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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-26482
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TRIKON TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-0454321
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)
Ringland Way, Newport, South Wales NP6 2TA, United Kingdom
(Address of principal executive offices)
+44 (0)1633 414 000
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
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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. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) 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 22, 1999, based on the closing price of the Common Stock
as recorded on the OTC Bulletin Board on such date, was approximately
$4,176,775. 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 22, 1999, the registrant had outstanding 94,023,835 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 year ended December 31, 1998
Page
----
PART I.................................................................. 1
Item 1. Business................................................... 1
Item 2. Properties................................................. 11
Item 3. Legal Proceedings.......................................... 12
Item 4. Submission of Matters to a Vote of Security Holders........ 12
PART II................................................................. 13
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters........................................ 13
Item 6. Selected Consolidated Financial Data of Trikon............. 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations of Trikon........................ 16
Item 7A. Quantative and Qualitative Disclosure About Market Risk.... 30
Item 8. Financial Statements and Supplementary Data................ 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 30
PART III................................................................ 31
Item 10. Directors and Executive Officers of Trikon................. 31
Item 11. Executive Compensation..................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 39
Item 13. Certain Relationships and Related Transactions............. 40
PART IV................................................................. 43
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................ 43
i
PART I
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and other similar expressions or
variations of such words are intended to identify these forward-looking
statements. Additionally, statements concerning future matters such as the
development of new products, enhancements or technologies, possible changes in
legislation and other statements regarding matters that are not historical
fact are forward-looking statements. The forward-looking statements involve
risks and uncertainties. Actual results could differ materially from those
projected in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, availability
of financial resources adequate for short-, medium- and long-term needs,
product demand and market acceptance, uncertainty about the effectiveness of
the restructuring and the adequacy of the provisions made in connection with
the restructuring, exposure to the economic downturn in Asia and continued
overcapacity in the DRAM market, as well as those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operation--
Factors Affecting Operating Results" and elsewhere in this Report.
ITEM 1. BUSINESS
Trikon Technologies, Inc. and its subsidiaries ("Trikon" or the "Company")
develop, manufacture, market and service semiconductor processing equipment
for the worldwide semiconductor manufacturing industry.
The Company's products are used for chemical vapor deposition (CVD),
sputtering--a type of physical vapor deposition (PVD)--and etch applications
and are sold to semiconductor manufacturers worldwide. Trikon currently offers
leading-edge products including the Planar 200(R) Flowfill(TM) system for
inter-metal dielectric CVD and the Sigma(R) sputter system for PVD, with
optional Forcefill(R) module. Trikon's CVD process technology, Flowfill(TM),
forms high quality silicon dioxide layers which possess the properties of both
gap fill and planarization. Forcefill(R) 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 also offers
various products for the etch market, including its Omega(R) Inductively
Coupled Plasma (ICP) system and its patented M^RI(TM) source technology for
dielectric, polysilicon and metal etch applications in the fabrication of
semiconductor devices. The Company's headquarters are in Newport, United
Kingdom.
Development of the Company
Initial Public Offering. On August 29, 1995, the Company completed an
initial public offering of its common stock, no par value ("Common Stock"),
resulting in approximately $40,093,235 of net proceeds to the Company. Since
that date, the Company has been subject to the reporting requirements of
Section 13(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
Formation of the CVD Partnership. On March 29, 1996, Trikon, as limited
partner, entered into the Agreement of Limited Partnership of PMT CVD
Partners, L.P. (the "CVD Partnership") with CVD Inc., as general partner, and
SBIC Partners, L.P. ("SBIC Partners"), Norwest Equity V ("Norwest") and R&M
Partners/CVD, G.P., each as a limited partner (collectively, the limited
partners are referred to as 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 M^RI(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, which was to be performed
by Trikon under an agreement with the CVD Partnership.
Convertible Subordinated Note Offering. On October 7, 1996, the Company
issued and sold 7 1/8% Convertible Subordinated Notes Due 2001 (the
"Convertible Notes") in the aggregate amount of $86,250,000 to Salomon
Brothers Inc (which has merged with a subsidiary of Travellers Group Inc. to
form Salomon Smith
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Barney Holdings Inc.) and Unterberg Harris (which has been renamed C.E.
Unterberg Towbin) (the "Initial Purchasers") in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"). The Initial Purchasers then offered and sold the
Convertible Notes to persons reasonably believed by the Initial Purchasers 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 provisions of Regulation S under the Securities Act. A portion
of the net proceeds from the issuance and sale of the Convertible Notes were
used by the Company to pay the cash portion of the purchase price paid to the
shareholders of Trikon Limited (as hereinafter defined) in the Acquisition (as
hereinafter defined). In connection with the issuance and sale of the
Convertible Notes, the Company agreed with the Initial Purchasers, for the
benefit of the Initial Purchasers and the holders of the Convertible Notes
from time to time, to prepare, file and cause a shelf registration statement
covering the Convertible Notes and the shares of Common Stock issuable upon
the conversion of the Convertible Notes to become effective within 90 days
after the closing date of the offering of the Acquisition (the "Original
Offering"). Because the Company did not cause such a shelf registration
statement to become effective within the required time period, the Company was
subject to the payment of liquidated damages until such a shelf registration
statement became effective. The liquidated damages were calculated at a rate
of one-half of one percent (50 basis points) per annum of the aggregate
principal amount outstanding of the Convertible Notes. In accordance with the
Exchange Offer (see below), the liability for liquidated damages was
terminated effective April 15, 1998.
Working Capital Facility. On November 15, 1996, in preparation for the
Acquisition, the Company entered into a senior secured facility (the "Working
Capital Facility") with certain banks (the "Lending Banks") in the United
States and United Kingdom that permitted the Company to borrow up to an
aggregate of $35.0 million, subject to certain borrowing base limitations
based upon eligible accounts receivable. The Working Capital Facility
contained sub-facilities which provided for the issuance of letters of credit
up to $4.0 million ($3.0 million in the United Kingdom and $1.0 million in the
United States) and an overdraft line of credit up to 2.5 million British
pounds. The working capital facility was paid off on November 12, 1997 (see
Pay-off Agreement below).
Electrotech Acquisition. On November 15, 1996, the Company completed the
acquisition (the "Acquisition") of 100% of the outstanding capital stock of
Electrotech Limited, an English corporation, Electrotech Equipments Limited,
an English corporation, and, directly or indirectly, each subsidiary thereof
for an aggregate consideration of $145.7 million, excluding approximately $8.0
million in acquisition costs, consisting of $75 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 for the Common
Stock on July 17, 1996, the last day prior to the public announcement of the
Acquisition. The net proceeds from the sale of the Convertible Notes in the
Original Offering were used by the Company to substantially fund the cash
needed with respect to the Acquisition. In connection with the Acquisition,
Christopher D. Dobson, formerly the principal shareholder of Electrotech
Limited and Electrotech Equipments Limited (collectively, "Electrotech"),
became the Chairman of the Board of Directors of Trikon, and Nigel Wheeler,
formerly the President of Electrotech became the President, Chief Operating
Officer and a director of Trikon. Subsequent to the Acquisition, Electrotech
Limited and Electrotech Equipments Limited formally changed their names to
Trikon Technologies Limited and Trikon Equipments Limited. As a result of the
Acquisition, each of Trikon Technologies Limited and Trikon Equipments Limited
became a direct, wholly-owned subsidiary of the Company. Trikon has since
reorganized its ownership of Trikon Technologies Limited and Trikon Equipments
Limited such that Trikon Technologies Limited and Trikon Equipments Limited
are directly owned by holding companies (collectively, with Trikon
Technologies Limited and Trikon Equipments Limited, referred to as "Trikon
Limited") that, in turn, are directly wholly-owned by Trikon. Unless the
context otherwise required, all references herein to "Trikon" or the "Company"
include Trikon Limited with respect to all periods on or after November 15,
1996.
Name Change. On March 31, 1997, the Company changed its name from Plasma &
Materials Technologies, Inc. to Trikon Technologies, Inc.
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Series G Preferred Stock Private Placement. Effective June 30, 1997, the
Company offered and sold 2,962,032 shares of its Series G Preferred Stock to
investors at a price of $6.75 per share in a transaction exempt from the
registration requirements of the Securities Act (the "Series G Private
Placement"). The investors in the Series G Private Placement also received a
total of 888,610 presently exercisable three-year warrants to purchase Common
Stock, at a price of $8.00 per share (the "Series G Warrants"). The Series G
Private Placement resulted in net proceeds of approximately $19,349,000 to the
Company.
CVD Acquisition. Effective June 30, 1997, the Company acquired all the
outstanding limited partnership interests of the CVD Partnership and all of
the share interests in the CVD Partnership's corporate general partner (the
"CVD Acquisition") in exchange for the Company's issuance of an aggregate of
679,680 shares of Common Stock of the Company (the "CVD Partnership Shares")
pro rata to the Limited Partners of the CVD Partnership, excluding the
Company, pursuant to the terms of a purchase agreement (the "CVD Purchase
Agreement"). The Company had previously determined that certain
characteristics of the CVD technology of Trikon Limited, acquired in the
Acquisition and known as "Flowfill" are superior to the high density
CVD processes which were being pursued by the CVD Partnership (through a
research and development agreement with the Company). Accordingly the Company
discontinued the research and development work on behalf of the CVD
Partnership and focused its consolidated efforts upon the Flowfill technology
used in the Trikon Limited equipment. As a result of the CVD Acquisition, the
Company acquired all CVD technology which had been developed by the CVD
Partnership prior to such discontinuation, together with approximately
$2,208,000 of unspent funds of the CVD Partnership. Any and all claims that
the Limited Partners of the CVD Partnership may have had in connection with
the termination of the research and development project thereunder or
otherwise relating to the CVD Partnership were released and discharged
pursuant to the CVD Purchase Agreement.
In connection with the purchase of all of the outstanding interests in the
CVD Partnership and its corporate general partner, the Company agreed to cause
a registration statement covering the shares issued to the Limited Partners on
June 30, 1997 to be filed under the Securities Act, and to become effective on
or prior to September 1, 1997. In the event that the Company did not cause a
registration statement covering the CVD Partnership Shares to become effective
on or prior to September 1, 1997, the Company agreed pursuant to the original
terms of the CVD Purchase Agreement to pay the holders of CVD Partnership
Shares liquidated damages comprised of a one-time fee of $75,000, and an
amount equal to $2,500 per day for each day after September 1, 1997 and prior
to the effective date of a registration statement.
On December 12, 1997, the Company and the holders of the CVD Partnership
Shares amended the CVD Purchase Agreement to provide for (i) the immediate
payment of liquidated damages accrued through November 1, 1997 of $225,000,
(ii) no further incurrence of liquidated damages should a registration
statement be effective by March 15, 1998, (iii) in the event Trikon does not
cause a registration statement to become effective by March 15, 1998,
resumption of liquidated damages accruing at a rate of $2,500 for each day
thereafter until a registration statement becomes effective, and (iv) should a
registration statement not be effective by April 1, 1998, Trikon becoming
obligated to pay the Limited Partners liquidated damages for the period
between November 1, 1997 and March 15, 1998, of $335,000. On September 15,
1998, pursuant to a second amendment to the CVD Purchase Agreement, the
Company issued 300,000 shares of Common Stock to the holders of CVD
Partnership Shares in exchange for the termination of their registration
rights, the relinquishment of any right to liquidated damages under the CVD
Purchase Agreement, including those accrued to the date of the second
amendment, and the release of the Company from any liability or claim arising
from or relating to the CVD Purchase Agreement.
Pay-off Agreement. At December 31, 1996 and March 31, 1997, the Company was
out of compliance with certain financial ratios and covenants established
under the Working Capital Facility. The Lending Banks under the Working
Capital Facility had granted the Company a waiver of such financial ratios and
covenants for the year and quarter then ended. Concurrent with the closing of
the Series G Private Placement, the Company entered into an amendment
agreement with its lending banks to amend its Working Capital Facility, which
amendment, among other things, revised certain financial ratios and covenants
as to which the Company had previously been
3
in default. In connection with and as consideration for the amendment, the
Company issued to the Lending Banks and their administrative agent warrants to
purchase an aggregate of 178,182 shares of Common Stock at an exercise price
of $6.75 per share. At June 30, 1997 and September 30, 1997, the Company was
again out of compliance with certain financial ratios and covenants under the
amended Working Capital Facility. As a result of the Company being in default
under the amended Working Capital Facility, the Lending Banks issued on
October 7, 1997 a payment blockage notice to the holders of the Convertible
Notes (the "Payment Blockage Notice"). The Payment Blockage Notice prevented
the payment of principal or interest due and payable under the Convertible
Notes on October 15, 1997. On November 12, 1997, the Company entered into a
pay-off agreement (the "Pay-off Agreement") with the Lending Banks under the
Working Capital Facility. Under the terms of the Pay-off Agreement, the
Company made payments in the aggregate of approximately $12.5 million
(including all outstanding principal and interest due at November 12, 1997) to
the Lending Banks under the Working Capital Facility, the Lending Banks under
the Working Capital Facility released all of their liens on the assets of the
Company, the Working Capital Facility and all of the Company's obligations
under the Working Capital Agreement were terminated, and the Payment Blockage
Notice was cancelled.
Non-Exclusive Licenses of Technology to Applied Materials. On November 12,
1997, the Company granted non-exclusive, worldwide, paid-up licenses of its
M^RI(TM) source and Forcefill(R) PVD technologies to Applied Materials for a
total consideration of $29.5 million. The license agreements with Applied
Materials do not preclude the Company from utilizing, or licensing to other
third parties, the licensed technologies.
Restructuring of Operations. On November 12, 1997, the Company announced the
closure of its M^RI etch division located in Chatsworth, California and the
sale of non-exclusive licenses of M^RI(TM) source and Forcefill PVD
technologies to Applied Materials. The restructuring of the M^RI etch
division, the shutdown of operations in Chatsworth, and other impairment
write-downs of the intangible assets established upon the acquisition of
Trikon Limited, resulted in charges to earnings in 1997 aggregating $77.6
million.
Non-Exclusive License of Technology to Lam Research. On March 18, 1998, the
Company granted a non-exclusive, worldwide license of its M^RI(TM) source
technology to Lam Research. Under the terms of the license agreement, Lam
Research will pay up to $20.0 million, $13.0 million of which has been paid in
1998 and $7.0 million of which consists of future contingent payments and
royalties. The license agreement does not preclude Trikon from utilizing, or
licensing to other third parties, the licensed technology.
Exchange Offer. On April 14, 1998 the Company commenced an exchange offer
(the "Exchange Offer") for all of the outstanding Convertible Notes, Series G
Preferred Stock and Series G Warrants, and filed a Schedule 13E-4 with the
Securities and Exchange Commission. The Exchange Offer expired on May 14,
1998, and immediately thereafter, the Company accepted for exchange or
conversion all validly tendered Convertible Notes, Series G Preferred Stock
and Series G Warrants. $82,103,000 principal amount of Convertible Notes
(approximately 95% of the aggregate principal amount outstanding), 2,873,143
shares of Series G Preferred Stock (approximately 97% of the total shares
outstanding) and 866,388 Series G Warrants (approximately 97% of the Series G
Warrants outstanding) had been validly tendered for exchange. Because more
than two-thirds of the outstanding shares of Series G Preferred Stock
tendered, in accordance with the terms of the Certificate of Determination of
the Company establishing the rights, preferences and privileges of the Series
G Preferred Stock, all other outstanding shares of Series G Preferred Stock
automatically converted into shares of Common Stock. The Company subsequently
exchanged the remaining 22,222 Series G Warrants on the same terms as those
already tendered. The $82,103,000 principal amount of Convertible Notes
tendered were exchanged for 22,660,798 new shares of Common Stock, 2,855,754
new shares of Series H Preferred Stock, $10 stated amount per share, and
29,264.625 new shares of Series I Junior Participating Preferred Stock. The
shares of Series G Preferred Stock and Series G Warrants were exchanged for
7,183,224 new shares of Common Stock and 7,997.489 new shares of Series I
Junior Participating Preferred Stock. The Series H Preferred Stock will be
redeemable at the option of the Company for cash on June 30, 2001, at a
redemption price equal to the stated amount and the holders of the Series H
Preferred Stock will be entitled to receive dividends at an annual rate of 8
1/8% of the stated amount payable annually, at the option of the Company, in
cash or additional shares of preferred stock or any combination thereof. The
Series H Preferred Stock will be subject to automatic conversion
4
if the Company's Common Stock price reaches certain levels and accelerated
redemption if certain cash flow levels are achieved.
In connection with the consummation of the Exchange Offer, the Company
agreed to issue 5,015,811 shares of restricted Common Stock and 6,476.995
shares of restricted Series I Preferred Stock to the Company's Chairman of the
Board. Subject to certain conditions, the restricted stock will vest one
hundred percent (100%) upon the earlier of (i) May 14, 2003, or (ii) the sale
of all or substantially all of the assets of the Company.
On July 28, 1998, at the Company's Annual Meeting of Shareholders, the
shareholders approved, among other things, an amendment (the "Charter
Amendment") to the Articles of Incorporation of the Company to provide for an
increase in the number of authorized shares of Common Stock. Upon approval of
the Charter Amendment, each share of Series I Preferred Stock automatically
converted into 1,000 shares of Common Stock.
In conjunction with the Exchange Offer, the Company did not pay accrued and
unpaid interest of $3.3 million due on the $82.103 million of Convertible
Notes accepted in the Exchange Offer. Interest due to holders of Convertible
Notes which did not accept the Exchange Offer was paid on May 15, 1998.
The Exchange Offer has been accounted for under SFAS No. 15 "Troubled Debt
Restructuring". As a result of the Exchange Offer, the Company recognized an
extraordinary gain of $20.3 million in the Consolidated Statement of
Operations for the year ended December 31, 1998.
Reduction in Work Force. On September 11, 1998, the Company announced a
reduction in work force of 73 employees and additional cost cutting measures.
New Chief Executive Officers. In May 29, 1998, the Company announced the
appointment of Tom McKee as Chief Executive Officer and director of the
Company. On September 7, 1998, Tom McKee resigned as Chief Executive Officer
and director for personal reasons. Effective October 27, 1998, the Company
appointed Nigel Wheeler as Chief Executive Officer of the Company. Mr. Wheeler
continues to serve on the Board of Directors.
Delisting from The Nasdaq National Market. Since April 9, 1998, the bid
price of the Company's shares of Common Stock has been below $1 per share and
consequently the Company was out of compliance with the minimum bid price
requirement of The Nasdaq Stock Market for listing on the Nasdaq National
Market. On November 11, 1998, following a hearing before the Nasdaq Listing
Qualification Panel, the Company's shares of Common Stock were delisted from
the Nasdaq National Market. The Company's shares of Common Stock are now
quoted on the OTC Bulletin Board.
Products
Trikon offers a line of single chamber and cluster semiconductor processing
tools which are designed to meet the varying requirements of its customers for
metal deposition, CVD of dielectric films, high density plasma etching of
dielectric, polysilicon and metal films and dry developing of photoresist.
Trikon's line of equipment includes the Planar 200(R) Flowfill(TM) system, the
Sigma Forcefill(TM) system, the Delta 201 system, and the Omega(R) 201-2
system.
Chemical Vapor Deposition
Planar 200(R) Flowfill(TM)
The inter-metal dielectric market requires a suitable planarized insulating
material to separate the several levels of microscopic wiring in a chip. 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(R) Flowfill(TM) multi-chambered cluster system, the advanced planarization
layer consists of three films which are deposited
5
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.
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 inter-metal dielectric market,
additional testing is necessary. There can be no assurance that this process
will result in the successful manufacture and production of ICs.
Because of the difficulties of dielectic gap fill, alternative processes are
under development or have been developed by competitors and semiconductor
manufacturers. These processes rely on an alternative process flow to
subtractive etching known as "inlay' or "damascene' whereby the dielectric is
firstly deposited and then metal features etched into the dielectric. Metal is
then deposited into these features and surplus metal above these features
removed by an etching process; typically chemical mechanical polishing (CMP).
Whilst Flowfill(TM) is compatible with CMP, the adoption of CMP negates any
gap fill advantages Flowfill(TM) may have over alternatives.
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 $750,000.
Physical Vapor Deposition
Sigma
Layers of metal alloys can be deposited by Trikon's Sigma product line, a
PVD machine with multiple process chambers. Such equipment deposits a uniform
layer of very pure interconnect metal on the whole surface of the
semiconductor wafer by a process known as sputtering. 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.
Recently a pulsed PVD process has been developed and sold for the deposition
of very high quality dielectics at temperatures lower than CVD techniques. The
selling price for the Sigma system ranges from approximately $2.0 million to
approximately $2.5 million, depending on the configuration of the system.
Sigma Forcefill(R)
The Sigma Forcefill(R) system was developed to extend Trikon's standard
Sigma metallization product capability into the sub-0.5 micron market. The
Forcefill(R) technology is used with traditional PVD techniques and eliminates
the standard use of tungsten for the contact hole plugging. The process can be
carried out on a standard Sigma series system with an attached Forcefill(R)
module, which involves depositing a layer of aluminum and transferring, the
wafer under vacuum to the Forcefill(R) module where the aluminum is heated and
forced under very high pressure into the hole, thus achieving a void-free
fill. Forcefill(R) allows manufacturers to eliminate the use of CVD tungsten
and to utilize an entirely aluminum-based multi-level metal scheme.
6
In March 1997, Trikon received indications from a significant customer that
the customer intended to place substantial orders for Forcefill(R) systems in
the second half of 1997. These orders were not received as a result of
difficulties of using a contact plug of the same material as the interconnect
with the zero overlay design rules. Such design rules allows a contact plug to
be partially uncovered by an interconnect line. As a result, when the
interconnect line is etched, the contact plug is exposed. If the contact plug
is made of the same material as the interconnect line, it too etches. The
recent development of damascene processing where the interconnect metal is
inlaid into insulating layers, rather than etched, removes this problem with
respect to Forcefill(R) technology. However, presently, CVD copper is the most
favored metal deposition for damascene processing.
