UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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
TRIKON TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4054321
- ------------------------------------------------- -----------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
Ringland Way, Newport, Gwent NP6 2TA, United Kingdom
- ---------------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 441-633-414-000
-----------------------------
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 X No ___
---
As of August 12, 1998, the total number of outstanding shares of the
Registrant's common stock was 93,723,829.
1
TRIKON TECHNOLOGIES, INC.
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheets
at June 30, 1998 and December 31, 1997..................... 3
Unaudited Condensed Consolidated Statements of
Operations for the Three Months ended June 30, 1998 and
1997 and for Six Months ended June 30, 1998 and 1997....... 6
Unaudited Condensed Consolidated Statements of Cash
Flows for the Six Months ended June 30, 1998 and 1997...... 7
Notes to Unaudited Condensed Consolidated Financial
Statements................................................. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 21
Item 2. Changes in Securities and Use of Proceeds.................. 21
Item 5. Other Information.......................................... 21
Item 6. Exhibits and Reports on Form 8-K........................... 22
SIGNATURE PAGE............................................................ 23
EXHIBITS.................................................................. 24
2
TRIKON TECHNOLOGIES, INC.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, December 31,
1998 1997(1)
-------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................... $13,405 $ 9,260
Accounts receivable, net of reserves.......................... 9,460 18,842
Inventories................................................... 18,961 23,870
Other current assets.......................................... 2,650 1,622
------- -------
Total current assets.......................................... 44,476 53,594
Property, equipment and leasehold improvements, net.............. 20,961 22,140
Demonstration systems, net....................................... 3,542 1,227
Bond financing costs, net........................................ 97 2,313
Other assets..................................................... 401 416
------- -------
Total assets..................................................... $69,477 $79,690
======= =======
See Notes to Unaudited Condensed Consolidated Financial Statements
3
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, December 31,
1998 1997(1)
---- ---------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Convertible subordinated notes.................................... $ -- $ 86,250
Accounts payable and accrued expenses............................. 5,169 9,765
Sales returns payable............................................. 11,468 11,468
Restructuring costs............................................... 2,520 3,952
Other current liabilities......................................... 6,420 7,953
--------- ---------
Total current liabilities......................................... 25,577 119,388
Convertible subordinated notes........................................ 4,147 --
Other non-current liabilities ....................................... 6,046 5,245
--------- ---------
Total liabilities..................................................... 35,770 124,633
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 - 3,125,000
Issued and outstanding - 0 at June 30, 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 - 3,000,000
Issued and outstanding 2,855,754 at June 30, 1998
and none at December 31, 1997................................ 28,558 --
Series I Junior Participating Preferred Stock, no par
value, $0.001 per share liquidation preference
Designated Shares - 44,000
Issued and outstanding - 43,739.109 at June 30, 1998
and 0 at December 31, 1997................................... 28,868 --
Common Stock, no par value
Authorized shares - 50,000,000
Issued and outstanding - 49,984,726 at June 30,
1998 and 15,147,115 at December 31, 1997..................... 170,104 137,767
Cumulative translation adjustment..................................... (272) (745)
Deferred Compensation................................................. (7,400) --
Accumulated deficit................................................... (186,151) (201,314)
--------- ---------
Total shareholders' equity (deficit).................................. 33,707 (44,943)
--------- ---------
Total liabilities and shareholders' equity (deficit).................. $ 69,477 $ 79,690
========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements
4
(1) The Condensed Consolidated Balance Sheet at December 31, 1997 has been
derived from the audited 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.
