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UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C.  20549
 
FORM 10-Q
 
[Mark One]
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2003
 
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
 
TRIKON TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4054321
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
Ringland Way, Newport, Gwent NP18 2TA, United Kingdom
 
              
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant’s telephone number, including area code 44-1633-414-000
 
Not Applicable
Former name, former address and former fiscal year, if changed since last report
 
Indicate by check whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
 
Yes       No  
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.
 
Yes       No  
 
As of May 6, 2003, the total number of outstanding shares of the Registrant’s common stock was 14,032,320.
 
 
Trikon Technologies, Inc.
 
INDEX
 
 
 
PAGE NUMBER
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
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Trikon Technologies, Inc.
 
PART 1 -   FINANCIAL INFORMATION
 
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
 
March 31, 2003
 
December 31, 2002
 
 
 
 
 
 
 
 
(Unaudited)
 
 
(Note A)
 
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
37,729
 
$
42,557
 
Accounts receivable, net
 
 
5,507
 
 
8,948
 
Inventories, net
 
 
18,509
 
 
20,486
 
Prepaid and other current assets
 
 
2,619
 
 
2,671
 
 
 
 
 
Total current assets
 
 
64,364
 
 
74,662
 
Property, equipment and leasehold improvements, net
 
 
18,172
 
 
19,636
 
Demonstration systems, net
 
 
2,912
 
 
2,669
 
Other assets
 
 
185
 
 
221
 
 
 
 
 
Total assets
 
$
85,633
 
$
97,188
 
 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
5,038
 
$
4,510
 
Current portion of long-term debt
 
 
16,389
 
 
8,651
 
Deferred revenue
 
 
981
 
 
1,169
 
Other current liabilities
 
 
3,950
 
 
5,288
 
 
 
 
 
Total current liabilities
 
 
26,358
 
 
19,618
 
               
Long-term debt less current portion
 
 
495
 
 
10,717
 
Pension obligations
 
 
4,771
 
 
5,313
 
Other non-current liabilities.
 
 
955
 
 
1,020
 
 
 
 
 
Total liabilities
 
 
32,579
 
 
36,668
 
Shareholders’ equity:
 
 
 
 
 
 
 
Preferred Stock:
 
 
—
 
 
—
 
Authorized shares — 20,000,000
 
 
 
 
 
 
 
Issued and outstanding — Nil at March 31, 2003 and December 31, 2002
 
 
 
 
 
 
 
Common Stock, no par value:
 
 
254,540
 
 
254,536
 
Authorized shares — 50,000,000
 
 
 
 
 
 
 
Issued and outstanding — 14,031,322 at March 31, 2003 and 14,025,702 at December 31, 2002
 
 
 
 
 
 
 
Accumulated other comprehensive loss
 
 
(8,986
)
 
(8,400
)
Deferred compensation
 
 
(190
)
 
(569
)
Accumulated deficit
 
 
(192,310
)
 
(185,047
)
 
 
 
 
Total shareholders’ equity
 
 
53,054
 
 
60,520
 
 
 
 
 
Total liabilities and shareholders’ equity
 
$
85,633
 
$
97,188
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements.
 
3
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Trikon Technologies, Inc.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
(In thousands, except for share data)
 
 
 
Three Months ended
 
 
 
 
 
 
March 31, 2003
 
March 31, 2002
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Product revenues
 
$
5,104
 
$
8,000
 
Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
 
 
4,340
 
 
5,771
 
Research and development
 
 
2,318
 
 
2,279
 
Selling, general and administrative
 
 
4,800
 
 
4,935
 
Settlement of pension liabilities and related expenses
 
 
706
 
 
—
 
 
 
 
 
 
 
 
12,164
 
 
12,985
 
Loss from operations
 
 
(7,060
)
 
(4,985
)
Foreign currency (losses) gains
 
 
(278
)
 
111
 
Interest income (expense), net
 
 
98
 
 
(7
)
 
 
 
 
Loss before income tax charge (credit)
 
 
(7,240
)
 
(4,881
)
Income tax charge (credit)
 
 
24
 
 
(1,098
)
 
 
 
 
Net loss
 
$
(7,264
)
$
(3,783
)
 
 
 
 
Loss per share data:
 
 
 
 
 
 
 
Basic:
 
$
(0.56
)
$
(0.32
)
Diluted:
 
$
(0.56
)
$
(0.32
)
Weighted average common shares used in the calculation:
 
 
 
 
 
 
 
Basic:
 
 
12,880
 
 
11,720
 
Diluted:
 
 
12,880
 
 
11,720
 
 
See Notes to Condensed Consolidated Financial Statements.
 
4
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Trikon Technologies, Inc.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
 
 
Three Months ended
 
 
 
 
 
 
March 31,
 
March 31,
 
 
 
 
 
 
 
2003
 
2002
 
 
 
 
 
Operating Activities
 
 
 
 
 
 
 
Net loss
 
$
(7,264
)
$
(3,783
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization of property plant and equipment
 
 
1,160
 
 
1,143
 
Amortization of deferred compensation
 
 
379
 
 
379
 
Provision for loss on accounts receivable
 
 
20
 
 
—
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
 
 
3,421
 
 
5,704
 
Inventories (including demonstration systems)
 
 
1,734
 
 
40
 
Other current assets
 
 
52
 
 
731
 
Accounts payable and other liabilities
 
 
(810
)
 
452
 
Income tax payable
 
 
—
 
 
(799
)
Pension obligations
 
 
(542
)
 
—
 
Deferred revenue
 
 
(188
)
 
(3,340
)
 
 
 
 
Net cash (used in) provided by operating activities
 
 
(2,038
)
 
527
 
Investing Activities
 
 
 
 
 
 
 
Purchases of property, equipment and leasehold improvements
 
 
(101
)
 
(114
)
Other assets and liabilities
 
 
(29
)
 
(61
)
 
 
 
 
Net cash used in investing activities
 
 
(130
)
 
(175
)
Financing Activities
 
 
 
 
 
 
 
Issuance of common stock
 
 
4
 
 
32
 
Repayments under bank credit lines
 
 
(1,975
)
 
—
 
Payments on capital lease obligations
 
 
(166
)
 
(151
)
 
 
 
 
Net cash used in financing activities
 
 
(2,137
)
 
(119
)
Effect of exchange rate changes in cash
 
 
(523
)
 
(1,697
)
Net decrease in cash and cash equivalents
 
 
(4,828
)
 
(1,464
)
Cash and cash equivalents at beginning of period
 
 
42,557
 
 
44,667
 
 
 
 
 
Cash and cash equivalents at end of period
 
 
37,729
 
$
43,203
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements.
 