The average selling price of the Sigma Forcefill(R) system ranges from
approximately $3.5 million to approximately $4.0 million, depending on the
configuration of the system.
Etch
Omega(R) 201-2
The Omega(R) etch platform utilizes the Company's field proven 200 series
hardware in a compact single chamber configuration minimizing the cleanroom
space required. The system is offered with a range of etch technologies
including Trikon's M^RI(TM) and Inductively Coupled Plasma ("ICP"). This
choice of process chambers means the Company can meet all process needs at all
technology levels. The price of Trikon's Omega(R) etch system ranges from
$800,000 to $1,400,000, depending on the configuration of the system.
Customers
The Company sells its systems to semiconductor manufacturers located
throughout the United States, Europe, Asia/Pacific, South Korea and Japan.
Trikon's total revenue includes amounts from certain individual customers
that exceed 10% of total revenue. Revenue from Lam Research and Siemens
represents 40% and 15% of total revenue, respectively, for the year ended
December 31, 1998. Revenue from two customers represented 35% and 13% each of
total revenue for the year ended December 31, 1997 and two customers
represented 19% and 12% each of total revenue for the year ended December 31,
1996.
International revenues accounted for approximately 52%, 37% and 77% of total
revenues in the years ended December 31, 1998, 1997 and 1996, respectively.
During 1998, 47% and 4% of total revenues were sales in Europe and Japan,
respectively. Sales outside of the United States will continue to account for
a substantial amount of the Company's total revenue.
The Company must obtain export licenses from the Export Control Organization
of the United Kingdom Department of Trade and Industry for shipments to
certain countries, including South Korea and Israel. 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.
7
Marketing, Sales and Customer Support
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 and technologies primarily through four separate sales
channels; direct sales, agency and distributor arrangements, and license
agreements.
In the United States, Trikon markets and sells its products principally
through its direct sales organization. In South Korea, Trikon markets and
sells its products directly through the sales staff of its wholly-owned South
Korean subsidiary. The European market is served by a direct sales group in
the United Kingdom, France and Germany which offers sales, customer support
and spare parts.
In Japan, Trikon has a distribution agreement with Innotech Corporation.
Trikon has no distributor arrangement in Japan for etch products. During 1998
the Company closed its office in Japan and support to Innotech Corporation is
now provided from the United Kingdom and Korea offices.
In other sales territories a mixture of sales agents and distributors are
used.
Trikon maintains active OEM agreements in Japan and Europe. Trikon currently
sells the M^RI(TM) source to Anelva Corporation for incorporation into Anelva
Corporation's systems licensed for sale worldwide. Trikon also licenses plasma
source technology to Leybold Systems GmbH of Germany for incorporation into
Leybold's systems that are sold worldwide.
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.
Research, Development and Engineering
Trikon believes that its future success will depend, in large 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, 1998, the Company employed 59 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 CVD
and PVD applications, polysilicon and integrated stack etch applications,
metal etch applications, including aluminum, and oxide etch applications.
Trikon's research, development and engineering expenses were approximately
$8.1 million, $17.0 million and $10.1 million for the years ended December 31,
1998, 1997 and 1996, respectively, and represented approximately 21.2%, 20.0%
and 24.0% of total revenue for these three periods, respectively. In addition
to direct research and development expenses, the Company recognized a charge
of $3.0 million in connection with the CVD Acquisition during the year ended
December 31, 1997 and $86.0 million for acquisition related in-process
research and development, in the year ended December 31, 1996, due to the
Acquisition of Trikon Limited.
8
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.
Manufacturing
At the Company's Newport, United Kingdom facility, Trikon takes full
responsibility for the manufacturing of virtually all key technology
components for the Company's products. This approach has enabled the Company
to ensure quality control and compliance with government regulation and reduce
dependence on third party suppliers.
Competition
The markets served by Trikon's products are very conservative, highly
competitive and subject to rapid technological change. Historically, new
technologies have only gained acceptance when industry leaders concurrently
adopted such new technologies. Significant competitive factors include timing
of new product offerings, 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 similar technologies, including other manufactures of High Density
Plasma (HDP) systems. In the high density plasma CVD market, Trikon's primary
competitors are Applied Materials, Novellus and Lam Research. Trikon's
Flowfill(TM) technology faces competition from other CVD manufacturers and
track manufacturers for spin on glass (SOG) deposition, primarily Tokyo
Electron. In the PVD market, Trikon's Forcefill(R) technology faces
competition from suppliers of aluminum and tungsten-plug PVD systems, such as
Applied Materials, and a number of other competitors, including Anelva, Tokyo
Electron, Novellus and Ulvac. 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 M^RI(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.
Virtually all of the Company's primary competitors are substantially larger
companies with broader product lines, and have well established reputations in
the CVD, PVD, etch 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 the Company'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.
The Company has granted non-exclusive, worldwide, paid-up licenses of its
M^RI(TM) source and Forcefill(R) PVD technologies to Applied Materials and of
its M^RI(TM) source technology to Lam Research in addition to existing
licensees. As a result, in the future the Company's PVD and etch products may
have to compete with products of Applied Materials and, with respect to etch
products, Lam Research based on the Company's technologies. Nevertheless,
Trikon believes that, in addition to the license income, such "second
sourcing" will demonstrate to the semiconductor manufacturing industry the
value of Trikon's technologies, make more likely a large base of research on
its technologies to support acceptance of these technologies in the
marketplace and enable customers to buy the Company's products, assured that
alternative sources of supply are available. The license agreements do not
preclude the Company from utilizing, or licensing to other third parties, the
licensed technologies.
9
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, three patents in the United Kingdom, three patents in Taiwan, one
patent in each of Germany, France, Italy and the Netherlands. The Company
currently has approximately 54 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 high density plasma
processing, 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(R)) and the equipment related
to these processes. The Company also holds a copyright on its MACSE(TM)
proprietary software. In addition, the Company has 12 trademarks that are
registered with the United States patent and trademark office, including
M^RI200(R), PINNACLE 8000(R), OMEGA(R), SOFT SPUTTER ETCH(R), PLANAR 200(R),
FORCEFILL(R), 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 Hifill(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.
In March 1999, the German Federal Patent Court determined that a
competitor's issued German patent concerning a process similar to Forcefill(R)
is cancelled and invalid from the date of issue. The court has yet to give the
reasons for its decision. During the Court's proceedings, the competitor
withdrew one of the patent's claims apparently directed to non vacuum
processes and declared that a divisional patent for this claim would be filed.
This divisional patent is therefore now pending opposition proceedings and
will again come before the same court if filed and opposed. The Company will
examine the divisional patent if filed and will vigorously oppose it, if it
relates to Trikon's business. In the opinion of the Company's advisors such
opposition is likely to be successful.
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 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
10
of facilities in the United Kingdom, and 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 March 25, 1999, the Company's backlog was approximately $7.8 million,
as compared to approximately $3.2 million at March 25, 1998. In addition, as
of March 25, 1999, the Company had non-binding letters of intent for future
sales of $2.7 million as compared to none as of March 25, 1998. The Company's
backlog at March 25, 1999 consisted primarily of orders for etch and PVD
products. The Company's backlog comprises system purchase and lease orders
that provide for delivery within fiscal 1999. 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, 1998, the Company had 264 regular employees, including 59
engaged in research, development 17 in sales and marketing, 68 in customer
support, 83 in manufacturing, and 37 in general administration and finance.
None of the employees of the Company are covered by a collective bargaining
agreement.
ITEM 2. PROPERTIES
Certain information concerning the Company's principal properties at
December 31, 1998 is set forth below:
Square Property
Location Type Principal Use Footage Interest
- -------- ---- ------------- ------- --------
Newport, Wales, United
Kingdom............... Office, Headquarters, Manufacturing, 110,000 leased
manufacturing & Sales and Customer Support,
laboratories Research & Engineering
Bristol, United Office, Not in use 55,700 freehold
Kingdom.............. manufacturing &
warehouse
Santa Clara, CA....... Office United States Administration 3,000 freehold
and Field Service Operations
The Company has a number of smaller properties and field offices located in
the United States, the United Kingdom, Germany, France and South Korea. The
Company believes that its properties adequately serve the Company's present
needs.
11
ITEM 3. LEGAL PROCEEDINGS
Dallas Semiconductor Corporation ("Dallas Semiconductor") filed on April 9,
1998 an action against the Company in state court in Dallas County, Texas. The
complaint alleges breach of warranty, fraud, negligent misrepresentation, and
breach of contract regarding the purchase of two PMT Pinnacle Polysilicon Etch
Systems from the Company. Dallas Semiconductor seeks damages of $8.0 million
and exemplary damages of $16.0 million. The lawsuit was removed on May 7, 1998
to federal court in the Northern District Court of Texas. The Company filed a
motion to dismiss the claims in federal court on May 27, 1998. In response,
Dallas Semiconductor decided not to oppose the merits of the motion but
instead exercise its "one time" right to amend its pleading under applicable
law. On June 26, 1998, Dallas Semiconductor filed a first amended complaint
setting forth its claims with greater specificity. The Company filed a motion
to dismiss the amended claims on July 30, 1998. The Company believes that the
claims are without merit and intends to vigorously defend them. At this early
stage, the Company cannot determine the total expense or the ultimate outcome
of the lawsuit. Although Management does not believe the claim will have a
material adverse effect on the Company's financial position, results of its
operations or cash flow, there can be no assurance to that effect.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market for the Registrant's Common Equity
The Common Stock trades on the OTC Bulletin Board and dealing prices are
recorded under the symbol "TRKN". The quarterly high and low sale prices for
Common Stock as reported by the Nasdaq National Market until November 11, 1998
and the OTC Bulletin Board thereafter, for the periods indicated below are as
follows:
High Low
------ ------
1997
First Quarter.................................................. $16.75 $11.00
Second Quarter................................................. $12.13 $ 4.25
Third Quarter.................................................. $12.25 $ 6.38
Fourth Quarter................................................. $ 9.31 $ 1.00
1998
First Quarter.................................................. $ 1.83 $ 1.00
Second Quarter................................................. $ 1.16 $ 0.53
Third Quarter.................................................. $ 0.59 $ 0.13
Fourth Quarter................................................. $ 0.13 $ 0.03
As of March 22, 1999, there were 167 shareholders of record of Common Stock.
The Company has not declared or paid cash dividends to holders of its shares
of Common Stock. A dividend of $973,238 due to holders of Series H Preferred
Stock of record on October 14, 1998 was paid with 97,320 new shares of Series
H Preferred Stock.
The Company anticipates that any 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. In addition, any declaration of dividends on the Common Stock will
depend, among other things, upon levels of indebtedness, the effect on the
conversion ratio of the Convertible Notes, restrictions in future debt
agreements, future earnings, the operating and financial condition of the
Company, its capital requirements and general business conditions.
On March 22, 1999, the closing price of the Common Stock as reported on the
OTC Bulletin Board was $0.0938 per share.
Unregistered Sales of Registrant's Equity Securities During Last Fiscal Year
As of September 30, 1998, the Company exchanged 22,222 Series G Warrants for
22,222 shares of Common Stock, substantially the same terms as those for the
Series G Warrants tendered in the Exchange Offer. This exchange was made in
reliance on the exemption from the registration requirements of the Securities
Act afforded by Section 3(a)(9) thereof. This exemption was available because
all securities exchanged were held by an existing securityholder of the
Company and the Company did not pay any commission or other remuneration to
any broker, dealer, salesman or other person for soliciting tenders of the
Series G Warrants.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA OF TRIKON
The following selected consolidated financial data of Trikon is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes thereto of Trikon and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Trikon," which
are included elsewhere herein. The selected consolidated financial data set
forth below as of December 31, 1998, 1997 and
13
1996 and for the years ended December 31, 1998, 1997, and 1996 have been
derived from the audited financial statements of Trikon included elsewhere
herein. The selected consolidated financial data set forth below as of
December 31, 1995 have been derived from audited financial statements of
Trikon not included herein. The selected consolidated financial data for the
twelve months ended December 31, 1994, have been derived from unaudited
financial statements of Trikon, but include all adjustments (consisting only
of normal recurring adjustments) which Trikon considers necessary for a fair
presentation of the results of operations for the periods presented.
Year Ended December 31
-----------------------------------------------
1998 1997 1996(3) 1995(2) 1994(1)
-------- --------- -------- ------- -------
(In thousands of U.S. dollars, except share
information)
Operating Data:
Revenues:
Product sales................ $ 25,125 $ 55,609 $ 39,386 $20,890 $ 9,813
License revenues............. 13,000 29,500 -- 400 700
Contract revenues............ -- -- 2,841 -- --
-------- --------- -------- ------- -------
Total revenues.............. 38,125 85,109 42,227 21,290 10,513
-------- --------- -------- ------- -------
Costs and expenses:
Cost of goods sold........... 20,378 61,974 24,597 11,144 6,444
Research and development..... 8,087 17,033 10,145 4,567 4,210
Selling, general and
administrative.............. 19,533 34,734 16,592 5,943 3,917
Amortization of intangibles.. -- 3,116 482 -- --
Purchased in-process
technology.................. -- 2,975 86,028 -- --
Restructuring costs.......... 1,843 18,273 -- -- --
Impairment write-downs....... -- 44,135 -- -- --
-------- --------- -------- ------- -------
Total costs and expenses.... 49,841 182,240 137,844 21,654 14,571
-------- --------- -------- ------- -------
Loss from operations.......... (11,716) (97,131) (95,617) (364) (4,058)
Interest:
Interest expense............. (2,923) (12,068) (1,821) (294) (159)
Interest income.............. 590 674 1,628 777 143
-------- --------- -------- ------- -------
Income (loss) before income
tax provision (benefit)...... (14,049) (108,525) (95,810) 119 (4,074)
Income tax provision
(benefit).................... (1,821) (9,248) (1,335) 1 54
-------- --------- -------- ------- -------
Net income (loss) before
extraordinary item........... (12,228) (99,277) (94,475) 118 (4,128)
Extraordinary item............ 20,293 -- -- -- --
-------- --------- -------- ------- -------
Net income (loss)............. $ 8,065 $ (99,277) $(94,475) $ 118 $(4,128)
======== ========= ======== ======= =======
Net income (loss) applicable
to common shares............. $ 6,579 $ (99,277) $(94,475) $ 118 $(4,128)
======== ========= ======== ======= =======
Earnings (loss) per common
share data(4)
Basic:
Earnings (loss) applicable
to common shares before
extraordinary item......... $ (0.24) $ (6.71) $ (10.03) $ 0.02 $ (1.04)
Extraordinary gain.......... 0.35 -- -- -- --
-------- --------- -------- ------- -------
Earnings (loss)............. $ 0.11 $ (6.71) $ (10.03) $ 0.02 $ (1.04)
======== ========= ======== ======= =======
Diluted:
Earnings (loss) applicable
to common shares before
extraordinary item......... $ (0.23) $ (6.71) $ (10.03) $ 0.02 $ (1.04)
Extraordinary gain.......... 0.34 -- -- -- --
-------- --------- -------- ------- -------
Earnings (loss)............. $ 0.11 $ (6.71) $ (10.03) $ 0.02 $ (1.04)
======== ========= ======== ======= =======
Average common shares used in
the calculation--Basic(4).... 57,691 14,800 9,420 5,614 3,960
- --Diluted..................... 58,778 14,800 9,420 6,025 3,960
14
December 31
------------------------------------------
1998 1997 1996(3) 1995(2) 1994(1)
------- -------- -------- ------- -------
(In thousands of U.S. dollars)
Balance Sheet Data:
Working capital (deficiency)(5).... $13,191 $(65,794) $ 58,071 $47,670 $ 6,171
Total assets....................... 55,752 79,690 183,180 59,293 16,631
Long-term debt (including capital
lease and pension obligations and
excluding deferred taxes,
redeemable convertible preferred
stock and convertible subordinated
notes), less current portion...... 4,750 5,245 6,651 686 733
Convertible Subordinated Notes,
less amounts classified as current
at December 31, 1997.............. 4,147 -- 86,250 -- --
Redeemable convertible preferred
stock............................. -- -- -- -- 14,205
Shareholders' equity (deficit),
excluding redeemable convertible
preferred stock................... 26,940 (44,943) 31,248 53,413 (4,419)
- --------
(1) During 1994, Trikon 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.
(2) On August 29, 1995, Trikon completed its initial public offering,
resulting in approximately $40,093,235 of net proceeds to Trikon. The
funds were used to cover Trikon's working capital needs, its investment in
evaluation systems and capital expenditures, and to continue to expand its
research and development and operational activities. The remaining funds
were used to finance the cash portion of the Acquisition and related
transaction costs and expenses.
(3) Includes the assets and liabilities, as of December 31, 1996, and the
results of operations from November 15, 1996 to December 31, 1996 of
Electrotech Limited and Electrotech Equipments Limited acquired on
November 15, 1996. See Note 2 of the Notes to the Consolidated Financial
Statements.
(4) See Note 1 of Notes to Consolidated Financial Statements in this Report
for an explanation of the method used to determine the number of shares
used to compute per share amounts.
(5) Working capital deficiency in 1997 includes the Convertible Notes.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF TRIKON
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations of Trikon should be read in conjunction with the
section entitled "Selected Consolidated Financial Data of Trikon" above, with
the audited consolidated financial statements of Trikon and notes thereto
included elsewhere in this Report. This discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. These forward-looking statements are based on current
expectations, assumptions, estimates and projections and entail various risks
and uncertainties that could cause actual results to differ materially from
those projected in the forward-looking statements. Such risks and
uncertainties include but are not limited to, availability of financial
resources adequate for short-, medium- and long-term needs, product demand and
market acceptance, uncertainty about the effectiveness of the restructuring
and the adequacy of the provisions made in connection with the restructuring,
exposure to the economic downturn in Asia and continued overcapacity in the
DRAM market, as well as those set forth below under "--Factors Affecting
Future Operating Results."
Overview
For the years ended December 31, 1998, 1997 and 1996, the Company reported
revenues of $38.1 million, $85.1 million and $42.2 million, respectively. For
the year ended December 31, 1998, the Company reported net income of $8.1
million. For the years ended December 31, 1997 and 1996, the Company reported
net losses of $99.3 million and $94.5 million, respectively.
On November 15, 1996 the Company acquired Electrotech Limited and
Electrotech Equipments Limited (collectively, "Electrotech"). Accordingly, the
results of operations include the results of operations of Electrotech from
November 16, 1996 through December 31, 1998. Subsequent to the Acquisition,
Electrotech Limited and Electrotech Equipments Limited formally changed their
names to Trikon Technologies Limited and Trikon Equipment Limited. As a result
of the Acquisition, each of Trikon Technologies Limited and Trikon Equipment
Limited become a direct, wholly-owned subsidiary of the Company. Trikon has
since reorganized its ownership of Trikon Technologies Limited and Trikon
Equipments Limited such that Trikon Technologies Limited and Trikon Equipments
Limited are directly owned by holding companies (collectively, with Trikon
Technologies Limited and Trikon Equipments Limited, referred to as "Trikon
Limited") that, in turn are directly wholly-owned by Trikon.
The results of operations for the year ended December 31, 1997 were
significantly affected by a restructuring of the Company. The results of
operations for the year ended December 31, 1996 were significantly affected by
a charge for purchased in-process technology associated with the acquisition
of Electrotech.
16
Results of Operations
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated:
Year ended December
31
------------------------
1998 1997 1996(1)
----- ------- -------
Product sales........................................ 65.9% 65.3% 93.3%
License revenues..................................... 34.1 34.7 --
Contract revenues.................................... -- -- 6.7
----- ------- ------
Total revenues....................................... 100.0 100.0 100.0
Cost of goods sold................................... 53.5 72.8 58.2
----- ------- ------
Gross profit......................................... 46.5 27.2 41.8
Operating expenses:
Research and development............................ 21.2 20.0 24.0
Selling, general and administrative................. 51.2 40.8 39.4
Amortization of intangibles......................... -- 3.7 1.1
Purchased in-process technology..................... -- 3.5 203.7
Restructuring costs................................. 4.9 21.5 --
Impairment write-downs.............................. -- 51.8 --
----- ------- ------
Total costs and expenses........................... 130.8 214.1 326.4
----- ------- ------
Loss from operations................................. (30.8) (114 .1) (226.4)
Interest expense, net................................ (6.1) (13.4) (0.5)
----- ------- ------
Loss before income tax provision (benefit)........... (36.9) (127.5) (226.9)
Income tax benefit................................... ( 4.8) (10.9) (3.2)
----- ------- ------
Net income (loss) before extraordinary item.......... (32.1) (116.6) (223.7)
Extraordinary item................................... 53.2 -- --
===== ======= ======
Net income (loss).................................... 21.1% (116.6)% (223.7)%
===== ======= ======
Gross margin (deficiency) on product sales........... 18.9% (11.4)% 37.5%
===== ======= ======
- --------
(1) Includes the results of operations from November 15, 1996 to December 31,
1996 of Trikon Limited, acquired on November 15, 1996. See Note 2 of the
Notes to Consolidated Financial Statements.
Comparison of the Years Ended December 31, 1997 and 1998
Product Sales. Product sales for the year ended December 31, 1998 decreased
54.9% to $25.1 million as compared to $55.6 million for the same period in
1997. Product sales were reduced as a result of the shipment of 10 systems for
the year ended December 31, 1998, as compared to 39 systems in the year ended
December 31, 1997.
Product sales outside of the United States accounted for 78% and 39% of
product revenues for the year ended December 31, 1998 and 1997, respectively.
The Company expects that sales outside of the United States will continue to
represent a significant percentage of the Company's product sales through
1999. 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. The quantity of product
shipped will fluctuate significantly from quarter to quarter and the
individual customers to which these products are sold can also change from
quarter to quarter. Given the significance of each individual sale, the
percentage of sales made outside of the United States will also fluctuate
significantly from quarter to quarter.
17
License Revenues. License revenues earned during the year ended December 31,
1998 amounted to $13.0 million compared to $29.5 million for the year ended
December 31, 1997. License revenues consists of a non-exclusive license of
M^RI(TM) source technology to Lam Research. The Company believes that there
are a limited number of companies other than Applied Material and Lam
Research, that might be interested in licensing the Company's M^RI(TM) source
technology. The Company is not actively seeking to license its Forcefill(R)
PVD technology to other parties. See "Business--Competition."