See Notes to Unaudited Condensed Consolidated Financial Statements
5
TRIKON TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues:
Product sales........................... $ 8,292 $ 19,111 $ 15,495 $ 31,063
License revenues........................ -- -- 10,000 --
----------- ----------- ----------- -----------
8,292 19,111 25,495 31,063
Costs and expenses:
Cost of goods sold...................... 6,546 12,618 11,181 22,467
Research and development................ 2,337 4,251 4,373 9,154
Selling, general and administrative..... 5,455 8,345 10,257 15,380
In-process technology................... -- 2,974 -- 2,974
Restructuring costs..................... 1,843 -- 1,843 --
Amortization of intangibles............. -- 904 -- 1,808
----------- ----------- ----------- -----------
16,181 29,092 27,654 51,783
----------- ----------- ----------- -----------
Loss from operations....................... (7,889) (9,981) (2,159) (20,720)
Other:
Interest expense, net................... (948) (2,421) (2,889) (4,766)
----------- ----------- ----------- -----------
Loss before income tax
provision (benefit)................... (8,837) (12,402) (5,048) (25,486)
Income tax provision (benefit).......... -- (1,441) (217) (2,906)
----------- ----------- ----------- -----------
Net loss before extraordinary item......... (8,837) (10,961) (4,831) (22,580)
Extraordinary item 20,293 -- 20,293 --
----------- ----------- ----------- -----------
Net income (loss) $ 11,456 $ (10,961) $ 15,462 $ (22,580)
=========== =========== =========== ===========
Net income (loss) applicable
to common shares........................ $ 11,158 $ (10,961) $ 15,164 $ (22,580)
=========== =========== =========== ===========
Earnings (loss) per common share data:
Basic:
Loss applicable to common shares before
extraordinary gain.................... $ (0.18) $ (0.76) $ (0.15) $ (1.57)
Extraordinary gain...................... 0.41 -- 0.62 --
----------- ----------- ----------- -----------
Net income (loss)....................... $ 0.23 $ (0.76) $ 0.47 $ (1.57)
=========== =========== =========== ===========
Diluted:
Loss applicable to common shares before
extraordinary gain..................... $ (0.18) $ (0.76) $ (0.16) $ (1.57)
Extraordinary gain...................... $ 0.40 $ -- $ 0.61 --
----------- ----------- ----------- -----------
Net income (loss)....................... $ 0.22 $ (0.76) $ 0.45 $ (1.57)
=========== =========== =========== ===========
Average common shares used in
the calculation: - Basic................. 49,794 14,433 32,566 14,378
- Diluted............... 51,226 14,433 33,335 14,378
See Notes to Unaudited Condensed Consolidated Financial Statements
6
TRIKON TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six months ended
------------------------------------
June 30, June 30,
1998 1997
------------- ---------
OPERATING ACTIVITIES
Net income (loss)............................................... $ 15,462 $(22,580)
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......................... 1,948 3,359
Amortization of intangibles..................................... 7 1,808
Amortization of financing costs................................. 300 349
Amortization of deferred compensation........................... 185
In-process technology........................................... -- 2,974
Deferred income taxes........................................... -- (3,048)
Changes in operating assets and liabilities:
Accounts receivable............................................. 9,382 (2,339)
Inventories..................................................... 4,909 11,549
Demonstration systems........................................... (2,315) (1,629)
Other current assets............................................ (1,013) 797
Accounts payable, other accrued expenses and other current (4,224) (11,042)
liabilities....................................................
Other liabilities............................................... 704 2,370
Other........................................................... 473 --
-------- --------
Net cash generated (used) in operating activities............... 5,525 (17,432)
INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements.......................................... (520) (6,175)
Proceeds from sales of short-term investments............. -- 824
Purchases of short-term investments....................... -- (2,472)
Other long-term assets.................................... -- (867)
------- --------
Net cash used in investing activities..................... (520) (8,690)
FINANCING ACTIVITIES
Net borrowings (repayments) under bank credit lines....... -- 6,534
Costs relating to Exchange Offer.......................... (700) --
Proceeds from sale of preferred stock..................... -- 15,775
Proceeds from sale of common stock and warrants........... -- 2,260
Payments on capital lease obligations..................... (160) (281)
------- --------
Net cash provided by (used) in financing activities....... (860) 24,288
------- --------
Net increase (decrease) in cash and cash equivalents...... 4,145 (1,834)
Cash and cash equivalents at beginning of period.......... 9,260 20,188
------- --------
Cash and cash equivalents at end of period................ $13,405 $ 18,354
======= ========
See Notes to Unaudited Condensed Consolidated Financial Statements
7
TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited 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 of 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 accruals) considered necessary for a fair presentation have
been included. The operating results for the six months ended June 30, 1998,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in Trikon Technologies,
Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December
31, 1997.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. During 1997, following significant losses
from operations, negative cash flows from operating activities, and violations
of debt covenants, the Company's working capital facility was terminated (see
Note G). The Company does not currently have a credit facility with any
lenders. Management's plans with respect to these conditions include the sale
of licenses, as discussed in Note I, restructuring of its operations,
obtaining a new working capital facility and the Exchange Offer (as defined
below) discussed in Note J. Management believes that the successful
implementation of these actions 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.