5
 
Trikon Technologies, Inc.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003
 
NOTE A
BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements include the accounts of Trikon Technologies, Inc. (the “Company”) and its subsidiaries.  All material intercompany balances and transactions have been eliminated.  The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  The operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 
 
The balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
 
Commencing in the first quarter of fiscal 2003 the Company has identified, on the face of the statement of operations, foreign currency gains and losses as a separate item after operating result but before income/loss before tax in the current period.  Certain prior-year amounts have been reclassified to conform to current-year presentation.
 
NOTE B
RECENT ACCOUNTING PRONOUNCEMENTS
 
Statement of Financial Accounting Standards No. (“SFAS”) 143, “Accounting for Asset Retirement Obligations,” addresses the accounting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for financial years commencing after June 15, 2002 and the adoption of this statement did not have a material effect on the Company’s financial position or results of operations.
 
SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and provides a single accounting model for the disposal of long-lived assets from continuing and discontinued operations. The Company adopted this standard on January 1, 2002 and the adoption of this statement did not have a material effect on the Company’s financial position or results of operations.
 
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The statement changes the measurement and timing of recognition for exit costs, including restructuring charges, and is effective for any such activities initiated after December 31, 2002. It has no effect on charges recorded for exit activities begun prior to this date. The adoption of this statement did not have a material effect on the Company’s financial position or results of operations.
 
SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure” amends SFAS No. 123, “Accounting for Stock-Based Compensation,” and provides for additional disclosures relating to the pro forma effects of fair value based accounting when accounting is based upon the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company has included the additional disclosures required by this standard in note H to these condensed financial statements.
 
6
 
NOTE C
INVENTORIES
 
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value.  The components of inventory consist of the following:
 
 
 
March 31, 2003
 
December 31, 2002
 
 
 
 
 
 
 
$
’000
 
$
’000
 
Customer service spares
 
$
3,512
 
$
4,327
 
Components
 
 
7,659
 
 
7,878
 
Work in process
 
 
7,338
 
 
7,065
 
Finished goods
 
 
—
 
 
1,216
 
 
 
 
 
 
 
$
18,509
 
$
20,486
 
 
 
 
 
 
NOTE D
COMPREHENSIVE LOSS
 
Comprehensive loss is comprised of the following:
 
 
 
Three Months Ended
 
 
 
 
 
 
March 31, 2003
 
March 31, 2002
 
 
 
 
 
 
 
$
’000
 
$
’000
 
Net loss
 
$
(7,264
)
$
(3,783
)
Foreign currency translation adjustments
 
 
(586
)
 
(1,634
)
 
 
 
 
Comprehensive loss
 
$
(7,850
)
$
(5,417
)
 
 
 
 
 
NOTE E
EARNINGS PER SHARE
 
The following table sets forth the computation of basic and diluted earnings per share:
 
 
 
Three Months Ended
 
 
 
 
 
 
March 31, 2003
 
March 31, 2002
 
 
 
 
 
Numerator ($’000):
 
 
 
 
 
 
 
Net loss
 
$
(7,264
)
$
(3,783
)
 
 
 
 
Denominator (thousands):
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
14,029
 
 
12,869
 
Restricted stock
 
 
(1,149
)
 
(1,149
)
 
 
 
 
Denominator for basic and fully diluted earnings per share
 
 
12,880
 
 
11,720
 
 
 
 
 
 
Basic and diluted earnings per share are calculated in accordance with SFAS 128, “Earnings Per Share,” which specifies the computation, presentation and disclosure requirements for earnings per share. The weighted-average number of shares used to calculate basic earnings per share for each period excludes 1,149,281 unvested shares of restricted common stock issued to our Chairman of the Board in 1998.  Such shares of restricted stock vested on May 14, 2003. 
 
The effect of the Company’s potential common shares from the Company’s stock option program and the restricted stock are excluded from the diluted shares calculation in accordance with SFAS 128 as they are antidilutive when a loss is incurred.
 
7
 
NOTE F
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.
 
NOTE G
SETTLEMENT OF DEFINED BENEFIT PENSION PLAN
 
During the quarter ended March 31, 2003 the Company continued to settle the liabilities of the defined benefit pension plan. A settlement charge in accordance with SFAS 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, of $555,000 was incurred in the quarter. Additionally, the Company incurred  $151,000 for costs relating to the wind up of the plan.
 