Gross Margin (Deficiency) on Product Sales. For the year ended December 31,
1998, the gross margin on product sales was 18.9% as compared to a gross
margin deficiency of 11.4% for the same period in 1997. The gross margin for
fiscal 1998 includes inventory write-downs amounting to $2.6 million. The
gross margin deficiency for fiscal 1997 includes inventory write-downs
relating to the Company's restructuring amounting to $20.7 million. Excluding
the inventory write-downs, the gross margin on product sales was 29.1% in
fiscal 1998. Gross margins have been negatively impacted due to issues related
to the weakened product demand such as unabsorbed manufacturing overhead
associated with the reduced units sold, and will continue to be adversely
affected in the first half of fiscal 1999. The low gross margin in fiscal 1997
was also due in part to the relatively low gross margin on the products of
Trikon Limited shipped in the year. The relatively low gross margin on the
products of Trikon Limited resulted from the write-up of its inventory on hand
as of November 15, 1996 to the fair market value of such inventory resulting
from the allocation of the purchase price of Trikon Limited as required under
Accounting Principles Board Opinion ("APB") No. 16. The write-up increased
cost of goods sold by approximately $5.2 million in the year ended December
31, 1997 as the related products were shipped. Excluding the charge to cost of
goods sold relating to the APB No. 16 adjustment and inventory write downs
attributable to the restructuring, gross profit margins on product sales for
the year ended December 31, 1997 would have been 35.1%. Substantially all of
the original inventory write-up has been recorded through costs of goods sold
during 1996 and 1997.
Research and Development Expenses. For the year ended December 31, 1998,
research and development expenses were $8.1 million, or 21.2% of total
revenues as compared to $17.0 million, or 20.0% of total revenues for the year
ended December 31, 1997. Included in research and development expenses during
the year ended December 31, 1997 was $7.8 million related to research and
development by the M^RI(TM) etch division which was closed during fourth
quarter 1997. The major focus of the Company's research and development
efforts during the year ended December 31, 1998 was on the development of new
processes in further advancing its proprietary PVD, CVD and etch technologies
as well as adding enhancements to its existing products.
Selling, General and Administrative Expense. For the year ended December 31,
1998, selling, general and administrative expenses were $19.5 million, or
51.2% of total revenues as compared to $34.7 million, or 40.8% of total
revenues for the same period in 1997. Selling, general and administrative
expenses for the year ended December 31, 1998 includes severance costs of $0.6
million and deferred compensation costs of $1.0 million relating to the issue
of restricted Common Stock to the Company's Chairman. Expenses for the year
ended December 31, 1997 included $14.5 million of selling, general and
administrative expenses related to the Etch Division operations based in
Chatsworth, California which was closed during fourth quarter 1997.
Amortization of Intangibles. Amortization of intangibles in the year ended
December 31, 1997 related to the amortization of intangibles established upon
the Acquisition of Trikon Limited. Those intangibles were written off in
connection with the restructuring in 1997.
Purchased In-Process Technology. The charge to operations for the purchase
of in-process technology during the year ended December 31, 1997 arose on
acquisition of the CVD partnership.
Restructuring Costs and Impairment Write-downs. In the fourth quarter of
1997, the Company commenced a restructuring which included the closure of its
M^RI etch operations located in Chatsworth, California. The cost of the
restructuring was estimated to be $18.3 million which was charged to
operations in the year ended December 31, 1997. During 1998, the restructuring
liability has been reduced by actual payments as anticipated by the Company.
During the year to December 31, 1998 the company set up an additional reserve
18
of $1.8 million for future support costs relating to M^RI equipment supplied
to customers prior to the commencement of restructuring in November 1997.
In connection with the restructuring, the Company wrote off certain M^RI(TM)
etch accounts receivable and property, plant and equipment and certain
intangible assets established on the Acquisition of Trikon Limited. The
impairment write-down charged to operations in the year ended December 31,
1997 amounted to $44.1 million.
As a result of the Company's decision to restructure its etch operations,
the Company anticipates certain M^RI(TM) etch related product returns.
Although the Company is not required to accept all such returns, the Company
believes it may be necessary to maintain certain customer relationships. At
December 31, 1997, the reserve for restructuring costs included an amount of
$11.5 million for the cost of such sales returns. During the year ended
December 31, 1998, the Company has paid $0.75 million in respect of sales
returns, and the balance of the reserve at December 31, 1998 is management's
estimate of the remaining liability.
Loss from Operations. For the year ended December 31, 1998, the Company
realized a $11.7 million loss from operations, or 30.8% of total revenues as
compared with a $97.1 million loss from operations, or 114.1% of total
revenues for the same period in 1997. The loss from operations in the year
ended December 31, 1997 included costs and charges of a one-time nature
amounting to $91.3 million.
Interest Expense. For the year ended December 31, 1998 interest expense
primarily relates to interest on outstanding 7 1/8% Convertible Notes.
Interest expense decreased to $2.9 million as compared to $12.1 million for
the year ended December 31, 1997 as a result of the exchange of $82.1 million
of 7 1/8% Convertible Notes for equity effective May 14, 1998, and the
termination of the Working Capital Facility in November 1997. In addition, in
the year ended December 31, 1997, $1.7 million of financing costs were written
off and charged to interest expense in connection with the termination of the
Company's Working Capital Facility. As a consequence of the Convertible Note
exchange and the termination of the Working Capital Facility, the charge to
interest expense in respect of the amortization of the costs associated with
the issuance of the Convertible Notes was proportionately reduced in fiscal
1998, and those relating to obtaining the Working Capital Facility were
eliminated.
Interest Income. For the year ended December 31, 1998 interest income was
$0.6 million as compared to $0.7 million for the year ended December 31, 1997.
Income Taxes. For the year ended December 31, 1998, the Company has recorded
a $1.8 million tax benefit as compared to the recording of a $9.2 million tax
benefit for the year ended December 31, 1997. The tax benefit represents a
recovery of overseas tax following a distribution of retained profits by an
overseas subsidiary during fiscal 1998 and the reduction of overseas tax
balances no longer required. The tax benefit for the year ended December 31,
1997, included approximately $9.2 million for the reversal of a deferred tax
liability related to the write-off of the intangible assets established upon
the Acquisition of Trikon Limited. The effective tax rate differs from the
statutory Federal tax rate due to losses incurred for which no benefit has
been provided. The Company's ability to use its domestic and foreign net
operating losses and credit carry forwards will depend upon future income and
will be subject to an annual limitation, required by the Internal Revenue Code
of 1986 and similar state provisions. See Note 10 of Notes to Consolidated
Financial Statements.
Upon closing of the Exchange Offer, a change of ownership occurred under
section 382 of the Internal Revenue Code, which will substantially limit the
availability of the Company's net operating loss carry forward. Due to the
limitation, a substantial amount of net operating loss carry forward may
expire unused.
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
19
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.
Extraordinary Gain. On May 14, 1998, the Company accepted for exchange
approximately $82.1 million principal amount of Convertible Notes tendered in
the Exchange Offer. The Convertible Notes were exchanged for 22,660,798 shares
of Common Stock, 29,264.625 shares of Series I Junior Participating Preferred
Stock and 2,855,754 shares of Series H Preferred Stock. The shares of Common
Stock and equivalents had an average value of $0.66 each following the
exchange. The extraordinary gain arising on the exchange is as follows (in
thousands):
Principal amount of Convertible Notes exchanged.................... $ 82,103
Interest waived.................................................... 3,635
--------
85,738
Value of Common Stock and equivalents issued....................... (34,271)
Series H Preferred Stock issued--principal amount.................. (28,558)
Convertible Note issuance costs written off........................ (1,916)
Costs relating to the exchange offer............................... (700)
--------
Gain on exchange................................................... $ 20,293
========
Comparison of the Years Ended December 31, 1996 and 1997
Product Sales. Product sales for the year ended December 31, 1997 increased
41.2% to $55.6 million as compared to $39.4 million for the same period in
1996. This increase was attributable primarily to revenues derived from
products acquired in connection with the Company's Acquisition of Trikon
Limited. Product sales increased as a result of the shipment of 39 systems for
the year ended December 31, 1997, as compared to 29 systems for the year ended
December 31, 1996.
Product sales outside of the United States accounted for 39% and 82% of
product revenues for the year ended December 31, 1997 and 1996, respectively.
License Revenues. License revenues earned during the year ended December 31,
1997 amounted to $29.5 million compared to none for the year ended December
31, 1996. License revenues consists of a non-exclusive paid up license of
M^RI(TM) source and Forcefill(R) PVD technologies to Applied Materials.
Contract Revenues. The Company did not receive any contract revenues during
the year ended December 31, 1997, as compared to $2.8 million for the
comparable period of fiscal 1996. The contract revenues received in fiscal
1996 were due to a research and development agreement entered into in March
1996 between Trikon and the CVD Partnership, which the Company terminated in
the first quarter of 1997. See Note 9 to Notes to Consolidated Financial
Statements.
Gross Margin (Deficiency) on Product Sales. For the year ended December 31,
1997, the gross margin deficiency on product sales was 11.4% as compared to a
gross margin of 37.5% for the same period in 1996. The gross margin deficiency
for fiscal 1997 includes inventory write-downs relating to the Company's
restructuring amounting to $20.7 million or 37.2% of product sales. The
decrease in gross margin is also due in part to the relatively low gross
margin on the products of Trikon Limited shipped in fiscal 1997. The
relatively low gross margin on the products of Trikon Limited results from the
write-up of its inventory on hand as of November 15, 1996 to the fair market
value of such inventory resulting from the allocation of the purchase price of
Trikon Limited as required under Accounting Principles Board Opinion ("APB")
No. 16. The write-up increased cost of goods sold by approximately $5.2
million in the year ended December 31, 1997 as the related products were
shipped. Excluding the charge to cost of goods sold relating to the APB No. 16
adjustment and inventory write downs attributable to the restructuring, gross
profit margins on product sales for the year ended
20
December 31, 1997 would have been 35.1%. Substantially all of the original
inventory write-up has been recorded through costs of goods sold during 1996
and 1997. Gross margins have also been negatively impacted due to issues
related to the weakened product demand such as unabsorbed manufacturing
overhead associated with the reduced units sold.
Research and Development Expenses. For the year ended December 31, 1997,
research and development expenses were $17.0 million, or 20.0% of total
revenues as compared to $10.1 million, or 24.0% of total revenues for the year
ended December 31, 1996. Included in research and development expenses during
the year ended December 31, 1997 was $9.2 million related to research and
development expenses incurred by Trikon Limited compared to $1.7 million in
the prior period, which only consisted of the period from the date of
Acquisition to December 31, 1996. The major focus of the Company's research
and development efforts during the year ended December 31, 1997 was on the
development of new processes in further advancing its proprietary PVD, CVD and
etch technologies as well as adding enhancements to its existing products. In
addition, expenses in 1996 included costs incurred associated with the
contract revenue from the CVD Partnership with respect to CVD applications of
the Company's technology. See Note 9 of Notes to Consolidated Financial
Statements.
Selling, General and Administrative Expense. For the year ended December 31,
1997, selling, general and administrative expenses were $34.7 million, or
40.8% of total revenues as compared to $16.6 million, or 39.3% of total
revenues for the same period in 1996. The dollar increases were primarily due
to the continued expansion of the Company's foreign operations, including the
operations of the new facility in Newport, South Wales, and marketing support
related charges directed at communicating the organizations' developments to
the marketplace. Expenses for the year ended December 31, 1997 consist of
$14.5 million and $20.2 million of selling, general and administrative
expenses related to the Etch Division operations based in Chatsworth,
California and the other operations of the Company, respectively.
Amortization of Intangibles. Amortization of intangibles primarily relates
to the amortization of the intangible assets established upon the acquisition
of Trikon Limited. The increase in the amortization is due to the year ended
December 31, 1997 including a full year of such amortization, as compared to
only six weeks in 1996.
Purchased In-Process Technology. The charge to operations for the purchase
of in-process technology during the year ended December 31, 1997 arose on
acquisition of the CVD partnership. The charge to operations during the year
ended December 31, 1996 arose on the Acquisition of Trikon Limited.
Restructuring Costs and Impairment Write-downs. Restructuring costs of $18.3
million and impairment write-downs of $44.1 million relate to the
restructuring of the Company as previously discussed. These amounts reflect
the estimates and assumptions of management of the eventual cost of the
Company's restructuring and the estimated value of the assets and liabilities
remaining after the restructuring.
Loss from Operations. For the year ended December 31, 1997, the Company
realized a $97.1 million loss from operations, or 114.1% of total revenues as
compared with a $95.6 million loss from operations, or 226.4% of total
revenues for the same period in 1996. The loss from operations in the year
ended December 31, 1997 included the following costs and charges that are of a
one- time nature (in millions):
Inventory write-downs relating to the Company's restructuring......... $20.7
Affect on gross margin of APB No. 16 write-up of inventory............ 5.2
Purchase of in-process technology..................................... 3.0
Restructuring costs................................................... 18.3
Impairment write-downs of tangible and intangible assets.............. 44.1
-----
$91.3
=====
The loss for the year ended December 31, 1996 included a one-time charge for
the purchase of in-process research and development of $86.0 million.
21
Interest Expense. For the year ended December 31, 1997 interest expense
increased to $12.1 million as compared to $1.8 million for the year ended
December 31, 1996. This was due to the accrual of interest payable to the
holders of the $86.25 million of convertible debt raised to fund part of the
Acquisition and interest associated with borrowings under the Working Capital
Facility. In addition, interest expense was recognized for the amortization of
the costs associated with the issuance of the Convertible Notes and obtaining
the Working Capital Facility. In addition, in the year ended December 31,
1997, $1.7 million of financing costs were written off and charged to interest
expense in connection with the termination of the Company's Working Capital
Facility.
Interest Income. For the year ended December 31, 1997 interest income was
$0.7 million as compared to $1.6 million for the year ended December 31, 1996.
This was due to lower cash balances during the 1997 periods.
Income Taxes. For the year ended December 31, 1997, the Company has recorded
a $9.2 million tax benefit as compared to the recording of a $1.3 million tax
benefit for the year ended December 31, 1996. The tax benefit represents the
combination of a foreign tax benefit associated with Trikon Limited's
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 Trikon Limited assets acquired. The tax benefit for the year
ended December 31, 1997, include approximately $9.2 million for the reversal
of a deferred tax liability related to the write-off of the intangible assets
established upon the Acquisition of Trikon Limited. The effective tax rate
differs from the statutory Federal tax rate due to losses incurred for which
no benefit has been provided. The Company's ability to use its domestic and
foreign net operating losses and credit carry forwards will depend upon future
income and will be subject to an annual limitation, required by the Internal
Revenue Code of 1986 and similar state provisions. See Note 10 of Notes to
Consolidated Financial Statements.
Liquidity and Capital Resources
At December 31, 1998 the Company had $7.9 million in cash compared to $9.3
million at December 31, 1997. The decrease in cash primarily resulted from the
use of cash in financing activities of $1.6 million less cash provided by
operating activities of $0.2 million.
In connection with the Acquisition of Trikon Limited, the Company issued
$86,250,000 of Convertible Notes. On April 14, 1998 the Company commenced the
Exchange Offer for all of the outstanding Convertible Notes, Series G
Preferred Stock and Warrants. The Exchange Offer expired on May 14, 1998, and
immediately thereafter, the Company accepted for exchange $82,103,000
principal amount of Convertible Notes (approximately 95% of the aggregate
principal amount outstanding). The $82,103,000 principal amount of Convertible
Notes tendered were exchanged for 22,660,798 new shares of Common Stock,
29,264.625 new shares of Series I Junior Participating Preferred Stock and
2,855,754 new shares of Series H Preferred Stock, $10 stated amount per share.
Each share of Series I Junior Participating Preferred Stock automatically
converted into 1,000 shares of Common Stock upon shareholder approval on July
28, 1998. The Series H Preferred Stock is redeemable at the option of the
Company for cash at a redemption price equal to the stated amount plus accrued
and unpaid dividends and the holders of the Series H Preferred Stock will be
entitled to receive dividends at an annual rate of 8 1/8% of the stated amount
payable annually, at the option of the Company, in cash or additional shares
of preferred stock or any combination thereof. The Series H Preferred Stock
will be subject to automatic conversion if the Company's Common Stock price
reaches certain levels and accelerated redemption if certain cash flow levels
are achieved. If the Company has not redeemed all of the outstanding Series H
Preferred Stock on or prior to June 30, 2001, then the holders of Series H
Preferred Stock shall be entitled to elect the number of directors that will
constitute a majority of the Board of Directors. The dividend of $973,238 due
on October 14, 1998 to the holders of Series H Preferred Stock was paid with
97,320 new shares of Preferred Stock. The Company is likely to pay future
dividends with new Preferred Stock until cash resources increase above the
amount considered adequate to meet the needs of the Company.
In conjunction with the Exchange Offer, the Company did not pay accrued and
unpaid interest of $3.3 million due on the $82.103 million of Convertible
Notes accepted in the Exchange Offer. Interest due to holders of Convertible
Notes which did not accept the Exchange Offer was paid on May 15, 1998.
22
On March 18, 1998, the Company granted a non-exclusive, worldwide license of
its M^RI(TM) source technology to Lam Research. Under the terms of the license
agreement, Lam Research will pay up to $20.0 million, $13.0 million of which
has been paid in 1998 and $7.0 million of which consists of future contingent
payments and royalties. The license agreement does not preclude Trikon from
utilizing, or licensing to other third parties, the licensed technology.
Effective June 30, 1997, the Company acquired all of the outstanding limited
partnership interests of the CVD Partnership and all of the shares of the CVD
Partnership's corporate general partner, in exchange for the Company's
issuance of an aggregate of 679,680 shares of Common Stock of the Company. In
connection with the purchase of all of the outstanding interests in the CVD
Partnership and its corporate general partner, the Company agreed to cause a
registration statement covering the CVD Partnership Shares to be filed under
the Securities Act and, to become effective on or prior to September 1, 1997.
In the event that the Company did not cause such a registration statement to
become effective on or prior to September 1, 1997, the Company agreed,
pursuant to the original terms of the CVD Purchase Agreement, to pay the
holders of CVD Partnership Shares liquidated damages in the amount of a one-
time fee of $75,000, and an amount equal to $2,500 per day for each day after
September 1, 1997 that such registration statement has not become effective.
On December 12, 1997, the Company and the holders of the CVD Partnership
Shares amended the CVD Purchase Agreement to provide for (i) the immediate
payment of liquidated damages accrued through November 1, 1997 of $225,000,
(ii) no further incurrence of liquidated damages should a registration
statement be effective by March 15, 1998, (iii) in the event Trikon does not
cause a registration statement to become effective by March 15, 1998,
resumption of liquidated damages accruing at a rate of $2,500 for each day
thereafter until a registration statement becomes effective, and (iv) should a
registration statement not be effective by April 1, 1998, Trikon will become
obligated to pay the Limited Partners liquidated damages for the period
between November 1, 1997 and March 15, 1998 of $335,000. On September 15,
1998, pursuant to a second amendment to the CVD Purchase Agreement, the
Company issued 300,000 shares of Common Stock to the holders of CVD
Partnership Shares in exchange for the termination of their registration
rights, the relinquishment of any rights to liquidated damages under the CVD
Purchase Agreement, including those accrued to the date of the second
amendment, and the release of the Company from any liability or claim arising
from or relating to the CVD Purchase Agreement.
On November 12, 1997, the Company entered into a pay-off agreement with its
Lending Banks under the Working Capital Facility. In order to collateralize
certain obligations of Trikon Limited relating to bankers guarantees and a
credit facility with the Company's U.K. lender, the Company provided cash
collateral of approximately $0.4 million to the U.K. lender at December 31,
1998.
During the year to December 31, 1998 Trikon Limited repaid $0.3 million
being the balance of a term-loan from Lloyd's Bank Plc which was secured by
property in Bristol, United Kingdom. Interest was payable for borrowings at a
fixed rate of 10.0025% per annum.
The Company has experienced significant losses from operations and negative
cash flows from operating activities. The Company is in discussions with its
Bankers concerning a new credit facility. Management believes that a
successful conclusion to these discussions and the cash flow from future
operations will be sufficient to fund the Company's operations. However, any
increase in costs or decrease or elimination of anticipated sources of
revenues or the inability of the Company to successfully implement
management's plans would raise significant doubt as to the Company's ability
to fund its operations in the ordinary course.
Factors Affecting Future Operating Results
Trading Conditions. The market for semiconductor capital equipment has been
constricted during 1998 as a result of a fall in demand for and prices of
certain semiconductors, in particular DRAM chips. As a result, certain
semiconductor producers have reduced or curtailed production capacity during
1998 and there can be no assurance that there will be an early upturn in
demand for new semiconductor capital equipment.
23
Trading Losses. During the year to December 31, 1998, the Company reported a
net loss before extraordinary items of $12.2 million and an operating loss of
$11.7 million. During 1998, the Company has reduced its global workforce by
218 or 45% and introduced additional economies in order to reduce operating
costs. In view of the uncertainty over future demand for the Company's
products, there can be no assurance that the Company will not continue to
sustain losses through 1999. Continued losses could materially and adversely
affect the Company's business.
Adequacy of Provisions for Restructuring. At December 31, 1998 the Company
has provisions totaling $10.7 million for sales returns and vendor claims.
These provisions reflect the estimates and assumptions of management, and
there can be no assurance that the provisions are adequate. If actual costs
are greater than the provisions, then it will materially and adversely effect
its results of operations.
Cash Resources. The Company is capital intensive and requires significant
funds to conduct operations and requires regular and significant investments
in working capital and research and development. In order to remain
competitive, the Company must continue to make significant investments in
technology and systems, in the expansion of its operations, in evaluation
systems and in research and development. As of the date of this Report, the
Company does not have a credit facility. The lack of a credit facility has
important consequences including, but not limited to, constraints upon working
capital, capital expenditures, acquisitions, research and development, and
other corporate expenditures.