NOTE B: INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The components of inventory consist of the following (in thousands):
June 30, December 31,
1998 1997
------- -------
Components.......................... $ 6,665 $ 7,864
Work in process..................... 12,296 13,680
Finished goods...................... -- 2,326
------- -------
$18,961 $23,870
======= =======
NOTE C: DEMONSTRATION SYSTEMS
Demonstration systems represent completed systems at 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 upon
evaluation period, provided that the equipment performs to specifications,
management expects that the customer will purchase the system, though they are
not obligated to do so. If the system is returned, it is refurbished for resale
or used for research and development. 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 they are not sold after one year.
NOTE D: PMT CVD PARTNERS, L.P. AGREEMENT
In the first quarter of fiscal 1997, the Company determined that certain
characteristics of the CVD technology of Trikon Limited (as defined below) known
as "Flowfill," were superior to the high density plasma CVD processes then being
pursued by a limited partnership sponsored by the Company (the "Limited
Partnership") pursuant to a R&D Agreement (the "R&D Agreement") entered into as
of March 29, 1996 between the Limited Partnership and the Company (under which
the Company performed all research and development work for the Limited
Partnership). The Company decided to discontinue further research and
development work under the R&D Agreement and instead focus its consolidated
efforts, on its own behalf and not on behalf of the Limited Partnership, upon
the Flowfill(R) CVD technology used in the equipment developed and manufactured
by Trikon Technologies
8
TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (CONTINUED)
Limited and Trikon Equipments Limited (collectively "Trikon Limited").
Accordingly, a settlement of any and all rights and claims by the limited
partners of the Limited Partnership was made on June 30, 1997 ("CVD Purchase
Agreement") 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 the Company's Common Stock (the "CVD Partnership 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 CVD Partnership Shares 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 comprising 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 did 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 would
become obligated to the holders of CVD Partnership Shares for the liquidated
damages for the period between November 1, 1997, and March 15, 1998, in the
amount of $335,000. As of June 30, 1998, the Company had not caused a
registration statement to become effective.
NOTE E: INCOME TAXES
The tax benefit in the three and six months ended June 30,1998 represents the
combination of a foreign tax benefit associated with Trikon Limited's
operating loss and no tax liability on domestic profits, because they are
fully absorbed by tax losses brought forward. In the first and second fiscal
quarter of 1997, 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. For these reasons, the effective tax rates differ from the statutory
federal tax rate. The Company's ability to use its domestic and foreign net
operating losses and credit carryforwards 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.
Upon closing of the Exchange Offer (see Note J), 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
carryforward. Due to the limitation, a substantial amount of net operating
loss carryforward 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 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.