A cash contribution was made to the plan in March 2003 of  $1.1 million. At March 31, 2003, pension obligations consisted of:
 
 
 
March 31, 2003
 
December 31, 2002
 
 
 
 
 
 
 
$
’000
 
$
’000
 
Unrecognized loss
 
$
7,220
 
$
7,220
 
Recognized at end of period
 
 
(2,449
)
 
(1,908
)
 
 
 
 
Benefit obligation in excess of plan assets
 
$
4,771
 
$
5,312
 
 
 
 
 
 
NOTE H
STOCK BASED COMPENSATION EXPENSE
 
The Company has estimated the fair value of the options at the date of grant using a Black-Scholes option pricing model which was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. The Company’s employee stock options have characteristics significantly different from those of traded options; therefore, the Black-Scholes option-pricing model may not provide a reliable measure of the fair value of the Company’s options. If compensation expense had been determined based on the grant date fair value as computed under the Black-Scholes option pricing model for awards in the first quarter of the current and prior period quarter in accordance with the provisions of SFAS No. 123 and SFAS No. 148, the Company’s net result and earnings per share would have been reduced to the pro forma amounts indicated below:
 
 
 
Three Months Ended
 
 
 
 
 
 
March 31, 2003
 
March 31, 2002
 
 
 
 
 
Net (loss) income as reported
 
$
(7,264
)
$
(3,783
)
Compensation expense included in determination of reported net income
 
 
—
 
 
—
 
Pro forma compensation expense calculated on the fair value method
 
 
(348
)
 
(338
)
 
 
 
 
Pro forma net (loss) income
 
$
(7,612
)
$
(4,121
)
 
 
 
 
Pro forma (loss) earnings per common share:
 
 
 
 
 
 
 
Basic:
 
$
(0.59
)
$
(0.35
)
Diluted:
 
$
(0.59
)
$
(0.35
)
 
8
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Report. This discussion 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.  The forward-looking statements included herein and any expectations based on such forward-looking statements are subject to risks and uncertainties and other important factors, including, without limitation, the length and severity of the continuing downturn in the semiconductor industry, the long sales cycle and implementation periods for Trikon’s systems, the acceptance of Trikon’s technologies and products, Trikon’s ability to respond to technological change, Trikon’s dependence on a limited number of customers and other factors such as those set forth under the heading risk factors and the other risks and uncertainties described from time to time in our public announcements and SEC filings, including, without limitation, our Quarterly and Annual Reports on Form 10-Q and 10-K, respectively.
 
OVERVIEW
 
We design, manufacture, market and service a broad line of advanced production equipment used to manufacture semiconductor devices.  Our products are used by our customers to manufacture silicon integrated circuits, compound semiconductor devices and circuits and optical waveguides.  These circuits and devices are key components in most advanced electronic products, such as telecommunications devices, consumer and industrial electronics and computers.
 
SIGNIFICANT ACCOUNTING POLICIES
 
General
 
Our discussion and analysis of the financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, income taxes, and warranty and installation obligations. We base our estimates and judgments on historical experience and on various other factors which we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider our accounting policies related to revenue recognition, foreign currency translation, the valuation of inventories including demonstration systems and accounting for the costs of installation and warranty obligations to be critical accounting policies due to the estimation process included in each such policy.
 
Revenue Recognition
 
We recognize revenues from equipment sales when persuasive evidence of an arrangement exists, the price of the goods and services being sold is fixed or determinable, delivery has occurred or services rendered and we are reasonably assured that we will collect payment. Generally, we recognize revenue on shipment, as the equipment is pre-tested in the factory prior to shipment and our terms of business are FOB factory. For new customers, or new products, revenue is recognized on shipment only if the customer attends and approves the pre-shipment testing procedures and we, and the customer, are satisfied that the performance of the equipment, once installed and operated, will meet the customer-defined specifications. Generally, even with new customers, we recognize the revenue on shipment because the customer attends and approves the pre-shipment testing.  The amount of revenue recorded is reduced by the amount of any customer retention (typically between 10% and 20%), which is not payable by the customer until installation is completed and final customer acceptance is achieved. The amount of customer retentions deferred at March 31, 2003 was $1.0 million compared to $1.1 million at December 31, 2002. The provision of installation and commissioning services are not considered essential to the functionality of the equipment.
 
9
 
Equipment sold as demonstration or evaluation units are recognized for revenue on transfer of title and either final acceptance, or satisfactory completion of testing to demonstrate that the equipment meets all the customer defined specifications.
 
Revenue related to spare parts is recognized on shipment and revenue related to service contracts is recognized ratably over the duration of the contracts.
 
Foreign Currency Translation
 
Most of our operations are located within the United Kingdom and most of our costs are incurred in British pounds. However our system sales are generally in US dollars and, to a lesser extent, in euros and we report in US dollars. As a result, fluctuations in the exchange rate between the US dollar and the British pound have a significant effect on our reported earnings and net asset position. We have determined that the functional currency for all UK operations is the British pound and as a result our actual expenses expressed in US dollars will fluctuate with changes in foreign currency exchange rates and result in currency gains and losses, which are charged to net income. Changes in the value of non-US net assets as a result of these movements of foreign currency exchange rates are treated as changes to the cumulative translation adjustment on the balance sheet.
 
Inventory valuation
 
Inventories are stated at the lower of cost or net realizable value, using standard costs which approximate to actual cost. We maintain a perpetual inventory system and continuously record the quantity on hand and standard cost of each product including purchased components sub assemblies and finished goods. We maintain the integrity of the perpetual inventory through a cycle stock count program. Our standard costs are re-assessed at least annually and generally reflect the most recent purchase cost and currently achievable assembly and test labor and overhead rates. We estimate our labor and overhead rates based upon average utilization rates and treat as a period cost abnormal absorption variances, which arise due to low or high production volumes. In the current industry downturn, and low levels of production, significant negative volume variances are being experienced, which has resulted in the lower gross margin as compared to the prior year.
 
We also make provision for slow moving and obsolete inventory and evaluate their adequacy on a quarterly basis. For our work in process and finished goods inventory, which generally consist of specific systems or modules, we compare the inventory on hand to current sales and market forecasts and other information that indicates the ability to identify a purchaser for such equipment.  We apply a formula approach to reserves against raw materials and spares inventory based upon 12 months historic usage, applying different criteria to components that are required for current products, non current products and spares.
 