International Exposure. Revenue outside the United States accounted for
approximately 52%, 37% and 77% of the Company's total revenues for the years
ended December 31, 1998, 1997 and 1996. The Company anticipates that sales
outside of the United States will continue to account for substantial amount
of the Company's total revenues. International sales are subject to certain
risks, 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, and potentially adverse
tax consequences. In addition, international sales may be materially adversely
affected by currency risks associated with devaluation of certain currencies.
There can be no assurance that these and other factors will not have a
material adverse effect on revenue and net earnings (losses).
Recent Developments in Semiconductor Industry. Trikon has focused a
significant portion of its marketing and sales efforts for its Flowfill(TM)
products on DRAM manufacturers. The DRAM market has recently been
characterized by overcapacity, which has resulted in historically low prices
for DRAM chips. As a result, DRAM manufacturers have reduced their investment
in semiconductor manufacturing equipment. Decreased product sales and pricing
pressures resulted in decreased gross and operating margins for Trikon for the
quarter ended December 31, 1998, as compared to the quarter ended December 31,
1997.
The Company is particularly sensitive to the current semiconductor market
slowdown because the loss or delay of one or more system sales during any
quarter can significantly and adversely affect its operating results for that
quarter, and also because the lengthy sales cycle experienced by the Company
may adversely affect its ability to rapidly recover from the downturn.
The semiconductor industry is aggressively pursuing copper, CMP and novel
low dielectric constant insulating materials for future metalization
structures. These changes present both opportunities and threats to Trikon.
Presently Trikon's Forcefill(R) product is not compatible with copper and
therefore developments are underway to enable a viable copper Forcefill(R)
process. There can be no assurance that Trikon will be able to develop and
produce new products that successfully address the challenges of new
metalization structures.
Development and Acceptance of New Products and Systems. While the Company
sells several conventional products, it also offers novel technologies. Its
Planar 200(R) Flowfill(TM) system uses a CVD technique applied to silicon
dioxide that allows for gap filling and planarization. Competing products
include spin on glass
24
(SOG) and high density plasma (HDP) coupled with a chemical mechanical
polishing (CMP) process. The Company's Sigma Forcefill(R) system incorporates
an alternative technology to conventional PVD techniques by using aluminum
forced by high pressure argon to fill small diameter deep holes and vias on
ICs. The Company's competitors produce systems that use a conventional CVD
tungsten system to fill deep holes and vias. Trikon's M^RI(TM) source offers
an alternative etch environment for the manufacture of IC to the reactive ion
etch (RIE), inductively coupled plasma (ICP) and electron cyclotron resonance
(ECR) etch technology currently used by Trikon's competitors. The Company will
continue to produce M^RI(TM) etch products at its Newport, United Kingdom
facility, and it intends to continue marketing licenses of the M^RI(TM) source
technology.
The Company's Planar 200(R) Flowfill(TM) is currently at the stage of
customer review and evaluation. Considerable efforts are being applied by the
Company to attain product functionality and reliability levels acceptable to
the Company's target markets, with an emphasis being given to the Planar
200(R) Flowfill(TM). To date, the substantial majority of the Company's sales
of its etch systems, Sigma Forcefill(R) and Planar 200(R) Flowfill(TM) systems
have been initial purchases by customers of individual systems. Typically,
semiconductor manufacturers initially purchase individual systems and deploy
them in a development or pre-production environment prior to purchasing
multiple systems for production. There can be no assurance that any of such
customers will purchase additional systems from the Company for deployment in
production or that any additional customers will enter into licensing
agreements for the M^RI(TM) source technology.
Given that certain of the Company's systems represent an alternative to
conventional CVD, PVD and etch systems currently marketed by competitors,
management believes that continued growth depends in large part upon the
ability of the Company to gain acceptance of its systems and technology. Due
to the substantial investment required by semiconductor manufacturers to
install and integrate capital equipment into a semiconductor production line,
these manufacturers will tend to choose equipment manufacturers based on past
relationships, product compatibility and proven financial performance. Once a
semiconductor manufacturer has selected a particular vendor, management
believes that the manufacturer generally relies upon the equipment supplied by
that vendor for the specific production line application, and frequently will
attempt to consolidate its other capital equipment requirements with the same
vendor. As a result, semiconductor manufacturers will normally engage in a
long period of analysis and planning before determining to convert to a new
vendor of capital equipment. Given these factors, there can be no assurance
that the Company will be successful in obtaining broader acceptance of its new
systems or of its Flowfill(TM) technologies, Forcefill(R) for M^RI(TM) source.
Potential Returns of Systems. Under certain circumstances, the Company has
provided completed systems to certain strategic customer sites. 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 evaluation period, provided that
the equipment performs to the specifications, management of the Company
expects that the customer will purchase the demonstration system, though they
are not obligated to do so. At December 31, 1998, the Company had a Sigma and
two Flowfill(TM) products located at a customer site under evaluation
agreements. There can be no assurance that the customers will purchase such
evaluation systems at the end of the agreed upon demonstration periods.
Following the announcement of the restructuring of the Etch Division,
certain customers have indicated an intent to return previously purchased
systems. The Company has a provision for such returns in its financial
statements as at December 31, 1998. There can be no assurance that this
reserve will be adequate to cover all such returns or any required settlement
with such customers.
Rapid Technological Change. The markets in which the Company and its
customers compete are characterized by rapidly changing technology, the
introduction of alternative technologies, evolving industry standards and
continuous improvements in products and services. Management believes that the
Company's future success will depend, in part, upon its ability to continue to
improve its systems and process technologies and to develop new technologies
and systems which compete effectively on the basis of total cost of ownership
and performance and which adequately address customer requirements. Due to the
risks inherent in transitioning to new products the Company will be required
to accurately forecast demand for new products while managing the transition
from older products. If new products have reliability or quality problems,
reduced orders, higher
25
manufacturing costs, delays in acceptance of and payment for new products and
additional service and warranty expense may result. There can be no assurance
that the Company will successfully develop and manufacture new products, or
that new products introduced by the Company will be accepted in the
marketplace. If the Company does not successfully introduce new products, the
Company's results of operations will be materially adversely affected.
Although the Company expects to continue to make significant investments in
research and development, there can be no assurance that the Company will be
able to develop and introduce new products or enhancements to its existing
products which satisfy customer needs in a timely manner or achieve market
acceptance with the planned research and development investment in 1999. The
failure to do so could adversely affect the Company's business.
Quarterly Operating Results Affected by Many Business Factors. The Company
has routinely experienced fluctuations in quarterly results and historically
derived most of its quarterly revenue from the sale of a small number of
systems which typically have list prices ranging from approximately $750,000
to $4,000,000. The Company ships a significant portion of its systems in the
last week of each quarter. Accordingly, the timing of the shipment of a single
system could have a significant impact on the Company's recognition of revenue
and its quarterly operating results. A delay in a shipment near the end of a
particular quarter may cause product sales in that quarter to fall below
expectations, and may thus materially and adversely affect operating results
for such quarter, which will have an adverse impact on the market price of the
Common Stock of the Company. Historically, the Company's backlog at the
beginning of a quarter has not included all sales required to achieve its
sales objectives for that quarter. As such, the Company's quarterly product
sales and operating results have historically depended on the receipt of
orders and the shipment of products in that same quarter.
As a result of its continued investments in research, development and
engineering, and the development of a worldwide sales and marketing
organization, the Company has significant fixed costs that it will not be able
to reduce rapidly if its sales goals for a particular period are not met. The
impact of this factor on operating results in any future period cannot be
forecasted accurately.
Highly Competitive Industry. The markets served by the Company's products
are extremely competitive. The Company faces significant competition from
various suppliers of systems that utilize alternative technologies. In the CVD
market, the Company's Flowfill(TM) technology faces competition from a number
of CVD competitors, including Applied Materials, Lam Research and Novellus. In
the PVD market, the Company's Forcefill technology faces competition from
suppliers of aluminum PVD systems, such as Applied Materials, Tokyo Electron,
Novellus and Ulvac. In the etch market, the Company's M^RI(TM)-based etch
systems and other etch products face competition from suppliers of RIE
systems, including Applied Materials, Lam Research and Tokyo Electron, from
ICP-based etch systems marketed by Applied Materials and Lam Research, as well
as the ECR-based etch system marketed by Hitachi. In addition, as a result of
the non-exclusive licenses sold to Applied Material and Lam Research, in the
future, the Company's PVD and etch products may have to compete with products
of Applied Materials and, with respect to the Company's etch products, Lam
Research, based upon the Company's technologies.
Many of these competitors are substantially larger companies with broader
product lines, and have well established reputations in the markets in which
the Company competes, longer operating histories, greater experience with high
volume manufacturing, broader name recognition, substantially larger customer
bases and substantially greater financial, technical and marketing resources
than the Company and, among other things, may therefore be less vulnerable
than the Company to long-term industry downturns, including the downturn
presently being experienced by the DRAM manufacturing industry. The Company
also faces potential competition from new entrants in its respective markets,
including established manufacturers in other segments of the semiconductor
capital equipment market, who may decide to diversify into the Company's
market segments. There can be no assurance that these competitors will not
develop enhancements to or future generations of competitive products that
will offer price and performance features superior to those offered by the
Company's systems.
26
Lengthy Sales Cycle. Sales of the Company's systems typically involve a
lengthy period during which it may expend substantial funds and management
effort. Such sales will depend, in significant part, upon the decision of a
prospective customer to increase manufacturing capacity or to expand current
manufacturing capacity, both of which involve a significant capital commitment
by the customer. The amount of time from initial contact with a customer to
the first order is typically nine to twelve months, and may be longer, and may
involve competing capital budget considerations for the customer, thus making
the timing of customers' orders uneven and difficult to predict. The Company's
ability to receive orders for production systems from potential semiconductor
manufacturing customers depends, among other things, upon such customers
undertaking an evaluation for new equipment. Presently, all of the Planar
200(R) Flowfill(TM)systems sold are being used by such customers to evaluate
the future manufacturing capabilities of such systems. There can be no
assurance that the Company will receive any orders for Planar 200(R)
Flowfill(TM) systems from any of the customers who have purchased such systems
for evaluation purposes. Prior to placing orders for production systems,
semiconductor manufacturing customers expect to evaluate systems on an
extended trial basis. Following initial system qualification, the Company
often experiences further delays in finalizing system sales while the customer
evaluates and receives approvals for the purchase of its systems and completes
a new or expanded facility. The failure or inability of the Company to convert
an evaluation system with a customer to a sale of production systems could
materially and adversely affect operations. Furthermore, this lengthy sales
cycle process may adversely affect the Company's ability to rapidly recover
from its current low sales level.
Failure to Retain Key Personnel. The Company's future success depends, to a
large extent, upon the efforts and abilities of a number of its current key
personnel. Such key personnel include, but are not limited to, Christopher D.
Dobson, Chairman of the Board and Chief Scientific Officer, Nigel Wheeler,
President and Chief Executive Officer, Nicolas Carrington, Senior Vice
President, Sales and Field Operations, and Jeremy Linnert, Chief Financial
Officer and Secretary. The loss of certain of these people or the Company's
inability to retain other key employees could materially and adversely affect
its operations.
Intellectual Property Rights. The Company relies on a variety of types of
intellectual property protection to protect proprietary technology, including
patent, copyright, trademark and trade secret laws, non-disclosure agreements
and other intellectual property protection methods. Although management
believes that the Company's patents and trademarks may have value, management
believes that its future success will also depend on the innovation, technical
expertise and marketing abilities of its personnel.
The Company currently holds a number of patents in the United Kingdom, the
United States, Taiwan, Germany, France, Italy and the Netherlands, and has
patent applications pending in South Korea, Japan and Europe.
There can be no assurance that patents will be issued on the Company's
pending patent applications or that competitors will not be able to
legitimately ascertain proprietary information embedded in its 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 patent will not be challenged, invalidated or
circumvented, or that the Company will have sufficient resources to prosecute
its rights. The Company has a policy to protect and defend vigorously its
patents, trademarks and trade secrets. In connection with the non-exclusive
licenses of technologies sold to Applied Materials, the Company released
Applied Materials from all claims or actions arising from acts, omissions or
dealings of Applied Materials prior to the licenses, other than claims against
Applied Materials for infringement of the patent or patent applications of the
Company relating to its Flowfill(TM) technology.
There are no pending lawsuits against the Company regarding infringement of
any existing patents or other intellectual property rights or any unresolved
claim where the Company has received notice that it is infringing the
intellectual property rights of others. There can be no assurance, however,
that such infringement claims will not be asserted in the future nor can there
be any assurance, if such claims were made, that the Company would
27
be able to defend against such claims successfully or, if necessary, obtain
licenses on reasonable terms. In addition, management believes that litigation
in the semiconductor equipment industry over patent and other intellectual
property rights has been increasing in recent years.
In March 1999, the German Federal Patent Court determined that a
competitor's issued German patent concerning a process similar to Forcefill(R)
is cancelled and invalid from the date of issue. The court has yet to give the
reasons for its decision. During the Court's proceedings, the competitor
withdrew one of the patent's claims apparently directed to non vacuum
processes and declared that a divisional patent for this claim would be filed.
This divisional patent is therefore now pending opposition proceedings and
will again come before the same court if filed and opposed. The Company will
examine the divisional patent if filed and will vigorously oppose it, if it
relates to the Company's business. In the opinion of the Company's advisors
such opposition is likely to be successful. Nevertheless, the Company cannot
guarantee the outcome of this matter and there can be no assurance as to the
possible effects of this matter on the Company.
Any involvement in a patent or other intellectual property dispute or in any
action to protect trade secrets and know-how, even if successful, could
materially and adversely affect operations. Adverse determinations in any such
action could subject the Company to significant liabilities, require it to
seek licenses from third parties, which might not be available, and possibly
prevent it from manufacturing and selling its products, any of which could
materially and adversely affect operations.
Customer Concentration. To date the Company's product sales have been highly
concentrated, with approximately 24% and 11% of its product revenues for the
year ended December 31, 1998 derived from sales to Siemens and Tower
Semiconductor and 20% and 14% of its product revenues for the year ended
December 31, 1997 derived from sales to Texas Instruments and Siemens. There
can be no assurance that Siemens and Tower Semiconductor will continue to
purchase systems and technology from the Company at current levels, or at all.
Year 2000. The Company has carried out a review of computer hardware and
software used by the Company for information purposes. The Company believes
that all critical hardware used by the Company is year 2000 compliant. Certain
of the proprietary software used by the Company is not year 2000 compliant and
in those cases the Company has received assurances from the suppliers that
compliance upgrades will be provided in a timely manner. Non-information
technology hardware and software used in factory and office management systems
have been reviewed and are compliant where appropriate.
Many of the Company's products include hardware/software that has either
been produced by the Company or supplied by outside vendors. The Company does
not consider year 2000 issues relevant to the continued safe operation of
these products because the use of time and date data by the Company's products
is limited to non-critical functions such as time stamping data log reference
files and time and date displays. The Company has carried out testing in
accordance with SEMATECH year 2000 readiness test procedures and in all
material aspects the Company's products comply with these test procedures.
Nevertheless, certain of the Company's products are controlled by the
Company's software operating on commercially available desktop type personal
computers. The Company believes that many of these personal computers contain
BIOS that are not year 2000 compliant. As a result, incorrect dates might be
displayed, used or transmitted in certain circumstances after December 31,
1999. The BIOS of personal computers may be upgraded or the date reset in
accordance with the manufacturer's instructions that are publicly available.
In addition, the Company has written and made available to its customers
special software that automatically corrects the date in the BIOS of personal
computers.
The Company has no control over, nor in most cases any actual knowledge of,
the personal computers used by customers in connection with the Company's
products nor does it have any control over the implementation by its customers
of available compliance upgrades. It therefore has little knowledge of the
actual compliance status of its products in operation at customers'
facilities. Systems currently shipped by the Company are compliant with year
2000 readiness tests as defined by SEMATECH.
28
The Company has circulated compliance questionnaires to relevant suppliers,
which address continuity of supply and compliance of past and present product.
Non-compliant responses are being investigated.
The Company expects to implement successfully the systems and programming
changes necessary to address year 2000 issues and, based on the information
currently available, does not believe that the cost of such actions will have
a material effect on the Company's results of operations or financial
condition. There can be no assurance, however, that there will not be a delay
in, or increased costs associated with, the implementation of such changes,
and the Company's inability to implement such changes could have an adverse
effect on future results of operations.
29
ITEM 7A. QUANTATATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion and analysis about market risk disclosures may
contain "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Such statements include
declarations regarding the intent, belief or current expectations of the
Company and its management and involve risks and uncertainties. Actual results
could differ materially from those projected in the forward-looking
statements.
The Company's earnings and cash flow are subject to fluctuations in foreign
currency exchange rates. Significant factors affecting this risk include the
Company's manufacturing and administrative cost base which is predominately in
British Pounds, and product sales outside the United States which may be
expressed in currencies other than the United States dollar. The Company
constantly monitors currency exchange rates and matches currency availability
and requirements whenever possible. The Company may from time to time enter
into forward foreign exchange transactions in order to minimize risk from firm
future positions arising from trading. As at December 31, 1998 and 1997 the
Company had no open forward currency transactions.
Based upon budgeted income and expenditures, a hypothetical increase of 10%
in the value of the British Pound against all other currencies in the first
quarter of 1999 would have no material effect on revenues expressed in United
States dollars and would increase operating costs and reduce cash-flow by
approximately $800,000. The same increase in the value of the British Pound
would increase the value of the net assets of the Company expressed in United
States dollars by approximately $3.0 million. The effect of the hypothetically
change in exchange rates ignores the affect this movement may have on other
variables including competitive risk. If it were possible to quantify this
impact, the results could well be different than the sensitivity effects shown
above. In addition, it is unlikely that all currencies would uniformly
strengthen or weaken relative to the British Pound. In reality, some
currencies may weaken while others may strengthen.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index included at "Item 14. Exhibits and Financial Statements
Schedules and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
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
- ---- --- --------
Christopher D. Dobson... 62 Director, Chairman of the Board and Chief Scientific Officer
Nigel Wheeler........... 49 Director, President, Chief Executive Officer
Jeremy Linnert.......... 54 Acting Chief Financial Officer and Secretary
Nicolas Carrington...... 36 Senior Vice President, Sales and Field Operations
Bernard Culverhouse..... 50 Vice President--Marketing
Richard M. Conn(1)(2)... 54 Director
Lawrence D. Lenihan,
Jr.(1)(2).............. 34 Director
Stephen N.
Wertheimer(1)(2)....... 48 Director
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Dobson joined Trikon's Board of Directors as Chairman in November 1996
upon the Acquisition of Trikon Limited. From December of 1997 to June 1998,
Mr. Dobson was Chief Executive Officer of the Company. Mr. Dobson was
appointed Chief Scientific Officer in May 1998. Mr. Dobson was a co-founder of
Trikon Limited and was the Chairman of Trikon Limited'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 the Acquisition of Trikon Limited. In
October 1998, Mr. Wheeler was appointed Chief Executive Officer. From July
1993 to November 1996, Mr. Wheeler served as Trikon Limited's Chief Executive
Officer. From July 1986 to July 1993, Mr. Wheeler was the General Operations
Director of Trikon Limited and had served in other capacities with Trikon
Limited since 1980.
Mr. Linnert joined Trikon in November 1996 upon the Acquisition of Trikon
Limited. In January 1998, Mr. Linnert was appointed Secretary and Acting Chief
Financial Officer of Trikon. Mr. Linnert served as a Director of Trikon from
January 1998 to June 1998. Mr. Linnert joined Trikon Limited in November 1988
as Management Accountant and became Financial Controller and Company Secretary
in December 1992. From November 1988 to December 1992, Mr. Linnert served as
assistant to the Financial Director of Trikon Limited.
Mr. Carrington was appointed Senior Vice President, General Manager of the
Deposition Division of Trikon in November 1996. In connection with the
restructuring of Trikon's business, his title was changed to Senior Vice
President, Sales and Field Operations in December 1997. He joined Trikon
Limited in 1991 as Technical Marketing Manager and was appointed Product
Director in September 1993, with responsibility for coordinating the
development and marketing of Trikon Limited products. From May 1990 to
February 1991 Mr. Carrington was Area Sales Manager for Northern Europe of
Tegal Corporation.
Mr. Culverhouse was appointed Vice President, Marketing in December 1998. He
joined Trikon Limited in 1993 and was appointed Director of Marketing in 1998.
From 1993 to 1996, Mr. Culverhouse served as the Sales Director of Trikon
Limited for United Kingdom and Asia.
Mr. Conn was elected to the Board of Directors of Trikon in January 1998.
Mr. Conn formed Business Development Consulting in early 1997 and serves as a
consultant in the semiconductor equipment industry. Prior to forming Business
Development Consulting, Mr. Conn was a Vice President of Sales at KLA
Instruments Corporation, the predecessor to KLA-Tencor from 1984 until 1996.
During his tenure at KLA Instruments Corporation, Mr. Conn was a member of the
boards of directors of KLA Instruments Corporation's subsidiaries in the
United Kingdom, France and Germany. Mr. Conn has held several other positions
in the semiconductor industry at companies that include Eaton Semiconductor
Equipment, Applied Materials UK and ITT Semiconductors.
31
Mr. Lenihan was appointed to the Board of Directors in June 1998. Mr.
Lenihan has been a Fund Manager for Pequot Capital Management, Inc. since
January 1999, and has been a managing member of the general partner of Pequot
Private Equity Fund, L.P. since February 1997. He is also a principal at
Dawson-Samberg Capital Management, Inc. From August 1993 to October 1996, Mr.
Lenihan was a principal at Broadview Associates, LLC. He currently serves as a
Director of Direc-To-Phone, Digital Generation Systems, Inc. and Memotec
Communications, Inc.
Mr. Wertheimer was appointed to the Board of Directors in June, 1998. He has
been a Managing Director of Credit Research and Trading LLC since 1996. He was
the President and Founder of Water Capital Corp. from 1991 to 1996. From 1988
to 1991, he was a Managing Director for Paine Webber Incorporated. Mr.