NOTE F: NET INCOME (LOSS) PER SHARE
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," which changes the method
previously used to compute earnings per share and requires restating all prior
periods. Under the new requirements, the dilutive effect of stock options are
excluded from the calculation of basic earnings per share and included in the
calculation of diluted earnings per share, when dilutive. Diluted earnings per
share for the three and six months ended June 30, 1998 exclude the effects of
all outstanding stock options because the exercise price of such stock options
exceeded the market price of the underlying stock, exclude the restricted
shares issued to the Company's Chairman of the Board (see Note J) because under
the treasury stock method these shares are anti-dilutive and assume the Series
G Preferred Stock was converted into 2,962,032 shares of
9
TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (CONTINUED)
Common Stock as of January 1, 1998 under the if-converted method. Diluted
earnings per share for the three and six months ended June 30, 1997 exclude
the effects of all options and convertible preferred stock because such
securities were anti-dilutive for the periods. Basic and diluted earnings
(loss) per share under SFAS No. 128 for the three and six months ending June
30, 1997 were the same as previously reported as primary loss per share. Net
income and the loss before extraordinary item used in computing basic and
diluted per share amounts has been adjusted for the accretion of $298,000 of
dividends on the Series G Preferred Stock. The weighted average shares
outstanding used in the computation of the basic and diluted per share amounts
assumes the Series I Preferred Stock had been converted into Common Stock at
the date of issuance.
NOTE G: LINE OF CREDIT AND LONG-TERM DEBT
During the period from November 14, 1996 to November 12, 1997, the Company had a
senior secured credit facility with certain domestic and U.K. lenders (the
"Working Capital Facility") that permitted the Company and its subsidiaries to
borrow an aggregate of up to $35.0 million, subject to borrowing base
limitations, based upon eligible accounts receivable. The Company was out of
compliance with certain financial ratios and covenants established under the
Working Capital Facility at December 31, 1996, March 31, 1997, June 30, 1997 and
September 30, 1997.
On November 12, 1997, in connection with the sale of licenses to Applied
Materials, Inc. ("Applied Materials") the Company entered into a pay-off
agreement with its domestic and U.K. lenders relating to the Working Capital
Facility (the "Pay-off Agreement). Under the Pay-off Agreement, among other
things, the Company made payments in the aggregate of approximately $12.5
million (which included all outstanding principal and interest due at November
12, 1997) to its lenders under the Working Capital Facility, the lenders under
the Working Capital Facility released all of their liens on the assets of the
Company and the Working Capital Facility was terminated. In addition, 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 $1.4 million to the U.K. lender. As
of June 30, 1998, the cash collateral provided was $1.1 million.
In connection with the acquisition of Trikon Limited, the Company issued
$86,250,000 principal amount of Convertible Subordinated Notes (the "Convertible
Notes"). Interest on the Convertible Notes was 7-1/8%, which was payable in
semi-annual installments beginning on April 15, 1997. 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 holders
of the Convertible Notes.
Until May 14,1998, the Convertible Notes contained certain provisions which,
upon the occurrence of an "Event of Default" (as defined in the Convertible
Notes) could cause the Convertible Notes to become due and payable immediately.
Such an Event of Default would occur if, among other things, the Company were to
default on the Working Capital Facility or any other secured indebtedness, as
defined in the Convertible Notes, caused by the failure to pay principal and
interest payments when due or resulting from the acceleration of any such
indebtedness prior to its express maturity in excess of $10.0 million.
On May 14, 1998, the Company accepted for exchange approximately $82.1 million
principal amount of the Convertible Notes duly tendered in the Exchange Offer
described in Note J below.
As outlined in the offering document, disseminated in connection with the
Exchange Offer, the Company did not pay interest of $3.3 million accrued to and
due on April 15, 1998. Interest was paid on May 15, 1998 to the holders of the
Convertible Notes which did not accept the Exchange Offer. In accordance with
the terms of the Exchange Offer, any accrued and unpaid interest on Convertible
Notes accepted in the Exchange Offer will not be paid and has been included in
the calculation of the extraordinary gain arising on the exchange of the
Convertible Notes.
NOTE H: PREFERRED STOCK
During the quarter ended June 30, 1997, the Company commenced a private offering
(the "Private Placement") of shares of its newly-authorized Series G Preferred
Stock together with three-year warrants to purchase Common Stock at an exercise
price of $8.00 per share (the "Warrants"). 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
10
TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (CONTINUED)
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 J),
the Company accepted for conversion 2,873,143 shares of Series G Preferred
Stock, or approximately 97% of the outstanding shares, duly tendered in the
Exchange Offer. In accordance with the terms of the Certificate of
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 other outstanding shares of Series G Preferred
Stock.