A major component of the estimate of inventory reserves is our estimate related to future customer demand, technological and or market obsolescence, the equipment operating life at the customer and general semiconductor market conditions. If future customer demand or market conditions are less favorable than our projections then additional inventory write-downs may be required, and these would be reflected in cost of sales in the period the reserves were adjusted.
 
Installation and Warranty
 
Our contracts cover on-site installation services and provide for a warranty of the machine. Generally we accrue for the costs of installation and commissioning services at the time of revenue recognition.  Our standard warranty period varies from 12 to 24 months, depending on a number of factors including the specific equipment purchased. We account for the estimated warranty cost as a charge to cost of sales at the time we recognize revenue. The warranty cost is based upon historic product performance and is based on a rolling 12-month average historic cost per machine per warranty month outstanding. We also recalculate the warranty liability for all remaining systems still under warranty using the most recent historic average and the difference is included as a component of cost of sales. We do not maintain any general reserves for warranty obligations. Actual performance in the future may vary from historic costs, including the identification of defects not currently identified, which could result in adjustments to our warranty reserves in future periods that are more volatile than in recent years.
 
10
 
RESULTS OF OPERATIONS
 
The following table sets forth certain operating data as a percentage of total revenue for the periods indicated:
 
 
 
Three Months Ended
 
 
 
 
 
 
March 31, 2003
 
March 31, 2002
 
 
 
 
 
Product revenues
 
 
100
%
 
100.0
%
Cost of goods sold
 
 
85.0
 
 
72.1
 
 
 
 
 
Gross margin
 
 
15.0
 
 
27.9
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
 
 
45.4
 
 
28.5
 
Selling, general and administrative
 
 
94.1
 
 
61.7
 
Pension liability settlement and other related charges
 
 
13.8
 
 
—
 
 
 
 
 
Total operating expenses
 
 
153.3
 
 
90.2
 
 
 
 
 
Loss from operations
 
 
(138.3
)
 
(62.3
)
Foreign currency (losses) gains
 
 
(5.4
)
 
1.4
 
Interest income (expense), net
 
 
1.9
 
 
(0.1
)
 
 
 
 
Loss before income tax (charge) credit
 
 
(141.8
)
 
(61.0
)
Income tax (charge) credit
 
 
(0.5
)
 
13.7
 
 
 
 
 
Net loss
 
 
(142.3
)%
 
(47.3
)%
 
 
 
 
 
REVENUES.  Product revenues for the three months ended March 31, 2003 decreased by 36% to $5.1 million compared to $8.0 million for the three months ended March 31, 2002. Shipments for the first quarter of fiscal 2003 were $4.9 million compared to $4.7 million in the first quarter of the prior year. Our customers continue to be cautious regarding their capital expenditure plans and orders for our products remained depressed. The protracted and continuing global slowdown in the semiconductor industry will continue to result in depressed levels of revenue for fiscal 2003.
 
Sales outside of the United States accounted for approximately 30% and 73% of total revenues in the three-month periods ended March 31, 2003 and March 31, 2002, respectively.  We expect that sales outside of the United States will continue to represent a significant percentage of our product sales through 2003.  In addition, because of the large unit price associated with our systems, we anticipate that our product sales will continue to be made to a small number of customers in each quarter. The quantity of product shipped may fluctuate significantly from quarter to quarter and the individual customers to whom 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 may also fluctuate significantly from quarter to quarter.
 
Our sales by product are as follows:
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2003
 
2002
 
 
 
 
 
 
 
PVD
 
 
0
 %
 
48
 %
CVD
 
 
51
 %
 
12
 %
Etch
 
 
4
 %
 
18
 %
Spares and service
 
 
45
 %
 
22
 %
 
 
 
 
 
 
Total
 
 
100
 %
 
100
 %
 
 
 
 
 
 
 
11
 
GROSS MARGIN.  The gross margin on product revenues for the three-month period ended March 31, 2003 was 15.0% as compared to 27.8% for the three-month period ended March 31, 2002. The depressed gross margin percentage continues to be attributable to the under utilization of fixed manufacturing and customer support facilities and personnel due to the significant decrease in sales and shipments. 
 
RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expenses for the three months ended March 31, 2003 were $2.3 million or 45.4% of total revenues compared with $2.3 million or 28.5% of total revenues for the three months ended March 31, 2002. The major focus of our research and development efforts continues to be the development of new processes in further advancing our proprietary PVD, CVD and etch technologies, especially the development of our low k technology, as well as adding enhancements to our existing products.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and administrative expenses for the three months ended March 31, 2003 were $4.8 million, or 94.1% of total revenues, compared to $4.9 million, or 61.7% of total revenues, in the three months ended March 30, 2002. The increase in selling, general and administrative expenses as a percentage of revenues is attributable to the significant decrease in revenues in the three-month period ended March 31, 2003.  In absolute dollars, however, the reported selling, general and administrative expenses decreased 3% as compared to the comparable period in the prior year.  However, as we incur most of our expenditures in British pounds, and the average US dollar exchange rate compared to the British pound has weakened by 11% in the first quarter of fiscal 2003 compared to the prior year thereby reducing the stated amount of savings. The cost savings in British pounds in the current quarter compared to the same quarter in the prior year were 14%.
 
RESULT FROM OPERATIONS.  As a result of the decrease in revenue for the three months ended March 31, 2003, combined with the current fixed operating cost structure of the business and the settlement charge and related expenses relating to the pension liability settlement of $706,000, we incurred a loss from operations of $7.1 million in the three months ended March 31, 2003 compared to $5.0 million in the three months ended March 31, 2002.
 

With respect to the pension plan, we are continuing the process to settle the remaining liability and expect that a further non-cash charge of approximately $2.5 million will be included within operating expenses during the second or subsequent quarters, although this charge could increase should actuarial and other factors affecting the settlement of these liabilities change between the balance sheet date and the actual date of final settlement.