Wertheimer is also Chairman of Advanced Mining Systems, Inc. and currently
serves as a director of El Paso Electric Company and Greenwich Fine Arts, Inc.
The term of office for each director is one year. All directors are elected
at the annual meeting of shareholders and hold office until the election and
qualification of their successor at the next annual meeting of shareholders.
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.
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
Trikon's Common Stock (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 Form 5s were
required for those persons, Trikon believes that its Insiders complied with
all applicable Section 16 filing requirements for 1998, on a timely basis,
with the exception of the following late filings by (i) Richard M. Conn, a
director of the Company, who filed a Form 3 in February 1998 to report his
beneficial ownership after being appointed as Director in January 1998, and
filed a Form 5 in February 1999 to report the grant of stock options to
purchase 12,500 shares of Common Stock in February 1998 and the grant of stock
options to purchase 77,500 shares of Common Stock in August 1998, (ii) Thomas
C. McKee, the former Chief Executive Officer of the Company, who filed a Form
3 in June 1998 after being appointed as a Director and the Chief Executive
Officer in June 1998, and (iii) Bernard Culverhouse, the Vice President,
Marketing of the Company, who filed a Form 3 in March 1999 to report his
beneficial ownership of stock options to purchase 221,000 shares of Common
Stock after being appointed Vice President, Marketing in December 1998.
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, 1998,
1997 and 1996, by (i) each person who served as Chief Executive Officer of
Trikon during the year ended December 31, 1998 and (ii) each of the other four
most highly compensated executive officers of Trikon who were serving as
executive officers at December 31, 1998 and whose total compensation exceeded
$100,000 (collectively, the "Named Executive Officers"). Perquisites amounting
in aggregate to the lesser of $50,000 or 10% of the total annual salary and
bonus reported for the named executive officer are not disclosed. For the
purpose of calculating salaries and other compensation paid in British pounds
to Nigel Wheeler, Christopher D. Dobson, Jeremy Linnert, Nicolas Carrington
and Bernard Culverhouse the conversion rate of 1.6638 is used, which is the
average rate of exchange for the year ended December 31, 1998.
32
Summary Compensation Table
Long-Term
Compensation Awards
------------------------
Compensation
------------------------------- Securities
Other Restricted Underlying
Fiscal Annual Stock Stock All Other
Year Salary($) Bonus($) Compensation Awards($) Options(#) Compensation($)
------ --------- -------- ------------ ---------- ---------- ---------------
Christopher D. 1998 $235,727 $ -- $ -- $7,183,004(2) -- --
Dobson(1)..............
Chairman of the Board 1997 315,917 -- -- -- -- --
and Chief Scientific 1996 52,653 -- -- -- -- --
Officer
Thomas C. McKee(3)...... 1998 90,258 -- -- -- -- $17,786 (4)
Former Director and
Chief Executive Officer
Nigel Wheeler(5)........ 1998 266,111 -- -- -- 500,000 50,306 (6)
Director, President and 1997 268,200 268,200 -- -- 200,000 50,388 (7)
Chief Executive Officer 1996 44,699 -- -- -- -- 5,485 (8)
Nicolas Carrington(9)... 1998 118,842 -- -- -- 306,300 16,463(10)
Senior Vice President, 1997 115,589 -- 1,509 -- 36,300 72,994(11)
Sales and Field 1996 13,711 -- -- -- -- 1,924(12)
Operations
Jeremy Linnert(13)...... 1998 106,196 -- -- -- 223,000 48,501(14)
Acting Chief Financial 1997 82,270 -- -- -- 15,000 55,830(15)
Officer and Secretary 1996 9,832 -- -- -- -- 2,450(16)
Bernard 1998 126,360 -- -- -- 221,000 25,005(18)
Culverhouse(17)........
Vice President-- 1997 104,443 -- -- -- 14,000 22,010(19)
Marketing 1996 10,687 -- -- -- -- 2,283(20)
- --------
(1) Mr. Dobson joined Trikon in November 1996 upon the Company's Acquisition
of Trikon Limited. Mr. Dobson served as Chief Executive Officer from
December 1997 to May 1998.
(2) On May 15, 1998, the Company issued to Mr. Dobson 5,015,811 shares of
restricted Common Stock and 6,476.995 shares of restricted Series I
Preferred Stock. Each share of restricted Series I Preferred Stock
automatically converted into 1,000 shares of restricted Common Stock on
July 28, 1998. The restricted shares of Common Stock and Series I
Preferred Stock were valued at $7,183,004 based upon the $0.625 per share
closing price of the equivalent unrestricted Common Stock on the date of
issuance. The restricted shares of Common Stock issued to Mr. Dobson vest
100% on the earlier of (i) May 14, 2003, or (ii) the sale of all or
substantially all of the assets of the Company. The number and value of
Mr. Dobson's aggregate restricted stock holdings at December 31, 1998 were
11,492,806 shares valued at $358,575.
(3) Mr. McKee served as Chief Executive Officer from June 1998 to September
1998.
(4) Of this amount, $12,500 represents a relocation allowance and $4,499
represents a car allowance.
(5) Mr. Wheeler joined Trikon in November 1996 as President and Chief
Operating Officer upon the Acquisition of Trikon Limited. He was appointed
Chief Executive Officer in October 1998.
(6) Of this amount, $11,997 represents a car allowance and $36,438 represents
pension contributions by Trikon on behalf of the officer.
(7) Of this amount, $15,651 represents a car allowance and $32,182 represents
pension contributions by Trikon on behalf of the officer.
(8) Of this amount, $1,922 represents a car allowance and $2,949 represents
pension contributions by Trikon on behalf of the officer.
(9) Mr. Carrington joined Trikon in November 1996 as Senior Vice President,
General Manager of Deposition Division. He was appointed Senior Vice
President Sales and Field Operations in December 1997.
33
(10) Of this amount, $10,916 represents a car allowance and $4,659 represents
pension contributions by Trikon on behalf of the officer.
(11) Of this amount, $57,795 represents consideration for Mr. Carrington's
agreement to remain with Trikon until March 31, 1998, $3,647 represents
contributions by the Company pursuant to a defined contribution agreement
on behalf of Mr. Carrington and $10,461 represents a car allowance
(12) Of this amount $1,283 represents a car allowance.
(13) Mr. Linnert joined Trikon in November 1996 upon the acquisition of
Electrotech. He was appointed Acting Chief Financial Officer and
Secretary in December 1998.
(14) Of this amount, $33,276 represents consideration for Mr. Linnert's
agreement to stand for election as a director for the period from January
to June 1998, $9,955 represents a car allowance and $3,938 represents
pension contributions paid by Trikon on behalf of the officer.
(15) Of this amount, $41,341 represents consideration for Mr. Linnert's
agreement to remain with Trikon until March 31, 1998 and $9,462
represents a car allowance.
(16) Of this amount, $1,210 represents a car allowance.
(17) Mr. Culverhouse joined Trikon in November 1996 upon the acquisition of
Electrotech. He was appointed Vice-President of Marketing on December 14,
1998.
(18) Of this amount, $7,242 represents a car allowance and $17,264 represents
pension contributions paid by Trikon on behalf of the officer.
(19) Of this amount, $6,698 represents a car allowance and $14,204 represents
pension contributions paid by Trikon on behalf of the officer.
(20) Of this amount, $830 represents a car allowance and $1,453 represents
pension contributions paid by Trikon on behalf of the officer
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
year ended December 31, 1998 to each of the Named Executive Officers. No stock
appreciation rights ("SARs") have ever been granted by Trikon.
Potential
Realizable
Value at
Assumed Annual
Rates of Stock
Price
Number of Percent of Appreciation
Securities Total Options for
Underlying Granted to Option Term(2)
Options Employees in Exercise Expiration ---------------
Granted(#) Fiscal Year(%) Price($/SH)(1) Date 5%($) 10%($)
---------- -------------- -------------- ---------- ------- -------
Christopher D. Dobson... -- -- -- -- -- --
Thomas C. McKee(3)...... 1,874,477 34.3185 0.6250 5-31-2005 -- --
Nigel Wheeler........... 200,000(4) 3.6617 1.4375 2-6-2008 180,807 458,201
100,000(5) 1.8308 1.4375 2-6-2008 90,404 229,101
200,000(6) 3.6617 0.0938 10-27-2008 11,792 29,883
Nicolas Carrington...... 36,300(4) 0.6646 1.4375 2-6-2008 32,816 83,163
20,000(5) 0.3662 1.4375 2-6-2008 18,081 45,820
250,000(7) 4.5771 0.0469 12-8-2008 7,370 18,677
Jeremy Linnert.......... 15,000(4) 0.2746 1.4375 2-6-2008 13,561 34,365
8,000(5) 0.1465 1.4375 2-6-2008 7,232 18,328
200,000(7) 3.6617 0.0469 12-8-2008 5,896 14,942
Bernard Culverhouse..... 14,000(4) 0.2563 1.4375 2-6-2008 12,656 32,074
7,000(5) 0.1281 1.4375 2-6-2008 6,328 16,037
200,000(7) 3.6617 0.0469 12-8-2008 4,717 11,953
34
- --------
(1) Represents the fair market value of the underlying shares of Common Stock
at the time of grant.
(2) 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 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.
(3) Mr. McKee resigned from the Company effective September 7, 1998. All of
Mr. McKee's stock options expired effective September 25, 1998.
(4) On February 6, 1998, the Company cancelled stock options for the same
number of shares previously granted to Messrs. Wheeler, Carrington,
Linnert and Culverhouse in 1997 and issued these new stock options with an
exercise price of $1.4375 per share. The new stock options vest in equal
annual increments of 25% over a four-year period of service measured from
September 18, 1997.
(5) Represents stock options that vest in equal, annual increments of 25% over
the four-year period of service measured from their date of grant,
February 6, 1998.
(6) Represents stock options that vest in equal, annual increments of 25% over
the four-year period of service measured from their date of grant, October
27, 1998.
(7) Represents stock options that vest in equal, annual increments of 25% over
the four-year period of service measured from their date of grant,
December 8, 1998.
Aggregated Stock Option Exercises in Last Fiscal Year and Fiscal Year-end
Option Values
The following table sets forth the number of exercisable and unexercisable
options held by each of the Named Executive Officers at December 31, 1998. No
shares of common stock were acquired upon exercise of stock options by the
Named Executive Officers during the fiscal year 1998. No exercisable or
unexercisable options were "In-The-Money" at December 31, 1998. No stock
appreciation rights were exercised by the Named Executive Officers during
fiscal year 1998, and no stock appreciation rights were outstanding at the end
of such year.
Number of Securities
Underlying Unexercised
Options at Fiscal
Year-End(#)
--------------------------
Name Exercisable /Unexercisable
---- ----------- --------------
Christopher D. Dobson............................. -- / --
Thomas C. McKee(1)................................ -- / --
Nigel Wheeler..................................... 50,000/ 450,000
Nicolas Carrington................................ 9,075/ 297,225
Jeremy Linnert.................................... 3,750/ 219,250
Bernard Culverhouse............................... 3,500/ 217,500
- --------
(1) Mr. McKee resigned from the Company effective September 7, 1998. All stock
options granted to Mr. McKee lapsed prior to exercise.
Pension Plan
The following table shows the estimated annual pension benefits payable to a
covered participant at normal retirement age, which is age 65, under the
Company's defined benefit pension plan, the Electrotech Retirement Benefits
Scheme. (For female members, pension earned prior to 6th April 1996 may be
taken unreduced from age 60.) The Electrotech Retirement Benefits Scheme was
originally initiated by Electrotech. As a result, only former Electrotech
employees are covered participants. Plan members are required to contribute at
the rate of 5% of taxable remuneration, the balance of the cost being met by
the Company. Benefits are provided on retirement, death and withdrawal, with
vesting after two years of service in the plan. Pensions increase in payment
at the rate of 5% per annum. Benefits are calculated with reference to taxable
remuneration and years of service in the plan and are not subject to offsets
for social security retirement benefits:
35
Pension Plan Table
Years of Service
-------------------------------------------------------------------------------------------------------------
Remuneration 5 10 15 20 25 30 35
- ------------ -------------- -------------- --------------- --------------- --------------- --------------- ---------------
(Pounds) 50,000.. (Pounds) 4,167 (Pounds) 8,333 (Pounds) 12,500 (Pounds) 16,667 (Pounds) 20,833 (Pounds) 25,000 (Pounds) 29,167
100,000........ 8,333 16,667 25,000 33,333 41,667 50,000 58,333
150,000........ 12,500 25,000 37,500 50,000 62,500 75,000 87,500
200,000........ 16,667 33,333 50,000 66,667 83,333 100,000 116,667
250,000........ 20,833 41,667 62,500 83,333 104,167 125,000 145,833
300,000........ 25,000 50,000 75,000 100,000 125,000 150,000 175,000
Remuneration 40 or more
- ------------ ---------------
(Pounds) 50,000.. (Pounds) 33,333
100,000........ 66,667
150,000........ 100,000
200,000........ 133,333
250,000........ 166,667
300,000........ 200,000
A participant's remuneration covered by the Company's pension plan is his or
her highest taxable salary (the "Highest Taxable Salary") in the last five
plan years of the participant's career or, in the case of a controlling
director with a 20% stock holding, the average such salary over his or her
last three plan years. A participant earns one-sixtieth (1/60) of his Highest
Taxable Salary for each year of service to a maximum of forty-sixtieths
(40/60). Taxable remuneration for the Named Executive Officers in the plan as
at the end of the last calendar year was (Pounds)163,000 (approximately
$268,200) for Mr. Wheeler and (Pounds)75,947 (approximately $126,360) for Mr.
Culverhouse. The projected number of years of service for Mr. Wheeler and Mr.
Culverhouse at their normal retirement age are 33 years and 10 months and 40
years, respectively. Pension contributions on behalf of Mr. Wheeler and Mr.
Culverhouse for fiscal years 1996, 1997, and 1998, respectively, are as
included in the All Other Compensation column of the Summary Compensation
Table.
Employment Agreements
On October 2, 1997, the Company entered into retention agreements with
Nicolas Carrington and Jeremy Linnert pursuant to which they agreed to remain
with the Company in their respective capacities of Senior Vice President,
General Manager and Financial Controller of the Deposition Division until
March 31, 1998 in exchange for payments of approximately $57,795 and $41,341,
respectively, or six months salary. The Company also entered into an
employment agreement with Nigel Wheeler, 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 with Mr. Wheeler renews annually unless terminated by either party.
Under the agreement, Mr. Wheeler is paid a base salary of $268,200 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.
On September 11, 1998, the Company announced that Mr. Wheeler would waive a
substantial portion of his salary until the Company returns to profitability.
On October 27, 1998, the Board of Directors appointed Mr. Wheeler as Chief
Executive Officer. In connection with his appointment as Chief Executive
Officer, the Board of Directors reinstated Mr. Wheeler's previous salary and
agreed to (i) immediately grant him options to purchase 200,000 shares of
Common Stock, (ii) on or about January 1, 1999, grant him additional options
to purchase 500,000 shares of Common Stock, and (iii) subject to shareholder
approval at the Company's next annual meeting, grant additional options to
purchase shares of Common Stock equal to 2% of the Company's then outstanding
Common Stock on a fully diluted basis. Mr. Wheeler is authorized to direct the
Company to allocate all or a portion of such options to other members of
management.
In connection with the Exchange Offer, the Board of Directors entered into
certain agreements with Christopher D. Dobson, Chairman of the Board and then
Chief Executive Officer of the Company. The Company and Mr. Dobson agreed that
upon the consummation of the Exchange Offer, 5,015,811 shares of restricted
36
Common Stock and 6,476.995 shares of restricted Series I Preferred Stock
(collectively, the "Restricted Stock") would be granted to Mr. Dobson. The
Restricted Stock shall vest one hundred percent (100%) upon the earlier of (i)
the date five years after the closing of the Exchange Offer, or (ii) the sale
of all or substantially all of the assets of the Company, the direct sale by
the Company's stockholders possessing more than 50% of the total combined
voting power of the Company's outstanding securities to persons different than
those holding such securities immediately prior to such sale or the merger or
consolidation in which securities possessing more than 50% of the total
combined voting power of the Company's outstanding securities are transferred
to persons different than those holding such securities immediately prior to
the merger or consolidation. The Restricted Stock shall automatically be
acquired by the Company in return for a payment of $0.001 per share of Common
Stock and $1.00 per share of Series I Preferred Stock upon Mr. Dobson's
termination for cause, voluntary cessation of providing services to the
Company or if, during the first two years following the Exchange Offer, Mr.
Dobson devotes fewer than 750 hours per annum to Trikon related matters. For
purposes of the Restricted Stock, the meaning of "for cause" is limited to
willful misconduct that materially injures the pecuniary interests of the
Company and any material breach of the noncompetition obligations under these
agreements. Mr. Dobson is permitted, at his discretion, to reallocate up to
twenty percent (20%) of the Restricted Stock to other members of senior
management of the Company.
The Board of Directors and Mr. Dobson further agreed that after the
consummation of the Exchange Offer, Mr. Dobson shall receive a contingent
variable interest up to 3% of the net proceeds (gross proceeds less reasonable
and customary expenses) received upon the sale of the Company as follows:
Cumulative
Sales Price($) Percentage(%)
-------------- -------------
At least $250 million.......................................... 0.5%
At least $260 million.......................................... 1.0
At least $270 million.......................................... 2.0
At least $280 million.......................................... 2.5
$300 million or more........................................... 3.0
In addition, the Board of Directors and Mr. Dobson agreed upon certain terms
of his employment following the consummation of the Exchange Offer. Among
other things, Mr. Dobson shall continue in his position as Chairman and Chief
Executive Officer of the Company, devote substantially his full business time
to his duties (which shall include research and development work performed on
Trikon projects and products, wherever located) and a base salary, of 196,000
British pounds. Upon successful recruitment of a chief executive officer
candidate, Mr. Dobson shall step down as Chief Executive Officer of the
Company and continue to receive compensation at his current rate of
compensation, unless in connection therewith he determines to devote
substantially less than 75% of his full business time to the Company in which
case his base salary shall be reduced by 50%. In the event that Mr. Dobson is
terminated for any reason other than cause prior to May 2001, he shall be paid
an amount equal to his base salary (as of the date of termination) for the
period from the date of termination until May 2001. During his employment, Mr.
Dobson has agreed not to directly or indirectly be involved with any
enterprise engaged in the semiconductor equipment manufacturing industry,
subject to a de minimis investment exception. In addition, he also agreed not
to solicit any employees of the Company to leave the Company nor any business
of any customers, licensors or licensees of the Company during his employment
and for two (2) additional years thereafter. All intellectual property and
know-how developed by Mr. Dobson while employed by the Company will
automatically be assigned to the Company without royalties or other payment.
On September 11, 1998, the Company announced that Mr. Dobson would waive his
salary until the Company returns to profitability.
In connection with the negotiation of the Applied Materials and Lam Research
licenses, restructuring the Company and future licensing efforts, the Board of
Directors authorized a $1,500,000 bonus payable to Mr. Dobson, subject to
consummation of the Exchange Offer. Payment of such bonus by the Company is
subject to (i) payment of all accrued and unpaid dividends on the Series H
Preferred Stock and redemption for cash of
37
all outstanding shares of Series H Preferred Stock issued as payment of
dividends on outstanding Series H Preferred Stock, (ii) such payment not being
made prior to June 30, 1999 and (iii) at the time of payment Trikon shall have
had at least $8,000,000 of EBITDA during and for its two most recently
completed fiscal quarters (taken as one period). For purposes of calculating
EBITDA, upfront license fees (excluding the Applied Material and Lam Research
licenses) shall be equally amortized over the twelve-month period following
receipt (including the month of receipt, and, incremental license fees
associated with the M^RI(TM) source technology.
At the end of May 1998, the Company also entered into an employment
agreement with Thomas C. McKee pursuant to which Mr. McKee was nominated as a
director and to act as the Chief Executive Officer for the period commencing
June 1, 1998 and continuing through December 31, 1999. Thereafter, the
agreement with Mr. McKee was to renew annually unless terminated by either
party upon thirty (30) days prior written notice. Under the agreement, Mr.
McKee was paid a base salary of $340,000 per year. The base salary was subject
to annual review by the Company and could be increased at the Board of
Director's discretion. In addition, Mr. McKee was eligible to receive an
annual performance bonus for each year of service in an amount not to exceed
fifty percent (50%) of his base salary which was to become payable upon the
achievement of certain financial objectives and performance milestones for
each year. Mr. McKee was also granted, in connection with entering into such
agreement, options to acquire 1,874,477 shares of Common Stock (representing
two percent (2%) of the Company's outstanding equity securities on a fully
diluted basis) at an exercise price of $.625 per share, the closing selling
price per share of Common Stock as reported on the Nasdaq National Market on
June 1, 1998. The employment agreement further provided for certain customary
insurance, vacation benefits and termination provisions as well as certain
housing cost reimbursements.
Other than as set forth above, Trikon currently has no employment contracts
with any of the Named Executive Officers.
Director Compensation
The Company's outside directors earn an annual retainer of $15,000 and
receive $1,000 for attending a Board meeting in person, $750 for attending a
Board meeting by telephone and $750 for attending a committee meeting in
person or by telephone. Payment of the annual retainer has been deferred until
the Board determines that sufficient cash flow is achieved. Outside directors
may also be reimbursed for certain expenses in connection with attendance at
Board and committee meetings. In addition, under the Company's 1998 Director
Stock Option Plan, outside directors automatically receive a grant of options
to purchase 90,000 shares of Common Stock upon his or her initial election to
the Board of Directors and a grant of options to purchase 18,000 shares of
Common Stock upon each reelection thereafter. The shares subject to each
90,000-share option grant vest in a series of four (4) successive equal annual
installments upon the director's completion of each year of service on the
Board of Directors over the four (4) year period measured from the date of
grant, and the shares subject to each 18,000-share option grant vest upon
completion of one year of service measured from the date of grant.