NOTE I: LICENSE AGREEMENTS
On November 12, 1997, the Company granted non-exclusive, worldwide, paid-up
licenses of its MORI(TM) source and Forcefill(R) PVD technologies to Applied
Materials. Under the terms of the license agreements and related technology
transfer agreements, Applied Materials paid the Company $29.5 million, $26.5
million of which was paid in 1997 and an additional $3 million of which was paid
in the first quarter of 1998 upon completion of the technology transfer. Under
one of the license agreements, Applied Materials also purchased four MORI(TM)
sources for $0.5 million prior to December 31, 1997.
On March 18, 1998, the Company granted a non-exclusive, worldwide license of its
MORI(TM) source technology to Lam Research. Under the terms of the license
agreement, Lam Research will pay up to $20.0 million, $10.0 million of which was
paid in the first half of 1998 and $10.0 million of which consists of contingent
payments and royalties. License revenue of $10 million has been recognized in
the consolidated income statement for the three months ended March 31, 1998.
The license agreements with Applied Materials and Lam Research do not preclude
Trikon from utilizing, or licensing to other third parties, the licensed
technology.
NOTE J: 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 Warrants, and filed a Schedule 13E-4 with the Securities and Exchange
Commission. The Exchange Offer expired at 5:00 P.M., New York City time, on May
14, 1998, and immediately thereafter, the Company accepted for exchange or
conversion all validly tendered Convertible Notes, Series G Preferred Stock and
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
Warrants (approximately 97% of the 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 $82,103,000 principal amount of Convertible Notes tendered have been
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 Warrants have been exchanged for 7,161,002 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 shall 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 is
subject to automatic conversion 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 has
agreed to issue 5,015,811 million 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. The
restricted stock issued
11
TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (CONTINUED)
to the Chairman of the Board is valued at $7.6 million, based upon average
traded prices immediately before and after the grant. This amount has been
accounted for as an increase to Common Stock and a charge to deferred
compensation within shareholders' equity. The deferred compensation is
being amortized on a straight line basis over a five year period and $0.2
million has been charged to selling, general and administrative expenses
during the three and six months ended June 30, 1998. Upon conversion of all
Series I Preferred Stock into Common Stock, the stock issued to the Chairman
of the Board represented approximately 11,500,000 shares, or 12% of
outstanding Common Stock (after giving effect to the elimination of the
restrictions on the Chairman of the Board's stock).
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.
After June 30, 1998 the Company agreed to exchange the remaining 22,222
Warrants on the same terms as those already tendered.
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. Interest was paid to the
holders of Convertible Notes which did not accept the Exchange Offer on May 15,
1998. In accordance with the terms of the Exchange Offer, any accrued and
unpaid interest on Convertible Notes accepted in the Exchange Offer will not be
paid and has been included in the calculation of the extraordinary gain arising
on the exchange of the Convertible Notes.
The Exchange Offer has been accounted for under SFAS No. 15, "Troubled Debt
Restructuring."
NOTE K: EMPLOYMENT AGREEMENTS
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 the Chairman of the Board.
The bonus is not payable prior to June 30, 1999 and is conditional, amongst
other matters, upon the Company having at least $8,000,000 of EBITDA during and
for its two most recently completed fiscal quarters, taken as one period. This
bonus has not been reflected in the financial statements at June 30, 1998 and
will be charged to future earnings when it is probable that the financial and
other conditions relating to the bonus will be met.
NOTE L: RESTRUCTURING
At December 31, 1997, the Company recorded a liability for certain restructuring
costs related to the closure of its Chatsworth operations. For the three and
six months ended June 30, 1998, the restructuring liability has been reduced by
actual payments, as anticipated by the Company. At June 30, 1998, the Company
set up an additional reserve of $1.843 million for future support costs relating
to MORI equipment supplied to customers prior to the commencement of the
restructuring.
As a result of the Company's decision to substantially exit the MORI Etch
business, the Company anticipates certain MORI(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.