In April 2003 we announced a cost reduction program to achieve savings of approximately $1 million per quarter, which we expect to have completed by May 31, 2003. The cost savings achieved will reduce both cost of sales, selling general and administration expenses, and to a lesser extent research and development expenses. There can be no assurance, however, that we will be able to achieve the projected cost savings and new sales initiatives will result in increased selling expenses.
 
 
INTEREST INCOME (EXPENSE), NET.  Net interest income was $98,000 for the three months ended March 31, 2003 compared with net interest expense of $7,000 for the three months ended March 31, 2002. While our average cash balances were similar during the first quarter of the current year and the prior year, our borrowing decreased resulting in less interest expense in the current year as compared to the prior year. Furthermore, we have been more proactive in the management of our cash and cash equivalents, resulting in better rates being earned.
 
INCOME TAXES.  For the three months ended March 31, 2003, we recorded a tax charge of $24,000 compared with a tax credit of $1.1 million for the three months ended March 31, 2002. We expect to report a small tax charge for the fiscal year ending December 31, 2003 which will consist solely of foreign taxes for which no carry forward net operating losses are available. In estimating the tax rate for the three months ended March 31, 2003, we have not provided any benefit for the deferred tax asset arising from operating losses generated that can only be offset against future profits.
 
12
 
LIQUIDITY AND CAPITAL RESOURCES
 
At March 31, 2003, we had $37.7 million in cash and cash equivalents, compared to $42.6 million at December 31, 2002. The primary uses of cash in the three months ended March 31, 2003 were operations, which used $2.0 million. In addition we invested $0.1 million in property, plant and equipment and repaid $2.1 million of our term loan facility with a British bank and our leasing obligations. In addition, currency translation adjustments resulted in a  $0.5 million decrease in our cash and cash equivalents at March 31, 2003.
 
As at March 31, 2003, we had a term loan from a British bank with a balance outstanding of 10.0 million British pounds compared to 11.2 million British pounds at December 31, 2002, (approximately $15.8 million and $18.2 million, respectively at the respective period end exchange rates).  The term loan at March 31, 2003 bears interest at the London Interbank Borrowing Rate (LIBOR) plus 1.25% (presently payable at the rate of 4.93%) per annum and also carries no prepayment penalties. Under the terms of this loan, we are required to pay an additional four equal installments of approximately $2.0 million per quarter commencing in April 2003 and a final repayment of $7.8 million in March 2004.
 
The loan facility includes financial covenants that require we maintain the ratio of net borrowings to net worth at  less than 0.5:1.0. In addition, we must maintain net interest cost at below 10% of profit before interest and taxes. For the six-month period ending June 30, 2003, the net interest cost covenant does not apply, and we will be allowed to incur net interest expense of 250,000 British pounds (approximately $405,000), but we must comply with the covenant for the six-month period ending December 31, 2003. If we incur net interest expense and revenues do not increase in 2003, or costs are not sufficiently reduced, we may not be in compliance with this covenant, and there can be no assurance that the bank will grant a waiver. The loan in question matures in March 2004 and we believe that failure to comply with this covenant will not result in an acceleration of the final repayment of the loan.
 
At March 31, 2003, our cash obligations and commitments relating to our debt obligations and lease payments are as follows ($’000):
 
 
 
Less than 1 year
 
1 to 5 years
 
Greater than 5 years
 
 
 
 
 
 
Bank Loan
 
$
15,800
 
 
—
 
 
—
 
Capital lease obligations
 
 
662
 
 
422
 
 
—
 
Operating lease obligations
 
 
1,710
 
 
4,393
 
 
1,929
 
 
With the exception of the above operating leases we have no off balance sheet financing activities.
 
Our cash balance of $37.7 million combined with cash generated by operations will be the primary sources of liquidity for the company.  During the next 12 months, we expect to use part of our cash balance to fund operations and to repay our 10 million British pounds bank debt.  The amount of cash reserves that we will be required to use to fund our operations will depend on how long the current downturn in the semiconductor industry lasts. If the downturn continues longer than anticipated, we will continue to rely on our cash resources to fund operations, but management believes that the current cash balances and the availability of new credit facilities from our current bank and potential cost reduction efforts, including the current reduction in workforce, will be sufficient to fund our operations for at least the next 12 months. In order to strengthen our cash position further, we may seek to raise additional debt or equity financing, however, given market conditions an equity offering does not appear likely at this time.
 
RISK FACTORS
 
The semiconductor industry is experiencing a protracted and continuing downturn, which has harmed and may continue to harm our sales and profitability.
 
We sell our products to the semiconductor industry, which is subject to sudden variations in product supply and demand. The industry is experiencing a protracted and continuing downturn at this time, the length and severity of which is difficult to estimate, but the downturn has continued to date and may continue for the remainder of 2003.  Management believes it is still unclear as to when conditions in the industry may improve. Our sales and revenues have been harmed significantly by the current downturn. Even after the current downturn ends there can be no
 
13
 
assurance that orders and sales will return to historical levels.
 
Generally, the timing, length and severity of the cycles in the semiconductor industry are difficult to predict. Semiconductor manufacturers may contribute to these cycles by misinterpreting conditions in the industry and over- or under-investing in semiconductor manufacturing capacity and equipment. We have little ability to anticipate or respond effectively to these industry cycles.
 
Downturns in the semiconductor industry often occur in connection with, or anticipation of, maturing product cycles for both semiconductor companies and their customers and declines in general economic conditions. Industry downturns have been characterized by reduced demand for semiconductor devices and equipment, production over-capacity and accelerated declines in average selling prices. During a period of declining demand, to maintain our profitability, we must be able to quickly and effectively reduce expenses and motivate and retain key employees. Many of our expenses are fixed and our ability to reduce other expenses in response to any downturn in the semiconductor industry is limited by our need for continued investment in engineering and research and development and extensive ongoing customer service and support requirements. During fiscal 2001 and 2002 and continuing in fiscal 2003, we have reduced our expenses, but our ability to continue to cut costs without reducing the scope of our business is limited.
 