In December 1997, the Company agreed to pay Jeremy Linnert (Pounds)20,000
(approximately $33,000), subject to his serving as a director until June 30,
1998, in consideration for his agreement to stand for election as director.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors of Trikon (the
"Compensation Committee") currently consists of Richard M. Conn who was
appointed on January 23, 1998, and Lawrence D. Lenihan Jr. and Stephen
Wertheimer who were appointed on June 10, 1998. Brian D. Jacobs also served on
the Compensation Committee from January 23, 1998 until his term of office
expired on July 28, 1998.
None of these individuals was at any time during the fiscal year ended
December 31, 1998 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.
38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the extent known by Trikon, the following table sets forth certain
information regarding beneficial ownership of Common Stock and Preferred Stock
as of March 1, 1999 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 or Series H Preferred Stock, (ii) each of Trikon's directors and
nominees for director, (iii) each person who served as Chief Executive Officer
of Trikon during the year ended December 31, 1998 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 have sole voting and investment power with respect to all shares
of Common Stock and Preferred Stock shown as beneficially owned by them,
subject to community property laws, where applicable.
Shares of
Shares of Series H Percent of
Common Stock Percent of Preferred Stock Series H
Name and Address of Beneficially Common Beneficially Preferred
Beneficial Owner Owned Stock(1) Owned Stock(2)
- ------------------- ------------ ---------- --------------- ----------
Christopher D. Dobson.... 16,346,140 17.4% -- --
Ringland Way, Newport
South Wales, NP6 2TA
U.K.
Pequot Capital
Management, Inc.(3)..... 10,122,509 10.8 143,871 4.9%
500 Nyala Farm Road
Westport, CT 06880
The DDJ Entities(4)...... 11,090,192 11.8 630,698 21.4
141 Linden Street, Suite
4
Wellesley, MA 02181
Citigroup Inc.(5)........ 6,651,730 7.1 383,059 13.0
838 Greenwich Street
New York, NY 10013
Mackay-Shields Financial
Corporation(6).......... 5,284,717 5.6 301,590 10.2
9 West 57th Street, 37th
Floor
New York, NY 10019
Putnam Investments....... 2,596,000 2.8 255,537 8.6
One Post Office Square
Boston, MA 02109
Larry Lenihan(3)......... 10,122,509 10.8 143,871 4.9
Stephen Wertheimer....... -- -- -- --
Nigel Wheeler............ -- -- -- --
Thomas McKee(7).......... -- -- -- --
Nicolas Carrington....... -- -- -- --
Jeremy Linnert........... -- -- -- --
Richard M. Conn.......... -- -- -- --
Bernard Culverhouse...... -- -- -- --
All current directors and
executive officers as a
group (8 persons)....... 26,571,849(8) 28.2 -- --
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Exchange Act. Percent ownership is based on the number of shares of Common
Stock outstanding as of March 1, 1999, which number was 94,015,616 shares,
plus any shares issuable pursuant to options and warrants held by the
person in question which may be exercised or converted within 60 days
after March 1, 1999.
(2) Percent ownership is based on the number of shares of Series H Preferred
Stock outstanding as of March 1, 1999, which number was 2,953,074.
39
(3) The number of shares beneficially owned by Pequot Capital Management, Inc.
is based on information contained in a Schedule 13D filed on January 8,
1999 and certain information provided by Pequot Capital Management, Inc.
to the Company. Pequot Capital Management, Inc., an investment adviser
registered under the Investment Advisers Act of 1940, acts as an
investment adviser to certain investment funds and managed accounts, which
hold shares of Common Stock and Series H Preferred Stock. Mr. Lenihan is a
fund manager at Pequot Capital Management, Inc. Mr. Lenihan disclaims
beneficial ownership of the shares for which Pequot Capital Management,
Inc. has beneficial ownership.
(4) The number of shares beneficially owned by the DDJ Entities is based on
the information contained in Amendment No. 3 to Schedule 13D filed by DDJ
Capital Management, LLC ("DDJ") on behalf of DDJ Capital III, LLC ("DDJ
III"), B III Capital Partners, L.P. (the "DDJ Fund") and itself on
October 30, 1998 and certain information provided by DDJ to the Company.
DDJ III is the general partner of, and DDJ is the investment manager for,
the DDJ Fund. All shares of Common Stock reported as beneficially owned by
DDJ Entities were directly beneficially owned by the DDJ Fund.
(5) The number of shares beneficially owned by Citigroup Inc. ("Citigroup") is
based on information in a Schedule 13G filed by Citigroup on February 16,
1999 and certain information provided by Citigroup to the Company. All
shares of the Common Stock reported as beneficially owned by Citigroup
were directly beneficially owned by subsidiaries of Citigroup.
(6) The number of shares beneficially owned by Mackay-Shields Financial
Corporation ("Mackay-Shields") is based on information contained in a
Schedule 13G filed by Mackay-Shields on February 8, 1999 and certain
information provided by Mackay-Shields to the Company.
(7) Mr. McKee resigned from the Company effective September 7, 1998.
(8) Includes 103,200 shares of Common Stock issuable under stock options
exercisable within 60 days of March 1, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CVD Partnership
On March 29, 1996, Trikon, as a Limited Partner, entered into the CVD
Limited Partnership with CVD Inc., as general partner, and SBIC Partners,
Norwest and R&M Partners/CVD, G.P., each as a Limited Partner. The CVD
Partnership was sponsored by Trikon to fund research and development costs and
expenses relating to CVD technology and applications using M^RI(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
to be performed by Trikon under an agreement with the CVD Partnership. In
connection with the formation of the CVD Partnership, Trikon entered into
option agreements (the "CVD Option Agreements") with the Limited Partners.
Pursuant to the CVD Option Agreements, Trikon had an exercisable option (the
"CVD 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. In addition, the Limited Partners received warrants (the "CVD
Warrants") to purchase an aggregate of 277,662 shares of Trikon's Common Stock
at a purchase price of $12.75 per share. The CVD Warrants would have become
exercisable for a one-year period following exercise of the CVD Option, but
only if the CVD Option had been actually exercised by Trikon. In connection
with their investment in the CVD Partnership, each of SBIC Partners and
Norwest received a CVD Warrant to purchase 130,726 shares of Common Stock.
Trikon was paid for research and development services in an amount equal to
its actual direct costs, as defined, plus a stated percentage of such costs.
During the years ended December 31, 1996 and 1997, the amount of such research
and development payments to Trikon by the CVD Partnership was $2,841,427 and
$0, respectively. Under the applicable agreement, Trikon would have been
obligated to pay royalties to the CVD Partnership on sales of developed CVD
products. Each of SBIC Partners and Norwest invested $2,500,000 in the CVD
Partnership. As of March 31, 1996, SBIC Partners beneficially owned 638,604
shares of Common Stock, or approximately 7.4% of the shares of Common Stock
then outstanding, and Norwest and its affiliates beneficially owned 603,898
shares of Common Stock, or approximately 7.0% of the shares of Common Stock
then outstanding.
40
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 asserted that 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 had in connection with such discontinuation was
appropriate.
Effective June 30, 1997, the Company acquired all the outstanding limited
partnership interests of the CVD Partnership and all of the share interests in
the CVD Partnership's corporate general partner in consideration of the
Company's issuance the CVD Partnership Shares pro rata to the Limited
Partners, excluding the Company, pursuant to the terms of the CVD Purchase
Agreement. As a result of the CVD Acquisition, all CVD technology which had
been developed by the CVD Partnership prior to such discontinuation, together
with approximately $2,208,000 of unspent funds of the CVD Partnership, are
owned solely by the Company. Any and all claims that the Limited Partners may
have had in connection with the termination of the research and development
project thereunder, the CVD Options, the CVD Warrants or otherwise relating to
the CVD Partnership were released and discharged pursuant to the CVD Purchase
Agreement.
In connection with the purchase of all of the outstanding interests in the
Limited Partnership and its corporate general partner, the Company agreed to
cause a registration statement covering the CVD Partnership Shares (the "CVD
Registration Statement") to be filed under the Securities Act and to become
effective on or prior to September 1, 1997. In the event that the Company did
not cause the CVD Registration Statement covering the CVD Partnership Shares
to become effective, the Company would be obligated, pursuant to the original
terms of the CVD Purchase Agreement, to pay the holders of CVD Partnership
Shares liquidated damages comprised of a one-time fee of $75,000, and an
amount equal to $2,500 per day for each day after September 1, 1997 and prior
to the effective date of the CVD Registration Statement.
The Company and the holders of the CVD Partnership Shares amended the CVD
Purchase Agreement on December 12, 1997 to provide for (i) the immediate
payment of liquidated damages accrued through November 1, 1997 of $225,000,
(ii) no further incurrence of liquidated damages should the CVD Registration
Statement be effective by March 15, 1998, (iii) in the event that Trikon does
not cause the CVD Registration Statement to become effective by March 15,
1998, resumption of liquidated damages accruing at a rate of $2,500 for each
day thereafter until the CVD Registration Statement becomes effective, and
(iv) should the CVD Registration Statement not be effective by April 1, 1998,
Trikon would become obligated to the Limited Partners for the liquidated
damages for the period between November 1, 1997 and March 15, 1998 of
$335,000. As of December 1, 1997, SBIC Partners beneficially owned 1,254,900
shares of Common Stock, or approximately 6.8% of the shares of Common Stock
then outstanding, and Norwest and its affiliates beneficially owned less than
5% of the shares of Common Stock then outstanding.
41
On September 15, 1998, pursuant to a second amendment to the CVD Purchase
Agreement, the Company issued 300,000 shares of Common Stock to holders of CVD
Partnership Shares in exchange for the termination of their registration
rights, the relinquishment of any right to liquidated damages under the CVD
Purchase Agreement, including those accrued to the date of the second
amendment, and the release of the Company from any liability or claim arising
from the CVD Purchase Agreement. As of September 15, 1998, both SBIC Partners
and Norwest and its affiliates held less than 5% of the shares of Common Stock
then outstanding.
----------------
The following are some of the companies mentioned in this Report: Anelva
Corporation, a subsidiary of NEC Corporation ("Anelva Corporation"), Applied
Materials, Inc. ("Applied Materials"), Dallas Semiconductor Corporation
("Dallas Semiconductor"), Hitachi, Ltd. ("Hitachi"), KLA-Tencor Corporation
("KLA-Tencor"), Lam Research Corporation ("Lam Research"), Leybold, Inc
("Leybold"), Novellus Systems, Inc. ("Novellus"), Siemens AG ("Siemens"),
Texas Instruments Incorporated ("Texas Instruments"), Tokyo Electron Ltd.
("Tokyo Electron"), Tower Semiconductor Ltd. ("Tower Semiconductor") and Ulvac
Japan, Ltd. ("Ulvac").
42
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-2
Consolidated Balance Sheets--December 31, 1998 and 1997.................. F-3
Consolidated Statements of Operations--Years ended December 31, 1998,
1997 and 1996........................................................... F-5
Consolidated Statements of Shareholders' Equity (Deficiency)--Years ended
December 31, 1998, 1997 and 1996........................................ F-6
Consolidated Statements of Cash Flows--Years ended December 31, 1998,
1997 and 1996........................................................... F-7
Notes to Consolidated Financial Statements............................... F-9
(a) (2) Index to Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts........................... F-28
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
------ -----------
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
3.4+ Certificate of Determination establishing the rights, preferences and
privileges of the Series H Preferred Stock
43
NUMBER DESCRIPTION
------ -----------
4.1# Indenture dated as of October 7, 1996 between the Company and U.S.
Trust Company of California, N.A.
4.2## Form of Common Stock Purchase Warrant issued to each investor under
the Note Purchase Agreement on December 16, 1996
4.3### Warrant to Purchase Common Stock issued to the lenders under the
Amendment to the Credit Agreement on June 17, 1997
4.4+ First Supplemental Indenture, dated as of May 14, 1998, between the
Company and U.S. Trust Company of California, N.A.
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, Trikon Limited and certain of Trikon Limited's
subsidiaries
10.2# Employment Agreement dated as of November 15, 1995 between that
Company and Nigel Wheeler
10.3# Registration Agreement dated as of November 15, 1996 between the
Company and Christopher D. Dobson
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++
10.9* 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++
10.13## Lease dated July 5, 1985 concerning the Company's facilities at
Newport, Gwent, United Kingdom, as assigned to Electrotech Limited
effective January 19, 1995
10.14### Partnership Interest and Share Purchase Agreement dated as of June
20, 1997 among the Company, SBIC Partners, Norwest Equity Partners,
and R&M Partners/CVD, G.P.
10.15+++ M0RI(TM) Source Technology License Agreement between the Company
and Applied Materials++
10.16+++ FORCEFILL(TM) Technology License Agreement between Trikon Equipment
Limited and Applied Materials++
10.17+++ FORCEFILL(TM) Technology License Agreement between Trikon
Technologies Limited and Applied Materials++
10.18##### Amendment No. 1 to Partnership Interest and Share Purchase
Agreement, dated December 12, 1997, among the Company, SBIC
Partners, Norwest, and R&M Partners/CVD, G.P.
10.19##### M0RI(TM) Source Technology License Agreement between the Company
and Lam Research Corporation++
10.20++ Employment Agreement, dated as of May 14, 1998, among Christopher
D. Dobson, the Company and Trikon Technologies Limited
44
NUMBER DESCRIPTION
------ -----------
10.21++ Letter Agreement, dated as of May 14, 1998, between Christopher D.
Dobson and the Company
10.22++ Employment Agreement, dated as of May 28, 1998 between the Company
and Thomas C. McKee
10.23+++ Amendment No. 2 to Partnership Interest and Share Purchase
Agreement, dated September 15, 1998, among the Company, SBIC
Partners, Norwest Equity Partners and R&M Partners/CVD, G.P.
10.24++++ 1998 Directors Stock Option Plan, as amended to date.
10.25 Offer letter to Nigel Wheeler, dated as of October 27, 1998.
11 Computation of Earnings (Loss) Per Share
21++ Subsidiaries of the Registrant
23.1 Consent of Ernst & Young
24.1+ 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 of 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.
**** Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended March 31, 1996 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 on October
3, 1996.
# Filed as an exhibit to the Company's Current Report on Form 8-K on
November 27, 1996.
## Filed as an exhibit to the Company's Annual Report on Form 10-K for the
Annual Period Ended December 31, 1996 on April 15, 1997.
### Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended June 30, 1997 on August 14, 1997.
#### Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 1997 on November 14, 1997.
##### Filed as an exhibit to the Company's Annual Report on Form 10-K for the
Annual Period Ended December 31, 1997 on April 8, 1998.
+ Filed as an exhibit to the Company's Current Report on Form 8-K on May
28, 1998.
++ Filed as an exhibit to the Company's Quarter Report on Form 10-Q for the
Quarterly Period Ended June 30, 1998 on August 14, 1998.
+++ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 1998 on August 14, 1998.
++++ Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-73445) on March 5, 1999.
+ Set forth in the signature page hereto.
++ Certain portions of this exhibit have been omitted from the copy filed
and are subject to an order granting confidential treatment with respect
thereto.
(B) REPORTS ON FORM 8-K
None
45
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: March 30, 1999
TRIKON TECHNOLOGIES, INC.
By: /s/ Nigel Wheeler
-----------------------------------
Nigel Wheeler
Chief Executive Officer,
President and
Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Nigel Wheeler and Jeremy Linnert, and each of
them with all power to act without the other, his true and lawful attorneys-
in-fact and agents, with full power of substitution and resubstitution, to
sign any and all amendments (including post-effective amendments) to this
Annual Report on Form 10-K 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 and necessary to be done in connection therewith, 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 their substitute or
substitutes, or any of them, shall 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/ Nigel Wheeler Chief Executive Officer, March 30, 1999
- ------------------------------- President and Chief
NIGEL WHEELER Operating Officer and
Director (Principal
Executive Officer)
/s/ Jeremy Linnert Acting Chief Financial March 30, 1999
- ------------------------------- Officer and Secretary
JEREMY LINNERT (Principal Financial and
Accounting Officer)
/s/ Christopher D. Dobson Chairman of the Board, March 30, 1999
- ------------------------------- Director and Chief
CHRISTOPHER D. DOBSON Scientific Officer
/s/ Richard M. Conn Director March 30, 1999
- -------------------------------
RICHARD M. CONN
Director
- -------------------------------
LAWRENCE D. LENIHAN
/s/ Stephen N. Wertheimer Director March 30, 1999
- -------------------------------
STEPHEN N. WERTHEIMER
46
INDEX TO FINANCIAL STATEMENTS
Page
-----
TRIKON TECHNOLOGIES, INC.
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets--December 31, 1998 and 1997................ F-3
Consolidated Statements of Operations--Years ended December 31, 1998,
1997 and 1996......................................................... F-5
Consolidated Statements of Shareholders' Equity (Deficiency)--Years
ended December 31, 1998, 1997 and 1996................................ F-6
Consolidated Statements of Cash Flows--Years ended December 31, 1998,
1997 and 1996......................................................... F-7
Notes to Consolidated Financial Statements............................. F-9
Schedule II--Valuation and Qualifying Accounts......................... F-28
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Trikon Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Trikon
Technologies, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity
(deficiency), and cash flows for each of the three years in the period ended
December 31, 1998. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with United States 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. at December 31, 1998 and 1997, and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended December 31, 1998, 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
Cardiff, Wales
March 30, 1999
F-2
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
December 31
---------------
1998 1997
------- -------
Assets
Current Assets:
Cash and cash equivalents.................................... $ 7,891 $ 9,260
Accounts receivable, less allowances of $2,539 and $2,657 at
December 31, 1998 and 1997, respectively.................... 6,122 18,842
Inventories, net............................................. 16,237 23,870
Other current assets......................................... 2,856 1,622
------- -------
Total current assets....................................... 33,106 53,594
Property, equipment and leasehold improvements:
Land......................................................... 1,780 2,208
Machinery and equipment...................................... 11,210 11,604
Furniture and fixtures....................................... 2,388 2,326
Leasehold improvements....................................... 9,687 9,037
------- -------
25,065 25,175
Less accumulated depreciation and amortization............... 6,399 3,035
------- -------
18,666 22,140
Demonstration systems, net of accumulated depreciation......... 3,573 1,227
Intangible assets, net of accumulated amortization:
Financing costs.............................................. 83 2,298
Other intangibles............................................ 0 15
------- -------
83 2,313
Other assets................................................. 324 416
------- -------
Total assets............................................... $55,752 $79,690
======= =======
See accompanying notes to the consolidated financial statements.
F-3
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
(In thousands, except for share data)
December 31
--------------------
1998 1997
--------- ---------
Liabilities and shareholders' equity (deficiency)
Current Liabilities:
Convertible subordinated notes......................... $ -- $ 86,250
Accounts payable....................................... 3,367 6,501
Accrued expenses....................................... 2,299 3,264
Warranty and related expenses.......................... 936 1,439
Accrued salaries and related liabilities............... 180 573
Income tax payable..................................... 82 1,606
Interest payable....................................... 63 1,542
Restructuring cost..................................... 1,099 3,952
Sales returns payable.................................. 10,718 11,468
Deferred revenue....................................... 946 1,923
Current portion of long-term debt and capital lease
obligations........................................... 225 870
--------- ---------
Total current liabilities............................ 19,915 119,388
Long-term debt and capital lease obligations, less
current portion......................................... 99 127
Other.................................................... 1,444 1,544
Pension obligations...................................... 3,207 3,574
Convertible subordinated notes........................... 4,147 --
--------- ---------
Total liabilities........................................ 28,812 124,633
Shareholders' Equity (Deficiency):
Preferred Stock
Authorized shares--20,000,000
Series G Preferred Stock, no par value, stated at
$6.75 per share liquidation preference
Designated shares--None at December 31, 1998 and
3,125,000 at December 31, 1997
Issued and outstanding--None at December 31, 1998
and 2,962,032 at December 31, 1997................ -- 19,349
Series H Preferred Stock, no par value, $10 per share
liquidation preference
Designated shares--3,500,000 at December 31, 1998
and none at December 31, 1997
Issued and outstanding--2,953,074 at December 31,
1998 and none at December 31, 1997................ 29,531 --
Common Stock, no par value
Authorized shares--110,000,000
Issued and outstanding--94,023,835 at December 31,
1998 and 15,147,115 at December 31, 1997............ 199,019 137,767
Cumulative translation adjustment...................... (751) (745)
Deferred Compensation.................................. (6,637) --
Accumulated deficit.................................... (194,222) (201,314)
--------- ---------
Total shareholders' equity (deficiency).............. 26,940 (44,943)
--------- ---------
Total liabilities and shareholders' equity........... $ 55,752 $ 79,690
========= =========
See accompanying notes to the consolidated financial statements.
F-4
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data)
Year Ended December 31
-----------------------------
1998 1997 1996
-------- --------- --------
Revenues:
Product sales................................. $ 25,125 $ 55,609 $ 39,386
License revenues.............................. 13,000 29,500 --
Contract revenues............................. -- -- 2,841
-------- --------- --------
38,125 85,109 42,227
Costs and expenses:
Cost of goods sold............................ 20,378 61,974 24,597
Research and development...................... 8,087 17,033 10,145
Selling, general and administrative........... 19,533 34,734 16,592
Amortization of intangibles................... -- 3,116 482
Purchased in-process technology............... -- 2,975 86,028
Restructuring costs........................... 1,843 18,273 --
Impairment write-downs........................ -- 44,135 --
-------- --------- --------
49,841 182,240 137,844
-------- --------- --------
Loss from operations............................ (11,716) (97,131) (95,617)
Interest:
Interest expense.............................. (2,923) (12,068) (1,821)
Interest income............................... 590 674 1,628
-------- --------- --------
Loss before income tax benefit.................. (14,049) (108,525) (95,810)
Income tax benefit.............................. (1,821) (9,248) (1,335)
-------- --------- --------
Net loss before extraordinary item.............. (12,228) (99,277) (94,475)
Extraordinary item.............................. 20,293 -- --
-------- --------- --------
Net income (loss)............................... $ 8,065 $ (99,277) $(94,475)
======== ========= ========
Net income (loss) applicable to common shares... $ 6,579 $ (99,277) $(94,475)
======== ========= ========
Earnings (loss) per common share data:
Basic:
Loss applicable to common shares before
extraordinary item........................... $ (0.24) $ (6.71) $ (10.03)
Extraordinary gain............................ 0.35 -- --
-------- --------- --------
Net income (loss)............................. $ 0.11 $ (6.71) $ (10.03)
======== ========= ========
Diluted:
Loss applicable to common shares before
extraordinary item........................... $ (0.23) $ (6.71) $ (10.03)
Extraordinary gain............................ 0.34 -- --
-------- --------- --------
Net income (loss)............................. $ 0.11 $ (6.71) $ (10.03)
======== ========= ========
Average common shares used in the calculation--
Basic.......................................... 57,691 14,800 9,420
- --Diluted....................................... 58,778 14,800 9,420
See accompanying notes to the consolidated financial statements.
