalents............................ (5,007) 128 (4,395)
Cash and cash equivalents at July 1..... (1,023) (1,151) 3,244
---------------- ---------------- ----------------
Cash and cash equivalents at June 30.... (Pounds) (6,030) (Pounds) (1,023) (Pounds) (1,151)
================ ================ ================
F-46
TRIKON TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996 AND 1995, AND THE TEN MONTHS ENDED
DECEMBER 31, 1994
Additions Deductions
-------------------------------------- --------------------
Amounts
Balance at Charged to Charged to Charged to Balance at
Beginning Costs and Other Reserve Net of End of
Description of Period Expenses Accounts Reinstatement Period
- ----------------------------- ----------------- -------------------- --------------- ------------------- ---------------
Year ended December 31, 1996
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
items $ -- $3,402,000 $ -- $ -- $3,402,000
------- ---------- -------------- -------------- ----------
$ -- $3,402,000 $ -- $ -- $3,402,000
======= ========== -------------- ============== ==========
Year ended December 31, 1995
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
items $33,522 $ (33,522) $ -- $ -- $ --
------- ---------- -------------- -------------- ----------
$33,522 $ (33,522) $ -- $ -- $ --
======= ========== ============== ============== ==========
Ten months ended December
31, 1994
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
items $30,000 $ 3,522 $ -- $ -- $ 33,522
------- ---------- -------------- -------------- ----------
$30,000 $ 3,522 $ -- $ -- $ 33,522
======= ========== ============== ============== ==========
EXHIBIT INDEX
-------------
PAGE
NUMBER DESCRIPTION NUMBER
- ------ ---------------------------------------------------------------------------------------------------- ------
2.1# Share Purchase Agreement dated July 17, 1996 (the "Share Purchase Agreement") among the Company,
Electrotech and the Electrotech Shareholders
2.2# Amendment No. 1 to Share Purchase Agreement dated as of September 9, 1996
2.3# Amendment No. 2 to Share Purchase Agreement dated as of October 16, 1996
2.4# Amendment No. 3 to Share Purchase Agreement dated as of November 13, 1996
3.1 Seventh Restated Articles of Incorporation of the Company
3.2 Certificate of Ownership of Plasma & Materials Technologies, Inc. amending the Company's
Seventh Restated Articles of Incorporation to effect the change of its name to "Trikon
Technologies, Inc."
3.3 Bylaws of the Company, as amended and currently in effect
4.1# Indenture dated as of October 7, 1996 between the Company and U.S. Trust Company of
California, N.A.
4.2* Warrant to Purchase Common Stock issued to St. Paul Fire and Marine Insurance Company on
November 29, 1993
4.3* Warrant to Purchase Common Stock issued to Brentwood Associates V, L.P. on November 29, 1993
4.4+++ Form of Common Stock Purchase Warrant, issued to certain of the Limited Partners (as hereinafter defined)
on March 29, 1996.
4.5 Form of Promissory Note issued to each investor under the Note Purchase Agreement on December
16, 1996
4.6 Form of Common Stock Purchase Warrant issued to each investor under the Note Purchase
Agreement on December 16, 1996
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
- -----------------------------------
10.1 1991 Stock Option Plan of the Company, as amended to date, including the Company's Share
Option Scheme for its U.K. employees and the related Share Option and Reimbursement Agreement
Between the Company, Electrotech and certain of Electrotech's subsidiaries
10.2# Employment Agreement dated as of November 15, 1996 between the Company and Nigel Wheeler
10.3# Registration Agreement dated as of November 15, 1996 between the Company and Christopher D.
Dobson
OTHER MATERIAL CONTRACTS
- -----------------------------------
10.4***+ International Technology License and Sales Agreement between the Company and Alcan-Tech Co.,
Inc. dated November 15, 1991
10.5***+ International Technology License and Sales Agreement between the Company and Anelva
Corporation, dated February 7, 1992
10.6*+ Technology License and Sales Agreement between the Company and Leybold AG dated December 8,
1992
10.7***+ Technology License and Sales Agreement between the Company and Watkins-Johnson Company dated
December 23, 1993
10.8* Master Lease Agreement between Phoenix Leasing Inc. and the Company, effective December 16,
1993 and ending December 16, 1997
10.9* Royalty Agreement dated October 3, 1986 by and between the Company and Messrs. Conn, Campbell
and Goebel
10.10* Assignment of Royalty Rights dated June 8, 1990 executed by Messrs. Conn and Campbell in favor
of the Company
10.11* Agreement entered into the 25th day of June 1986 by and between the Company and
Leybold-Heraeus GmbH
10.12**+ Distribution Agreement dated July 1, 1995 by and between the Company and Canon Sales
PAGE
NUMBER DESCRIPTION NUMBER
- ------ ---------------------------------------------------------------------------------------------------- ------
10.13# Registration Agreement dated as of October 7, 1996 among the Company, Salomon Brothers
Inc and Unterberg Harris
10.14++ Agreement of Limited Partnership of PMT CVD Partners, L.P. (the "CVD Partnership") dated as of
March 29, 1996, entered into between CVD, Inc. (the "General Partner") and the limited
partners listed therein (the "Limited Partners")
10.15+++ Form of Option Agreement, dated as of March 29, 1996, entered into between the Company and
certain of the Limited Partners
10.16+++ Form of Partnership Subscription Agreement, dated as of March 29, 1996, entered into among the
Partnership, the General Partner and certain of the Limited Partners
10.17+++ Share Subscription and Shareholders Agreement, dated as of March 29, 1996, entered into
between the General Partner and the Limited Partners, as the shareholders of the General
Partner
10.18+++ Research & Development Agreement, dated as of March 29, 1996, entered into between the Company
and the CVD Partnership
10.19+++ Technology License Agreement, dated as of March 29, 1996, entered into between the Company and
the CVD Partnership
10.20 Credit Agreement dated as of November 15, 1996 between the Company, Electrotech, NationsBank
of Texas, N.A. and Lloyds Bank plc
10.21 Note Purchase and Loan Agreement dated as of December 16, 1996 (the "Note Purchase Agreement")
by and among the Company and the persons listed on Schedule 1 thereto
10.22 Lease dated July 5, 1985 concerning the Company's facilities at Newport, Gwent, United Kingdom,
as assigned to Electrotech Limited effective January 19, 1995
11 Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
23.2 Consent of Independent Auditors
24.## Power of Attorney
27 Financial Data Schedule
_____________
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-4450) on July 11, 1995.
** Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-94450) on July 28, 1995.
*** Filed as an exhibit to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-94450) on August 22, 1995.
+ Certain portions of this exhibit have been omitted from the copies filed as
part of Amendment No. 1 or Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-94450), as the case may be, and
are the subject of an order granting confidential treatment with respect
thereto.
++ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
Quarterly Period Ended March 31, 1996 (File No. 0-26482) on May 15, 1996.
+++ Filed as an exhibit to the Company's Amendment No. 1 to Quarterly Report on
Form 10-Q/A for the Quarterly Period Ended March 31, 1996 (File No. 0-
26482) on October 3, 1996.
# Filed as an exhibit to the Company's Current Report on Form 8-K (File No.
0-26482) on November 27, 1996.
## Set forth in the signature page hereto.