In addition, the long lead time for production and delivery of our products, and the possibility of customer order cancellations, creates a risk that we may incur expenditures or purchase inventories for products which we cannot sell.
 
At the time the current downturn ends, we may not be in a position to meet our customers’ needs. Industry upturns have been characterized by abrupt increases in demand for semiconductor devices and equipment and production under-capacity. During a period of increasing demand and rapid growth, we must be able to quickly hire, train and assimilate a sufficient number of qualified personnel, particularly engineers, and obtain sufficient components in order to increase production to meet customer demand. If we are unable to increase production on a timely basis in times of increased demand, then  some of our existing or potential customers could place orders with our competitors and, as a result, we may not be able to fully benefit from any industry upturn.
 
We will not be able to compete effectively if we fail to address the rapid technological change in the semiconductor industry.
 
The semiconductor industry and the semiconductor equipment industry are subject to rapid technological change and frequent introductions of enhancements to existing products, and if we are unable to develop and incorporate new technologies in our products, then we will be unable to compete effectively and our business will be materially and adversely affected. Technological trends have had and will continue to have a significant impact on our business. Our results of operations and ability to remain competitive are largely based upon our ability to accurately anticipate customer and market requirements. Accordingly, we may be required to maintain a relatively high level of research and development spending, even at a time of declining sales and profitability, in order to maintain our competitive position.
 
Our success in developing, introducing and selling new and enhanced products depends upon a variety of factors, including:
 
 
 
•
appropriate technology and product selection;
 
 
 
 
 
 
•
timely and efficient completion of product design and development;
 
 
 
 
 
 
•
timely and efficient implementation of manufacturing and assembly processes;
 
 
 
 
 
 
•
effective sales and marketing;
 
 
 
 
 
 
•
product performance in the field; and
 
 
 
 
 
 
•
product support and service.
 
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We may not be able to accurately forecast or respond to commercial and technical trends in the semiconductor industry or respond to specific product announcements by our competitors. Our competitors may be developing technologies and products that are more effective or that achieve more widespread acceptance. In addition, we may incur substantial costs to ensure the functionality and reliability of our current and future products. If our products are unreliable or do not meet our customers’ expectations, then reduced orders, higher manufacturing costs, delays in collecting accounts receivable or additional service and warranty expense could result. We may also experience delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements. Significant delays can occur between a product’s introduction and the commencement of volume production of that product. Any of these events could negatively affect our ability to generate the return we intend to achieve on our investments in these new products.
 
We expect the semiconductor industry to migrate to the further use of copper and will need to continue to adapt our products for use with copper and copper processes. If we fail to make our products compatible with copper and copper processes at the time our competitors offer copper compatible products, our revenues and market share will be negatively affected.
 
The semiconductor industry also has historically moved to larger diameter wafers requiring new equipment as a strategy to reduce manufacturing costs. The maximum diameter of silicon wafers used in production is increasing from 200mm to 300mm. While we have already shipped 300mm systems for our CVD products, we continue to develop the technology and solutions for our PVD and etch systems. There can be no assurance, however, that we will be able to complete the development of 300mm systems in time to meet market demand. If our current products and our 300mm systems are not competitive or available at the correct time, we may lose customers or fail to gain new business from potential customers, which would have a material adverse effect on our revenues and net earnings.
 
We believe that our technology for the deposition of low k dielectrics is advanced compared to our competitors and we are dedicating significant resources to continue to lead in this field and to achieve the commercial sales of our low k systems. However, the physical characteristics of low k films make the manufacturing process significantly more difficult than with existing insulating materials and, as a result, device manufacturers have been slow to adopt the use of low k materials and this adoption has been delayed during the current downturn. Device manufacturers continue to find alternative methods to manufacture devices at smaller feature sizes, and forgo the development and use of low k materials. Also, there can be no assurance that the industry will adopt a CVD method for the deposition of low k films. Other technologies for which we do not manufacture equipment could also be used for the deposition of low k films. If we fail to continue to develop our low k CVD solution to achieve all the specifications required by device manufacturers, or our competitors develop competing low k solutions, then our ability to grow our revenues and market share from these products would be negatively affected.
 
Our operational results could be negatively affected by currency fluctuations.
 
We are based in the United Kingdom, and most of our operating expenses are incurred in British pounds. Our revenues, however, are generally denominated in US dollars, and to a lesser extent in euros, and we report our financial results in US dollars. Accordingly, if the British pound increases in value against the US dollar, our expenses as a percentage of revenues will increase and gross margins and net income will be negatively affected.
 
Our competitors have greater financial resources and greater name recognition than we do and therefore may compete more successfully.
 
We face competition or potential competition from many companies with greater resources than ours. If we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.
 
Virtually all of our primary competitors in the silicon-based semiconductor equipment market are substantially larger companies and some of them have broader product lines than ours. They have well-established reputations in the markets in which we compete, greater experience with high volume manufacturing, broader name recognition, substantially larger customer bases, and substantially greater financial, technical, manufacturing and marketing resources than we do. The dominant silicon-based semiconductor equipment manufacturers may determine to enter, or attempt to increase their market share, in the compound semiconductor equipment market. In each market, we
 
15
 
also face potential competition from new entrants, including established manufacturers in other segments of the semiconductor capital equipment market who may decide to diversify into our market segments of CVD, PVD and plasma etch.
 
Semiconductor manufacturers are loyal to their current semiconductor equipment supplier, which may make it difficult for us to obtain new customers.
 