F-5
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(In thousands)
Accum-
ulated Cum-
Compre- ulative
Accum- hensive Deferred
Series G Series H ulated Income Compen-
Preferred Stock Preferred Stock Common Stock Deficit (Loss) sation Total
---------------- ---------------- --------------- --------- ------- -------- --------
Shares Amount Shares Amount Shares Amount
------ -------- ------- -------- ------ --------
Balance at January 1,
1996................... -- $ -- -- $ -- 8,660 $ 60,975 $ (7,562) $ -- $ -- $ 53,413
Exercise of options.... -- -- -- -- 45 128 -- -- -- 128
Issuance of stock for
bonuses............... -- -- -- -- 5 70 -- -- -- 70
Issuance of Common
Stock for acquisition
of Trikon Limited..... -- -- -- -- 5,600 70,700 -- -- -- 70,700
Cumulative translation
adjustments........... -- -- -- -- -- -- -- 1,412 -- 1,412
Net loss............... -- -- -- -- -- -- (94,475) -- -- (94,475)
--------
Comprehensive income
(loss)................ -- -- -- -- -- -- -- -- -- (93,063)
------ -------- ------ -------- ------ -------- --------- ------ ------- --------
Balance at December 31,
1996................... -- -- -- -- 14,310 131,873 (102,037) 1,412 -- 31,248
Exercise of options.... -- -- -- -- 150 268 -- -- -- 268
Issuance of stock...... -- -- -- -- 7 49 -- -- -- 49
Issuance of Common
Stock for acquisition
of CVD Limited
Partnership........... -- -- -- -- 680 5,183 -- -- -- 5,183
Issuance of (Series G)
Convertible Preferred
Stock................. 2,962 19,349 -- -- -- -- -- -- -- 19,349
Issuance of warrants to
purchase Common
Stock................. -- -- -- -- -- 394 -- -- -- 394
Cumulative translation
adjustments........... -- -- -- -- -- -- -- (2,157) -- (2,157)
Net Loss............... -- -- -- -- -- -- (99,277) -- -- (99,277)
--------
Comprehensive income
(loss)................ -- -- -- -- -- -- -- -- -- (101,434)
------ -------- ------ -------- ------ -------- --------- ------ ------- --------
Balance at December 31,
1997................... 2,962 19,349 -- -- 15,147 137,767 (201,314) (745) -- (44,943)
Exchange Offer for
Series G Preferred
Stock................. (2,962) (19,349) 2,856 28,558 15,158 19,349 -- -- -- 28,558
Exchange Offer for
$82.103m. Convertible
Notes................. -- -- -- -- 51,925 34,271 -- -- -- 34,271
Restricted Stock issued
to Chairman........... -- -- -- -- 11,493 7,585 -- -- (7,585) --
Shares issued to
holders of CVD
Partnership shares.... -- -- -- -- 300 47 -- -- -- 47
Amortization of
restricted stock...... -- -- -- -- -- -- -- -- 948 948
Cumulative translation
adjustments........... -- -- -- -- -- -- -- (6) -- (6)
Net income............. -- -- -- -- -- -- 8,065 -- -- 8,065
--------
Comprehensive income... -- -- -- -- -- -- -- -- -- 8,059
--------
Preference dividend.... -- -- 97 973 -- -- (973) -- -- --
------ -------- ------ -------- ------ -------- --------- ------ ------- --------
Balance at December 31,
1998................... 0 $ 0 2,953 $ 29,531 94,023 $199,019 $(194,222) $ (751) $(6,637) $ 26,940
====== ======== ====== ======== ====== ======== ========= ====== ======= ========
- -------
(1) The $82.103 million of Convertible Notes were exchanged for 22,660,798 new
shares of Common Stock and 29,264.625 new shares of Series I Preferred
Stock. Each share of Series I Preferred Stock automatically converted to
1,000 shares of Common Stock upon shareholder approval on July 28, 1998.
See accompanying notes to the consolidated financial statements.
F-6
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
Operating Activities
Net income (loss)............................... $ 8,065 $(99,277) $(94,475)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Extraordinary item............................. (20,293) -- --
Depreciation and amortization of plant,
equipment, leasehold improvements and
demonstration systems......................... 3,891 7,161 1,937
Amortization of intangibles.................... 15 3,116 482
Amortization of financing costs................ 300 931 --
Amortization of deferred compensation.......... 948 -- --
Provision for loss on accounts receivable...... (64) 632 3,402
Write-off of financing cost.................... -- 1,680 --
Write-off of purchased in-process technology... -- 2,975 86,029
Impairment write-downs......................... -- 44,135 --
Inventory write-downs.......................... -- 20,735 --
Deferred income taxes.......................... -- (9,660) (1,145)
Changes in operating assets and liabilities:
Accounts receivable........................... 12,784 6,615 (5,493)
Inventories (including demonstration
systems)..................................... 5,166 13,003 (10,442)
Other current assets.......................... (1,234) 3,101 312
Sales returns................................. (750) 11,419 --
Restructuring cost............................ (2,853) 3,952 --
Accounts payable and other liabilities........ (3,260) (16,581) 9,949
Income tax payable............................ (1,524) (2,705) --
Deferred revenue.............................. (977) 1,923 --
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... 214 (6,845) (9,444)
Investing Activities
Purchases of property, equipment and leasehold
improvements................................... (511) (10,684) (10,032)
Proceeds from sale of property, equipment and
leasehold improvements......................... 484 1,288 --
Proceeds from sales of short-term investments... -- 11,800 33,427
Purchase of short-term investments.............. -- (10,336) (20,899)
Purchase of Trikon Limited, net of cash acquired
of $4,444,000.................................. -- -- (76,832)
Other assets.................................... 92 (172) (185)
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... 65 (8,104) (74,521)
Financing Activities
Repayment of debt acquired in acquisition of
Trikon Limited................................. -- -- (17,631)
Proceeds from issuance of convertible
subordinated notes............................. -- -- 86,250
Costs relating to Exchange Offer................ (700)
Financing costs................................. -- -- (4,516)
Net borrowings (repayments) under bank credit
lines.......................................... (325) (14,151) 14,151
Proceeds from sale of Preferred Stock (net of
insurance costs)............................... -- 19,349 --
Cash received in purchase of CVD Partnership
with issuance of common stock.................. -- 2,208 --
Proceeds from sale of Common Stock and
Warrants....................................... -- 317 198
Payments on capital lease obligations........... (617) (1,545) (482)
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (1,642) 6,178 77,970
Effect of exchange rate changes in cash......... (6) (2,157) 1,413
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (1,369) (10,928) (4,582)
Cash and cash equivalents at beginning of year.. 9,260 20,188 24,770
-------- -------- --------
Cash and cash equivalents at end of year........ $ 7,891 $ 9,260 $ 20,188
======== ======== ========
F-7
TRIKON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(continued)
(In thousands of dollars)
Year Ended December 31
---------------------------
1998 1997 1996
----- ----------- --------
Supplemental Statements of Cash Flows Information
Cash paid during the year for:
Interest......................................... $ 422 $ 1,238 $ 496
Taxes (primarily foreign)........................ 368 2,885 221
Non-cash investing and financing activities:
Equipment acquired under capital lease........... 269 -- --
Acquisition of Trikon Limited:
Fair market value of assets acquired............. -- -- $206,936
Fair market value of liabilities assumed......... -- -- (53,259)
Issuance of common stock......................... -- -- (70,700)
Cash acquired.................................... -- -- (4,444)
Acquisition costs of $7,976 less amounts paid
through December 31, 1996....................... -- -- (1,701)
----- ----------- --------
Cash paid to acquire Trikon Limited.............. $ -- $ -- $ 76,832
===== =========== ========
Acquisition of CVD Limited Partnership:
Fair market value of assets acquired............. $ -- $ 5,183,000 $ --
Issuance of common stock......................... -- (5,183,000) --
Cash acquired.................................... -- (2,208,000) --
----- ----------- --------
Cash received in purchase of CVD Limited
Partnership...................................... $ -- $(2,208,000) $ --
===== =========== ========
See accompanying notes to the consolidated financial statements.
F-8
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
Background
Trikon Technologies, Inc. and its subsidiaries (the "Company") operates in
one segment, designing, manufacturing and marketing advanced high density, low
pressure plasma sources, process modules and plasma processing systems. These
products are used for chemical and physical vapor deposition and etch
applications and are sold to semiconductor manufacturers worldwide.
The consolidated financial statements of the Company include the accounts of
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
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 accrued 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 was
the shareholder of the general partner.
Deferred revenues represent payments received toward future product sales
and services which have not been recognized.
Licensing Agreements
On March 18, 1998, the Company granted a non-exclusive, worldwide license of
its M^RI(TM) source technology to Lam Research Corporation ("Lam Research").
Under the terms of the agreement, Lam Research will pay up to $20 million, $13
million of which was paid in 1998 and $7 million of which consists of
contingent payments and royalties. License revenue of $13 million has been
recognized in the consolidated income statement for the year ended December
31, 1998. In the year ended December 31, 1997, the Company granted non-
exclusive, worldwide, paid-up licenses of its M^RI(TM) source and Forcefill(R)
PVD technologies to Applied Materials, Inc. for a total consideration of $30
million, of which $500,000 was allocated to the sale, under the license
agreement, of four M^RI(TM) sources shipped in 1997. The license agreements
with Lam Research and Applied Materials Inc. do not preclude Trikon from
utilizing, or licensing to third parties, the licensed technology.
Use of Estimates
The preparation of 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.
F-9
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consists of the following at December 31:
1998 1997
------- -------
(In thousands)
Components................................................... $ 4,060 $ 7,864
Work-in-process.............................................. 11,015 13,680
Finished goods............................................... 1,162 2,326
------- -------
$16,237 $23,870
======= =======
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) or the lease term. Owned
buildings are depreciated using the straight-line method over 50 years.
Demonstration Systems
Demonstration or evaluation systems are completed systems located at certain
strategic customer sites ("beta 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 the system. Demonstration systems are stated at the lower of cost or
estimated net realizable value and are depreciated on a straight line method
over four years, if the product is not sold after one year.
Intangible Assets
Financing costs consists of costs incurred primarily related to the issuance
of the convertible subordinated 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. In connection with the
termination of the Company's Working Capital Facility, approximately
$1,680,000 of financing costs related to the working capital facility were
written off as a charge to interest expense in the year to December 31, 1997.
In connection with the Exchange Offer (Note 4), approximately $1,916,000 of
costs relating to the issuance of the Convertible Subordinated Notes accepted
in the exchange were charged against the extraordinary gain arising on
exchange (Note 5).
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 $57,000 at
December 31, 1998.
Accounting for Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, the liability method is used
in accounting for income taxes.
F-10
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Research and Development Costs
Research and development costs are expensed as incurred and, in the year
ended December 31, 1996, include the cost incurred under a contract to perform
research and development for a limited partnership.
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 of the Company's Common Stock over the
option price on the measurement date. In October 1995, 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.
Earnings (Loss) Per Share
Basic and diluted earnings per share is calculated in accordance with FASB
Statement No. 128, "Earnings Per Share," which specifies the computation,
presentation and disclosure requirements for earnings per share. Basic and
diluted earnings per share for each of the years ended December 31, 1997 and
1996 are unchanged since all stock options and warrants are anti-dilutive for
the years where the Company incurred a net loss.
Comprehensive Income
As of January 1, 1998, the Company adopted FASB Statement No. 130, Reporting
Comprehensive Income. SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement has no impact on the Company's net income or shareholders'
equity. SFAS 130 required unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption are reported separately in shareholders' equity to be
included in other comprehensive income. The other comprehensive income (loss)
for the years ended December 31, 1998, 1997 and 1996 is currency translation
adjustment.
During the years ended December 31, 1998, 1997 and 1996, total comprehensive
income (loss) amounted to $8.1 million, $(101.4 million) and $(93.1 million).
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.
F-11
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Foreign Currency Translation--(continued)
During the year ended December 31, 1998, the exchange gain credited to
operations was $639,000. During the years ended December 31, 1997 and 1996,
exchange losses charged to earnings amounted to $667,000 and $951,000,
respectively.
Reclassifications
Certain amounts in the 1996 financial statements have been reclassified to
be consistent with the 1997 and 1998 presentation.
2. BUSINESS ACQUISITION
On November 15, 1996, the Company acquired all the issued and outstanding
shares of Electrotech Limited and Electrotech Equipments Limited. Subsequent
to the Acquisition, Electrotech Limited and Electrotech Equipments Limited
formally changed their names to Trikon Technologies Limited and Trikon
Equipments Limited (collectively Trikon Limited). Trikon Limited 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 $86,028,000 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 in the year ended December 31, 1996.
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 Trikon Limited's projects
in development. 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 Trikon
Limited's current products and projects in development.
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
totaled 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--(Continued)
December 31, 1998
2. BUSINESS ACQUISITION--(Continued)
The Company's consolidated results of operations include the operating
results of Trikon Limited from the acquisition date. The following unaudited
pro forma information combines the consolidated results of operations of the
Company and Trikon Limited 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
------------ -----------
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 $86,029,000 or $3,008,000 of
charges to cost of sales related to the write-off of inventory which was sold
during the period, both of which were included in operating results for the
year ended December 31, 1996.
3. RESTRUCTURING AND IMPAIRMENT WRITE-DOWNS
Restructuring
In the second half of 1997, the Company began a restructuring of its
operations which included the closure of its M^RI(TM) etch operations located
in Chatsworth, California. Product sales revenues and operating losses,
excluding restructuring costs and impairment writedowns, of the Etch business,
which were not anticipated to generate significant revenues in the future,
were $8,803,000 and $23,855,000 for the year ended December 31, 1997.
The costs of the restructuring which were charged to operations in the year
ended December 31, 1997 were estimated to be $18.3 million. Of this amount,
$11.5 million related to reserves for the cost of sales returns which might
arise as a result of the Company's decision to substantially exit the M^RI(TM)
etch business. During the year ended December 31, 1998 the closure of the
M^RI(TM) etch operations has been completed at a cost substantially in
accordance with the estimates. The Company has made payments in respect of
sales returns of $750,000 to December 31, 1998. Discussions are continuing
with customers concerning M^RI(TM) equipment returns and the balance of the
reserves at December 31, 1998 remains the Company's estimate of the
outstanding liability for M^RI(TM) etch product returns.
At June 30, 1998, the Company set up an additional reserve of $1.8 million
for future support costs relating to M^RI(TM) equipment supplied to customers
prior to the commencement of the restructuring. During the period ended
December 31,1998, support costs of $1.2 million relating to M^RI(TM) equipment
have been charged against this reserve, in line with Company estimates.
Impairment Write-downs
During the year ended December 31, 1997, in connection with the closure of
the Chatsworth Etch operations and the sale of the M^RI(TM) Source and
Forcefill(R) PVD licenses, the Company recorded non cash related charges of
approximately $32.5 million for the write-off of certain accounts receivable,
inventory and long-lived assets which due to the sale of the licenses and the
decision to close the facility have become impaired. The inventory
F-13
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
3. RESTRUCTURING AND IMPAIRMENT WRITE-DOWNS--(CONTINUED)
Impairment Write-downs--(continued)
write-downs amounted to $20.7 million and were charged to cost of goods sold
and the remaining write-offs are included in impairment losses on the
accompanying statement of operations. In addition, based on recent and
projected operating results, the Company evaluated its long-lived assets,
principally the intangible assets established in the acquisition of Trikon
Limited, for impairment under SFAS No. 121. The carrying amount of these
assets exceeded the projected undiscounted future cash flows, and accordingly,
the carrying amount was written down to fair value. Fair value was determined
based on an analysis of the projected future discounted cash flows of the
underlying operations, including cash generated from the disposal of
underlying assets, which resulted in a near zero valuation of these assets. A
write-off of $32.3 million was recorded and included in impairment losses in
the accompanying statement of operations.
The impairment write-downs, excluding inventory write-downs of $20.7 million
recorded in cost of goods sold, reflected in the statement of operations
consisted of the following non-cash related charges:
AMOUNT
--------------
(IN THOUSANDS)
Accounts receivable........................................... $ 1,141
Property plant and equipment.................................. 10,228
Other assets.................................................. 440
Developed technology.......................................... 27,106
Assembled workforce........................................... 4,947
Covenant not to compete....................................... 273
-------
$44,135
=======
4. EXCHANGE OFFER
On April 14, 1998, the Company commenced an exchange offer (the "Exchange
Offer") for all outstanding Convertible Subordinated Notes (the "Convertible
Notes"), and Series G Preferred Stock and Warrants, and filed a Schedule 13E-4
with the Securities and Exchange Commission. The Exchange Offer expired on May
14, 1998, and immediately thereafter, the Company accepted for exchange or
conversion all validly tendered Convertible Subordinated Notes, series G
Preferred Stock and Warrants. (See Notes 7 and 8.)
In connection with the consummation of the Exchange Offer, the Company has
issued 11,492,806 shares of restricted Common Stock to the Company's Chairman
of the Board. Subject to certain conditions, the restricted Stock will vest
one hundred percent (100%) upon the earlier of (i) May 14, 2003, or (ii) the
sale of all or substantially all of the assets of the Company. The restricted
Stock represents approximately 12% of the outstanding Common Stock (after
giving effect to the elimination of the restrictions on the Stock). The
restricted Stock was valued at $7.6 million based upon average traded prices
immediately after the grant. This amount has been accounted for as an addition
to Common Stock and as deferred compensation within the Statement of
Shareholders Equity. The deferred compensation is being amortized on a
straight line basis over a five year period resulting in a charge against
operations of $1.0 million during the year ended December 31, 1998.
5. EXTRAORDINARY GAIN
On May 14, 1998, the Company accepted for exchange $82.1 million principal
amount of Convertible Notes tendered in the Exchange Offer (See Note 4 ). The
Convertible Notes were exchanged for 22,660,798 shares of Common Stock,
29,264.625 Series I Junior participating Preferred Stock and 2,855,754 Series
H Preferred Stock.
F-14
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
5. EXTRAORDINARY GAIN--(Continued)
The shares of Common Stock and equivalents had an average value of $0.66 each
following the exchange. The transaction did not have a cash flow implication
with the exception of costs of $700,000.
The extraordinary gain arising on the exchange is as follows (in thousands):
Principal amount of Convertible Notes exchanged.................... $ 82,103
Interest waived.................................................... 3,635
--------
85,378
Value of Common Stock and equivalents issued....................... (34,271)
Series H Preferred Stock issued--principal amount.................. (28,558)
Convertible Note issuance costs written off........................ (1,916)
Costs relating to the exchange offer............................... (700)
--------
Gain on exchange of Convertible Notes.............................. $ 20,293
========
6. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Year Ended December 31
------------------------------
1998(1) 1997(2)(3) 1996(4)
--------- ---------- --------
(In thousands)
Revenues:
Unaffiliated Customers
North America(1)............................ $ 18,704 $ 45,946 $ 33,446
Foreign (primarily Europe)(1).............. 19,421 39,163 8,781
Inter-geographic:
North America............................. 169 653 --
Foreign (primarily Europe)................ 2,645 16,382 174
Eliminations.............................. (2,814) (17,035) (174)
--------- -------- --------
$ 38,125 $ 85,109 $ 42,227
========= ======== ========
Operating loss:
North America(2)............................ $ 9,421 $(50,991) $ (5,582)
Foreign (primarily Europe)(3).............. (21,137) (46,140) (90,035)
--------- -------- --------
$(11,716) $(97,131) $(95,617)
========= ======== ========
Identifiable assets:
United States.............................. $ 4,029 $ 15,893 $ 60,568
Foreign (primarily Europe)................. 51,723 63,797 122,612
--------- -------- --------
55,752 $ 79,690 $183,180
========= ======== ========
Export Sales from the United States........ $ 250 $ 187 $ 23,585
========= ======== ========
- --------
(1) The year to December 31, 1998 includes $13 million of revenues under a
M^RI(TM) license agreement.
(2) Included in North America and Foreign revenues is $19.5 million and $10.0
million, respectively, of revenues under the M^RI(TM) source and the
Forcefill(R) PVD license agreements.
F-15
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
6. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND
EXPORTS SALES--(Continued)
(3) The North America operating loss for the year ended December 31, 1997
includes a restructuring charge of $18.3 million and asset impairment
write-downs of $28.2 million, including inventory write downs of
$16.4 million. The foreign operating loss for the year ended December 31,
1997 includes impairment write downs of $36.6 million, including inventory
write downs of $4.3 million.
(4) The year ended December 31, 1996 includes a $86.0 million charge for in-
process technology, and a $3.0 million charge to cost of goods sold,
representing a portion of the purchase price of Trikon Limited allocated
to inventory, which was sold subsequent to the acquisition date.
7. LONG-TERM DEBT
Convertible Notes
In connection with the acquisition of Trikon Limited, the Company issued
$86,250,000 of 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. From January 1997 to May 14, 1998, the Convertible Notes bore an
additional 0.5% interest per annum due to the Company's noncompliance with
certain registration rights of the Convertible Notes.
On May 14, 1998, in conjunction with the Exchange Offer (Note 4), the
Company accepted for exchange or conversion $82,103,000 principal amount of
validly tendered Convertible Notes. As outlined in the Exchange Offer
documents, the Company did not pay interest of $3.3 million accrued to and due
on April 15, 1998 to holders of Convertible Notes which accepted the Exchange
Offer. The amount of unpaid interest has been included in the calculation of
the extraordinary gain arising on the exchange of the Convertible Notes (Note
5). Interest due to the holders of Convertible Notes which did not accept the
Exchange Offer was paid on May 15, 1998 and subsequently is payable on the due
dates.