We believe that once a semiconductor manufacturer has selected a supplier’s equipment for a particular fabrication line, the manufacturer often will continue to rely on that supplier’s equipment for future requirements, including new generations of similar products. If we are unable to sell our products to potential customers who currently are using other suppliers’ equipment, it could be difficult for us to increase our revenues or market share. Changing from one equipment supplier to another may be expensive and may require a substantial investment of resources by the customer. Accordingly, we may experience difficulty in achieving significant sales to a customer using another supplier’s equipment. At the same time, however, we cannot assure you that our existing customers will continue to use our equipment in the future.
 
Our products generally have long sales cycles and implementation periods, which increase our costs of obtaining orders and reduce the predictability of our earnings.
 
Our products are technologically complex. Prospective customers generally must commit significant resources to test and evaluate our products and to install and integrate them into larger systems. In addition, customers often require a significant number of product presentations and demonstrations, in some instances evaluating equipment on site, before reaching a sufficient level of confidence in the product’s performance and compatibility with their requirements to place an order. As a result, our sales process is often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new products. The sales cycles of our products often last for many months or even years. Longer sales cycles require us to invest significant resources in attempting to make sales and delay the generation of revenue. In addition, we may incur significant costs in supporting evaluation equipment at our customers’ facilities.
 
Long sales cycles also subject us to other risks, including customers’ budgetary constraints, internal acceptance reviews and cancellations. In addition, orders expected in one quarter could shift to another because of the timing of customers’ purchase decisions. The time required for our customers to incorporate our products into their manufacturing processes can vary significantly with the needs of our customers and generally exceeds several months, which further complicates our planning processes and reduces the predictability of our operating results.
 
We depend upon sole suppliers for certain key components.
 
We depend on a number of sole suppliers for key components used in the manufacture of our products. If we are unable to obtain timely delivery of sufficient quantities of these components, we would be unable to manufacture our products to meet customer demand, unless we are able to locate replacement components. Most significantly, our Sigma® fxP™, Planar™ fxP™ and Omega™ fxP™ systems are designed around an automation module supplied by Brooks Automation. Due to the high cost of these modules we keep very few in inventory. If Brooks Automation fails to deliver the component on a timely basis, delivery of our Sigma® fxP™, Planar™ fxP™ and Omega™ fxP™ systems will be delayed and sales may be lost. If Brooks Automation is unable to deliver any such modules for a prolonged period of time, we will have to redesign our Sigma® fxP™ and Planar™ fxP™ systems so that we may utilize other wafer transport systems. There can be no assurance that we will be able to do so, or that customers will adopt the redesigned systems.
 
Our final assembly and testing is concentrated in one facility.
 
Our final assembly and testing activity is concentrated in our facility in Newport, United Kingdom. We have no alternative facilities to allow for continued production if we are required to cease production in our facility, as a result of a fire, natural disaster or otherwise. In such event, we will be unable to produce any products until the facility is replaced. Any such interruption in our manufacturing schedule could cause us to lose sales and customers.
 
16
 
If we are unable to hire and retain a sufficient number of qualified personnel, our ability to manage growth will be negatively affected.
 
Our business and future operating results depend in part upon our ability to attract and retain qualified management, technical, sales and support personnel for our operations on a worldwide basis. Competition for qualified personnel is intense, and we cannot guarantee that we will be able to continue to attract and retain qualified personnel. Our operations could be negatively affected if we lose key executives or employees or are unable to attract and retain skilled executives and employees as needed.
 
Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights from challenges by third parties.
 
Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, non-disclosure and other contractual agreements and technical measures to protect our proprietary rights.
 
There can be no assurance that patents will be issued on our pending patent applications or that competitors will not be able to ascertain legitimately proprietary information embedded in our products that is not covered by patent or copyright. In such case, we may be precluded from preventing the competitor from making use of such information. In addition, should we wish to assert our patent rights against a particular competitor’s product, there can be no assurance that any claim in any of our patents will be sufficiently broad nor, if sufficiently broad, any assurance that our patent will not be challenged, invalidated or circumvented, or that we will have sufficient resources to prosecute our rights.
 
Claims or litigation regarding intellectual property rights could seriously harm our business or require us to incur significant costs.
 
In recent years, there has been significant litigation in the United States in the semiconductor equipment industry involving patents and other intellectual property rights. There can be no assurance that infringement claims will not be asserted against us in the future or if such claims are made, that we would be able to defend against such claims successfully or, if necessary, obtain licenses on reasonable terms.
 
Any claim that our products infringe the proprietary rights of others would force us to defend ourselves and possibly our customers against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. These lawsuits, regardless of their outcome, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation could force us to do one or more of the following:
 
 
 
•
lose or forfeit our proprietary rights;
 
 
 
 
 
 
•
stop manufacturing or selling our products that incorporate the challenged intellectual property;
 
 
 
 
 
 
•
obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms or at all and may involve significant royalty payments;
 
 
 
 
 
 
•
pay damages, including treble damages and attorney’s fees in some circumstances; or
 
 
 
 
 
 
•
redesign those products that use the challenged intellectual property.
 
If we are forced to take any of the foregoing actions, our business could be severely harmed.
 
17
 
Our sales are characterized by low volume sales of high cost systems and we derive a significant percentage of our revenue from sales to a small number of customers. If we are not able to retain these customers, or if these customers reschedule, reduce or cancel orders, then our revenues will be reduced and our financial results will suffer.
 
To date, our product sales in most fiscal years have been highly concentrated among a small number of customers. We may not be able to retain our key customers or these customers may cancel purchase orders or reschedule or decrease their level of purchases from us. Any substantial decrease or delay in sales to one or more of our key customers could harm our sales and financial results. There can be no assurance that these customers will continue to purchase systems and technology from us at current levels, or at all. Sales to these large customers have varied significantly from year to year and will continue to fluctuate in the future. These sales also may fluctuate significantly from quarter to quarter.
 
Our operations are subject to health and safety and environmental laws that may expose us to liabilities for noncompliance.
 
We are subject to a variety of governmental regulations relating to the use, storage, discharge, handling, manufacture and disposal of all materials present at, or our output from, our facilities, including the toxic or other hazardous chemical by-products of our manufacturing processes. Environmental claims against us or our failure to comply with any present or future regulations could result in:
 
 
 
•
the assessment of damages or imposition of fines against us;
 
 
 
 
 
 
•
the suspension of production of our products; or
 
 
 
 
 
 
•
the cessation of our operations.
 
New regulations could require us to purchase costly equipment or to incur other significant expenses. Our failure to control the use or adequately restrict the discharge of hazardous substances could subject us to future liabilities, which could negatively affect our earnings and financial position.
 
Any acquisitions we may make could disrupt our business and severely harm our financial condition.
 
From time to time, we may consider investments in complementary companies, products or technologies. While we have no current agreements or specific plans to do so, we may acquire businesses, products or technologies in the future. In the event of any future acquisitions, we could:
 
 
 
•
issue stock that would dilute our current stockholders’ percentage ownership;
 
 
 
 
 
 
•
incur debt;
 
 
 
 
 
 
•
assume liabilities;
 
 
 
 
 
 
•
incur amortization expenses related to tangible assets and other intangible assets; or
 
 
 
 
 
 
•
incur large and immediate accounting write-offs.
 
Our operation of any acquired business will also involve numerous risks, including:
 
 
 
•
problems integrating the purchased operations, technologies or products;
 
 
 
 
 
 
•
unanticipated costs and liabilities for which we are not able to obtain indemnification from the sellers;
 
 
 
 
 
 
•
diversion of management’s attention from our core business;
 
 
 
 
 
 
•
adverse effects on existing business relationships with customers;
       
 
 
•
risks associated with entering markets in which we have no or limited prior experience; and
 
 
 
 
 
 
•
potential loss of key employees, particularly those of the purchased organizations.
 
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ITEM 3.
QUANTITATIVE 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 of 1933 and Section 21E of the Exchange Act of 1934.  Such statements include declarations regarding the intent, belief or current expectations of we and its management and involve risks and uncertainties.  Actual results could differ materially from those projected in the forward-looking statements.
 
Our earnings and cash flow are subject to fluctuations in foreign currency exchange rates.  Significant factors affecting this risk include our 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.  We constantly monitor currency exchange rates and match currency availability and requirements whenever possible.  We 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 March 31, 2003 and December 31, 2002 we did not have any 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 second quarter of 2003 would have no material effect on revenues, which are primarily expressed in United States dollars and would increase operating costs and reduce cash flow by approximately $1.3 million.  The same increase in the value of the British pound would increase the value of the net assets of we expressed in United States dollars by approximately $5.4 million.  The effect of the hypothetical change in exchange rates ignores the effect this movement may have on other variables including competitive risk.  If it were possible to quantify this impact, the results could well be different from 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 4.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
An evaluation was performed under the supervision and with the participation of our management team, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of this report. Based on that evaluation, our management, including the CEO and CFO, have concluded that our disclosure controls and procedures were effective as of March 31, 2003.
 
Changes in Internal Controls
 
There were no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to their most recent evaluation.
 
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part on likely future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
 
19
 
PART II
OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
 
 
As of May 14, 2003 there were no material pending legal proceedings to which we, our subsidiaries are a party. From time to time we become involved in ordinary, routine or regulatory legal proceedings incidental to our business.
 
 
ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS
 
 
 
Not Applicable
 
 
ITEM 3.
DEFAULTS UNDER SENIOR SECURITIES
 
 
 
Not Applicable
 
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 
 
Not applicable
 
 
ITEM 5.
OTHER INFORMATION
 
 
 
Under section 10A(i) of the securities Exchange act of 1934, as added by section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for listing the non audit services approved in the first quarter of 2003 by our Audit Committee to be performed by Ernst & Young LLP, our external independent auditor. In order to reduce the amount of non-audit work performed by Ernst & Young LLP, we determined to retain a different firm to assist with all tax matters. The audit committee authorized a payment of  $1,600 to Ernst and Young LLP to transfer historic tax compliance information to KPMG LLP, who was retained during the quarter to provide tax compliance and consulting services on an ongoing basis.
 
 
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
 
 
 
(a)
 
The following exhibits are included herein:
 
 
 
 
 
 
 
99.1*
Certification of the Chief Executive Officer of Trikon Technologies, Inc., dated May 14, 2003, pursuant to 18 U.S.C section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
99.2*
Certification of the Chief Financial Officer of Trikon Technologies, Inc., dated May 14, 2003, pursuant to 18 U.S.C section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
(b)
 
Reports on Form 8-K:
 
 
 
 
 
 
 
We filed a current report on form 8K on March 28, 2003.
 
 
 
 
 
* Filed herewith.
 
20
 
Trikon Technologies, Inc.
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
TRIKON TECHNOLOGIES, INC.
 
Date: May 14, 2003
/s/ JIHAD KIWAN
 
Jihad Kiwan
 
Chief Executive Officer, Chief Operating Officer, President and Director
 
 
 
/s/ WILLIAM J CHAPPELL
 
William J Chappell
 
Chief Financial Officer
 
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CERTIFICATIONS
 
I, Jihad Kiwan, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of Trikon Technologies, Inc.;
 
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date: May 14, 2003
 
 
/s/ JIHAD KIWAN
 
Jihad Kiwan
 
Chief Executive Officer, Chief Operating Officer
 
and President
 
22
 
CERTIFICATIONS (cont’d)
 
I, William John Chappell, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of Trikon Technologies, Inc.;
 
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date: May 14, 2003
 
 
/s/ WILLIAM J CHAPPELL
 
William J Chappell
 
Chief Financial Officer and Senior Vice President
 
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