U.K. Term Note
The Company's United Kingdom subsidiary had a term-loan from Lloyd's Bank
Plc which was secured by property in Bristol, United Kingdom. The balance of
the loan was repaid on May 23, 1998.
8. PREFERRED STOCK AND WARRANTS
Preferred Stock
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.
During the quarter ended June 30, 1997, the Company sold an aggregate of
2,962,032 shares of Series G Preferred Stock (together with Warrants to
purchase an aggregate of 888,610 shares of Common Stock) with net proceeds to
the Company of approximately $19,349,000. Investors in the Private Placement
received Warrants exercisable for a number of shares of Common Stock equal to
30% of the number of shares of Series G Preferred Stock purchased, at a total
price of $6.75 per share of Series G Preferred Stock. On May 14, 1998,
following the expiration of the Exchange Offer (see Note 4), the Company
accepted for conversion 2,873,143 shares of Series G Preferred Stock and
866,388 Warrants, or approximately 97% each of the shares and Warrants
outstanding, duly tendered in the Exchange Offer. In accordance with the terms
of the Certificate of
F-16
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
8. PREFERRED STOCK AND WARRANTS--(Continued)
Preferred Stock--(continued)
Determination of the Company that sets forth the rights, preferences and
privileges of the Series G Preferred Stock, the conversion of more than two-
thirds of the outstanding shares of Series G Preferred Stock caused the
automatic conversion of all the outstanding shares of Series G Preferred
Stock. In the quarter ended September 30, 1998, the Company exchanged the
remaining 22,222 Warrants on the same terms as those already tendered.
In conjunction with the Exchange Offer, the Company filed a Certificate of
Determination concerning new Series H Preferred Stock, and, following the
expiration of the Exchange Offer, the Company issued 2,855,754 new shares of
Series H Preferred Stock, $10 stated amount per share, to holders of
$82,103,000 principal amount of Convertible Notes validly tendered for
exchange. The Series H Preferred Stock will be redeemable at the option of the
Company for cash at a redemption price equal to the stated amount plus accrued
and unpaid dividends and the holders of the Series H Preferred Stock shall be
entitled to receive dividends at an annual rate of 8 1/8% of the stated amount
payable semiannually on October 15 and April 15, in cash or additional shares
of Preferred Stock or any combination thereof at the option of the Company.
The Series H Preferred Stock will be subject to automatic conversion if the
Company's Common Stock price reached certain levels and increased dividend
rate if certain EBITDA levels are achieved. If the Company has not redeemed
all of the outstanding Series H Preferred Stock on or prior to June 30, 2001,
then the holders of Series H Preferred Stock shall be entitled to elect the
number of directors that will constitute a majority of the Board of Directors.
On October 15, 1998 the Company elected to pay the dividend then due to
holders of Series H Preferred Stock by the issue of 97,320 new shares of
Series H Preferred Stock. On October 27, 1998, the Board of Directors resolved
to increase the number of shares of Series H Preferred Stock authorized for
issue from 3,000,000 to 3,500,000.
Warrants
On the date of execution of the Note Purchase Agreement, discussed in Note
5, warrants (the Note Purchase Agreement Warrants) to acquire up to 245,100
shares of Common Stock with an exercise price of $12.75 per share were issued.
The Note Purchase Agreement Warrants vested 50% upon the execution of the Note
Purchase Agreement and 50% upon funding of borrowings under the Note Purchase
Agreement. No borrowings were ever funded under the Note Purchase Agreement
and, accordingly, warrants to purchase 122,550 shares of Common Stock are
exercisable. All such warrants expire on December 16, 2001. The Company has
not assigned any value to the warrants that are currently exercisable, because
such amounts are not significant to the financial statements.
On June 30, 1997, in conjunction with the issue of an amended Working
Capital Facility agreement, the Company issued to the lending Banks, and their
administrative agents, warrants to purchase an aggregate of 178,182 shares of
Common Stock at an exercise price of $6.75 per share.
At December 31, 1998, the following warrants were outstanding:
Number
of Shares Exercise
Warrant Shares Exercisable Price Expiration Date
------- ------- ----------- -------- -----------------
Note Purchase Agreement
Warrants................... 245,100 122,550 $12.75 October 7, 2001
Amended Working Capital
Warrants................... 178,182 178,182 $ 6.75 November 16, 1999
F-17
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
9. PMT CVD PARTNERS, L.P.
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.
In the first quarter of fiscal 1997, the Company determined that certain
characteristics of the CVD technology of Trikon Limited 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. The
Company accordingly, discontinued further research and development work under
the R&D Agreement and has instead focused its consolidated efforts, on its own
behalf and not on behalf of the Limited Partnership, upon the Flowfill
CVD technology used in the Trikon Limited equipment.
Accordingly, a settlement of any and all rights and claims by the limited
partners of the Limited Partnership was made on June 30, 1997 to terminate the
R&D Agreement and all related agreements, and purchase all of the outstanding
interests in the Limited Partnership for 679,680 shares of Common Stock (the
"LP Shares"). The assets acquired included approximately $2.2 million of cash
and approximately $3.0 million of in-process research and development which
was recorded as a one-time charge as purchased in-process technology expense
in the quarter ended June 30, 1997. In connection with the purchase of all of
the outstanding interests in the Limited Partnership, the Company agreed to
cause a registration statement covering the LP Shares to be filed under the
Securities Act of 1933, as amended (the "Securities Act"), to become effective
on or prior to September 1, 1997. In the event that the Company did not cause
a registration statement to become effective on or prior to September 1, 1997,
the Company originally agreed to pay the holders of the CVD Partnership Shares
liquidated damages comprised of a one-time fee of $75,000 and an amount equal
to $2,500 per day for each day after September 1, 1997 and prior to the
effective date of the registration statement. The Company and the holders of
the CVD Partnership Shares amended the CVD Purchase Agreement on December 12,
1997 to provide for (i) the immediate payment of liquidated damages accrued
through November 1, 1997 of $225,000, (ii) no further incurrence of liquidated
damages should the registration statement be effective by March 15, 1998,
(iii) in the event that Trikon does not cause the registration statement to
become effective by March 15, 1998, resumption of liquidated damages accruing
at a rate of $2,500 for each day thereafter until the Registration Statement
becomes effective, and (iv) should the registration statement not be effective
by April 1, 1998, Trikon will become obligated to the Limited Partners for the
liquidated damages for the period between November 1, 1997 and March 15, 1998
of $335,000. On September 15, 1998 pursuant to a second amendment to the
CVD Purchase Agreement, the Company issued 300,000 shares of Common Stock to
the holders of CVD Partnership Shares in exchange for the termination of their
registration rights, the relinquishment of any rights to liquidated damages
under the CVD Partnership Agreement, including those accrued to the date of
the second amendment, and the release of the Company from any liability or
claim arising from or relating to the CVD Partnership Agreement. This has
resulted in a $0.2 million gain which has been credited against income expense
in the Consolidated Statement of Operations for the year ended December 31,
1998.
F-18
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
10. INCOME TAXES
The income tax provision (benefit) consists of the following:
Year Ended December 31
-------------------------
1998 1997 1996
------- ------- -------
(In thousands)
Current:
Federal........................................ $ -- $ -- $ 7
State.......................................... -- -- 34
Foreign........................................ (1,821) -- (231)
------- ------- -------
(1,821) -- (190)
Deferred:
Foreign........................................ -- (9,248) (1,145)
------- ------- -------
Total deferred provision (benefit)............ $(1,821) $(9,248) $(1,335)
======= ======= =======
A reconciliation of the statutory federal income tax rate, as a percentage of
income (loss) before tax, is as follows:
Year Ended December 31
-------------------------
1998 1997 1996
------- ------- -------
Statutory federal income tax rate--provision
(benefit)..................................... (35)% (35)% (35)%
Nondeductible in-process technology charge..... -- -- 31
Change in valuation reserve due to net
operating loss carryforwards not utilized..... 22 26 3
------- ------- -------
(13)% (9)% (1)%
======= ======= =======
F-19
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
10. INCOME TAXES--(Continued)
Significant components of the Company's deferred tax liabilities and assets
are as follows at December 31:
1998 1997 1996
------- ------- -------
(in thousands)
Deferred tax liabilities
Domestic:
State taxes not benefited......................... $ -- $ 1,603 $ 294
Tax depreciation in excess of book depreciation... -- 38 --
Foreign:
Basis difference from acquisition of Trikon
Limited.......................................... -- -- 9,692
Tax depreciation in excess of book................ 1,236 -- 1,360
------- ------- -------
1,236 1,641 11,346
Deferred tax assets
Domestic:
State taxes....................................... 172 -- --
Allowances not currently deductible for tax
purposes......................................... -- 482 1,674
Accrued expenses not currently deductible for tax
purposes......................................... -- 11 460
Book depreciation in excess of tax depreciation... -- -- 291
Net operating loss carryforwards.................. -- 12,121 2,375
Foreign tax credit carryforwards.................. 3,902 285 285
Research and development and other credits........ -- 1,770 1,463
Inventory write-downs............................. -- 10,598 --
Restructuring costs............................... -- 7,044 --
Foreign:
Allowances and accruals not currently deductible
for tax purposes................................. 7,022 -- 1,392
------- ------- -------
11,096 32,311 7,940
Less valuation reserve on domestic deferred tax
assets............................................ 9,860 30,670 6,254
------- ------- -------
Net deferred tax assets............................ 1,236 1,641 1,686
------- ------- -------
Net deferred tax liabilities....................... $ -- $ -- $ 9,660
======= ======= =======
The basis difference from the acquisition of Trikon Limited in 1996 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. In 1997 the Company wrote-off the basis difference and the
associated deferred tax liability. The income tax benefit for the year ended
December 31, 1997 includes a benefit of $9,248,000, representing the reversal
of the deferred tax liability as a result of the impairment write-down of
certain long-lived intangible assets established in connection with the
acquisition of Trikon Limited in November 1996.
The loss before income taxes of the Company's foreign subsidiaries for the
years ended December 31, 1998 and 1997 were approximately $20,668,000 and
$47,865,000, respectively. The loss before income taxes of the Company's
foreign subsidiaries for the year ended December 31, 1996, excluding the
$86,028,000 charge for in-process technology and the $3,008,000 charge to cost
of goods sold, related to the allocation of the purchase price in the
acquisition of Trikon Limited, was approximately $1,350,000.
F-20
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
10. INCOME TAXES--(Continued)
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $11,000,000 and $600,000, respectively.
The net operating loss carryforwards will expire at various dates beginning in
years 2003 through 2018, if not utilized.
Utilization of the net operating losses and credits is subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amount used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities for federal and state income
taxes as of December 31, 1998 are as follows:
Deferred tax assets:
Net operating loss carryforwards.............................. $ 4,100,000
Valuation allowance for deferred tax assets................... (4,100,000)
-----------
Net deferred tax assets....................................... $ --
===========
In the current year the valuation allowance decreased by approximately $20.8
million.
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
United States 401(k)
In November 1993, the Company established a 401(k) plan (the Plan) covering
substantially all of its United States 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, 1998, 1997
and 1996.
United Kingdom Pension Plan
The group 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.
Information required in respect of the net periodic benefit cost and related
obligation determined in accordance with US Statements of Financial Accounting
Standards 87 and 132 is given below.
Benefits under the pension plan are principally determined by years of
service and employee remuneration.
Pension plan funding policy is based on annual contributions at a rate that
is intended to fund benefits as a level percentage of pay over the working
lifetime of the plan participants. The assets of the scheme are invested
primarily in equities, UK fixed interest stocks and property.
There are no other post-retirement benefits provided to employees.
F-21
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS--(Continued)
United Kingdom Pension Plan--(continued)
Assumptions used to determine the net periodic benefit cost of the 1998 and
1997 financial year and related benefit obligation are shown below.
Discount rate.......................................................... 7.00%
Long term rate of return on plan assets................................ 8.50%
Increase in compensation levels........................................ 6.00%
The actuarial calculations in respect of the plan assume a rate of increase
of pensions in payment of 4% per annum (1997-4% per annum).
The components of net benefit expense are detailed in the table below.
1998 1997
$'000s $'000s
------ ------
Service cost................................................. 400 367
Interest cost on benefit obligation.......................... 802 710
Expected return on plan assets............................... (532) (498)
Net amortization and deferral:
--recognized (gains) and losses............................. 37 --
------ ------
Net benefit expense.......................................... 707 579
====== ======
The funded status of the plan is summarized in the table below.
1998 1997
$'000s $'000s
------ ------
Benefit obligation at end of year............................ 12,312 11,116
Fair value of plan assets.................................... 7,037 5,922
------ ------
Benefit obligation in excess of plan assets.................. 5,275 5,194
Unrecognized prior service cost.............................. -- --
Unrecognized net loss........................................ 1,514 1,332
------ ------
Net amount recognized at end of year......................... 3,761 3,862
====== ======
Change in benefit obligation
1998 1997
$'000s $'000s
------ ------
Benefit obligation at start of year.......................... 11,116 9,631
Translation difference....................................... 135 --
Service cost................................................. 400 367
Interest cost................................................ 802 710
Contributions by plan participants........................... 93 104
Actuarial (gains) and losses................................. (134) 454
Benefits (paid).............................................. (100) (150)
Plan amendments.............................................. -- --
------ ------
Benefit obligation at end of year............................ 12,312 11,116
====== ======
F-22
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS--(Continued)
Change in plan assets
1998 1997
$'000s $'000s
------ ------
Fair value of plan assets at start of year................... 5,922 5,399
Translation difference....................................... 72 --
Actual return (loss) on plan assets.......................... 487 249
Contributions by plan participants........................... 93 104
Contributions by employer.................................... 563 320
Benefits (paid).............................................. (100) (150)
----- -----
Fair value of plan assets at end of year..................... 7,037 5,922
===== =====
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 Personal Pension plan for the year ended December 31, 1998 and 1997
amounted to $315,000 and $251,000 respectively.
12. 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, 1998 and 1997 was $965,000 and $1,119,000, and accumulated
amortization was $451,000 and $457,000, respectively. Amortization expense
under these leases is included in depreciation expense.
Future minimum lease payments under capital leases and non-cancellable
operating leases with initial terms of one year or more consisted of the
following at December 31, 1998:
Capital Operating
Leases Leases
------- ---------
(In thousands)
1999..................................................... $230 $1,580
2000..................................................... 99 1,330
2001..................................................... -- 1,230
2002..................................................... -- 1,220
2003..................................................... 1,220
---- ------
329 $6,580
======
Less amounts representing imputed interest............... 29
----
Present value of net minimum lease payments, including
amounts classified as current........................... $300
====
Rental expense for operating leases was $1.8 million, $1.5 million and $0.7
million for the years ended December 31, 1998, 1997, and 1996, respectively.
F-23
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
12. COMMITMENTS AND CONTINGENCIES--(Continued)
Contingencies
In March 1999, the German Federal Patent Court determined that a
competitor's issued German patent concerning a process similar to the
Company's Forcefill(R) process is cancelled and invalid from the date of
issue. The court has yet to give the reasons for its decision. During the
Court's proceedings, the competitor withdrew one of the patent's claims
apparently directed to non vacuum processes and declared that a divisional
patent for this claim would be filed. This divisional patent is therefore now
pending opposition proceedings and will again come before the same court if
filed and opposed. The Company will examine the divisional patent if filed and
will vigorously oppose it, if it relates to the Company's business.
Nevertheless, the Company cannot guarantee 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.
In the ordinary course of business and in connection with the Company's
restructuring, the Company is involved with various types of claims and legal
proceedings which may result in litigation or other legal proceedings. The
Company does not anticipate that any of these proceedings will have a material
adverse effect on the Company's financial position, cash flow or results of
operations.
13. FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash
equivalents, accounts receivable, accounts payable, capital lease obligations,
and the convertible subordinated notes. The carrying amounts at December 31,
1998 of these financial instruments approximates their fair value, except for
the convertible subordinated notes for which the fair market value was below
face value.
Major Customers and Concentration of Credit Risk
Accounts receivable consist primarily of amounts due from original equipment
manufacturers, end use customers, and distributors within the Company's
industry. At December 31, 1998 four customers represented 20%, 15%, 14%, and
13% of the total accounts receivable. At December 31, 1997, four customers
represented 16%, 14%, 13% and 11%, 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. Credit losses
have been within management's expectations and an estimate of uncollectible
accounts has been provided for in the financial statements.
Total revenue includes amounts from certain individual customers that exceed
10% of total revenue. Revenue from two customers represented 40% and 15% each
of total revenue for the year ended December 31, 1998, revenue from two
customers represented 35% and 13% each of the total revenue for the year ended
December 31, 1997 and revenue from two customers represented 19% and 12% each
of total revenue for the year ended December 31, 1996.
F-24
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
14. REVENUE BY GEOGRAPHIC AREA
The Company's revenue by geographic area approximated the following:
Year Ended December 31
-----------------------
1998 1997 1996
------- ------- -------
(In thousands)
United States....................................... $18,339 $53,433 $ 9,854
Europe.............................................. 17,900 25,087 8,655
Asia Pacific (primarily Japan and Korea)............ 1,886 6,589 23,718
------- ------- -------
Total............................................... $38,125 $85,109 $42,227
======= ======= =======
15. 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 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. At the annual meeting of Shareholders
held in July 1998, the number of shares of Common Stock reserved for issuance
under the option plan was increased to 8,870,000 and the restriction on the
maximum number which could be granted to UK-based employees was removed. The
shares issued under the Option Plan shall become vested over periods up to
five years and have a maximum term of ten years. A summary of the changes in
the status of options is as follows:
Weighted
Average
Price
Shares Price Range Per
Outstanding Per Share Share
----------- ------------ --------
Outstanding at January 1, 1996............ 662,000 $1.05-$13.63 $4.23
Granted.................................. 416,000 8.88-14.75 12.14
Cancelled................................ (79,000) 1.05-14.75 5.66
Exercised................................ (45,000) 1.05-6.3 2.81
----------
Outstanding at December 31, 1996.......... 954,000 1.05-14.75 7.63
Granted.................................. 1,277,000 7.0-12.25 10.92
Cancelled................................ (502,000) 1.05-14.75 9.38
Exercised................................ (150,000) 1.05-8.88 1.78
----------
Outstanding at December 31, 1997.......... 1,579,000 1.05-14.75 10.16
Granted.................................. 5,462,000 0.05-1.44 0.69
Cancelled................................ (3,997,000) 0.63-14.75 4.43
Exercised................................ --
----------
Outstanding at December 31, 1998.......... 3,044,000 $0.05-$ 1.44 $0.59
==========
At December 31, 1998, 1997 and 1996, 175,000, 302,000, and 370,000 shares
were exercisable at weighted-average prices of $1.44, $7.77 and $5.95,
respectively. Option shares available for grant at December 31, 1998 were
5,559,000.
F-25
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
15. STOCK OPTIONS--(Continued)
Information regarding stock options outstanding as of December 31, 1998 is
as follows:
Options
Options Outstanding Exercisable
-------------------- ----------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Contractual Exercise
Price Range Price Life Shares Price
----------- -------- ----------- ------- --------
Under $5.00............................. 0.59 9.6 174,770 1.44
Fair Value Disclosure
SFAS No. 123, Accounting for Awards of Stock-Based Compensation to Employees
requires the use of option valuation models to provide supplemental
information regarding options granted after 1994. Pro forma information
regarding net income (loss) 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 1998, 1997, and 1996, respectively: Risk-free interest rates
of 5.5%, 6.0%, and 5.9%; a zero dividend yield in all three years; volatility
factors of the expected market price of the Company's Common Stock of 378.1%
for 1998 and 65.7% for 1997 and 1996 and an expected life of the options of
7.0 years for 1998 and 5.5 years for 1997 and 1996. These assumptions resulted
in weighted-average fair values of $0.59, $6.85, and $7.62 per share for stock
options granted in 1998, 1997, and 1996, 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-26
TRIKON TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
15. STOCK OPTIONS--(Continued)
Fair Value Disclosure (continued)
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 loss for 1997 has been adjusted to reflect the cancellation of
non-vested options terminated in conjunction with the restructuring. The pro
forma effect on net income for 1998, 1997, and 1996 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
---------------------------------------
1998 1997 1996
---------- ------------- ------------
Pro forma net income (loss)....... $7,681,000 $(100,946,000) $(95,157,000)
Pro forma earnings (loss) per
common share:
Basic:
Loss applicable to common shares
before extraordinary item...... $ (0.24) $ (6.82) $ (10.10)
Extraordinary item.............. 0.35 -- --
---------- ------------- ------------
Net income (loss)............... $ 0.11 $ (6.82) $ (10.10)
========== ============= ============
Diluted:
Loss applicable to common shares
before extraordinary item...... $ (0.24) $ (6.82) $ (10.10)
Extraordinary item.............. 0.35 -- --
---------- ------------- ------------
Net income (loss)............... $ 0.11 $ (6.82) $ (10.10)
========== ============= ============
F-27
TRIKON TECHNOLOGIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ADDITIONS DEDUCTIONS
--------------------- -------------
AMOUNT
CHARGED TO
BALANCE AT CHARGED TO CHARGED TO RESERVE BALANCE AT
BEGINNING COSTS AND OTHER NET OF END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS REINSTATEMENT PERIOD
- ----------- ---------- ---------- ---------- ------------- ----------
YEAR ENDED DECEMBER 31,
1998
asset accounts:
Allowance for doubtful
items.................. $2,657,000 $ -- $ -- $ 118,000 $2,539,000
YEAR ENDED DECEMBER 31,
1997
asset accounts:
Allowance for doubtful
items.................. $4,732,000 $1,773,000 $ -- $3,848,000 $2,657,000
YEAR ENDED DECEMBER 31,
1996
asset accounts:
Allowance for doubtful
items.................. $ -- $3,402,000 $1,330,000(1) $ -- $4,732,000
- --------
(1) Represents valuation allowance recorded against receivables acquired in
November 16, 1997 acquisition of Trikon Limited.
F-28