Accordingly, the sales return reserve recorded as of June 30, 1998 is
management's estimate of the liability for MORI(TM) Etch products that may be
returned due to the Company's decision to substantially exit the MORI Etch
business. There have been no payments made for sales returns in the six months
ended June 30, 1998.
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 the 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.
In the ordinary course of business and in connection with the Company's
restructuring, the Company is involved in various types of claims and legal
proceedings which will result in litigation or other legal proceedings. The
12
TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (CONTINUED)
Company does not anticipate that any of the proceedings will have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
NOTE M: 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 (See Note
J). The Convertible Notes were exchanged for 22,660,798 million shares of
Common Stock, 29,264.625 shares of Series I Junior Participating Preferred Stock
and 2,855,754 million 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 Subordinated Notes exchanged $ 82,103
Interest waived 3,635
--------
85,738
Value of Common Stock and Series I Preferred Stock (34,271)
Series H Preferred Stock issued (28,558)
Convertible Subordinated Note issuance costs written-off (1,916)
Costs relating to the Exchange Offer (700)
--------
Net gain on exchange $ 20,293
========
NOTE N: COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130.
During the six months of 1998 and 1997, total comprehensive income (loss)
amounted to $15.9 million and ($24.2) million, respectively.
During the three months ended June 30, 1998 and 1997, total comprehensive income
(loss) amounted to $4.6 million and $(13.9) million, respectively.
13
TRIKON TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth below 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 with respect to the financial condition, results
of operations and business of the Company. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially and adversely from those set forth in the forward-looking
statements, including, without limitation, the availability of financial
resources adequate for the Company's short-, medium- and long-term needs, the
Company's ability to successfully implement its strategy of reorganizing its
product lines and overall business, varying customer demand for the Company's
new products and system products, potential material adverse effects on such
demand resulting from the Company's licensing of its MORI(TM) source and
Forcefill(R) physical vapor deposition ("PVD") technologies to Applied Materials
and Lam Research, supply and manufacturing constraints and costs, dependence on
outside suppliers, the various effects on revenue, margins, inventories and
operating expenses of reorganizing in the Company's product lines and overall
business, the Company's ability to build and maintain adequate staff
infrastructure in the area of PVD and chemical vapor deposition ("CVD") design,
product engineering and development, sales and marketing, and administrations,
customer warranty claims, slowing growth in the demand for semiconductors,
challenges from the Company's competition, general economic conditions,
including the economic downturn in Asia, potential delisting from the Nasdaq
National Market if the Company cannot meet the listing requirements, year 2000
problems, and the other risks and uncertainties described from time to time in
the Company's public announcements and SEC filings, including without limitation
the Company's Quarterly and Annual Reports on Form 10-Q and 10-K, respectively.
The Company cautions that the foregoing list of important factors is not
exclusive. In addition, such list of important factors speaks only as of the
date hereof and the Company does not undertake to update any written or oral
forward-looking statement that may be made from time to time by or on behalf of
the Company.
OVERVIEW
The Company develops, manufactures, markets and services semiconductor equipment
for the worldwide semiconductor manufacturing industry.
On November 15, 1996, the Company acquired (the "Acquisition") Electrotech
Limited and Electrotech Equipments Limited, privately-owned United Kingdom
companies founded in 1968, for an aggregate consideration of $75.0 million in
cash and 5.6 million shares of Common Stock, with an estimated fair market value
of $70.7 million, based on the closing sale price of a share of Common Stock on
the Nasdaq National Market on the last day prior to the public announcement of
the parties' agreement to the terms of the Acquisition. During the second
quarter of 1997, Electrotech Limited and Electrotech Equipments Limited changed
their names to Trikon Limited and Trikon Equipments Limited (collectively
"Trikon Limited"). Trikon Limited develops, manufactures, markets and services
semiconductor fabrication equipment with products and technologies for CVD, PVD
and etch applications. The Acquisition expanded the Company's product lines and
its sales and service organization which has enabled the Company to have a
greater presence throughout the United States, Europe and Asia.
In the second half of 1997, in response to continuing losses, violations of debt
covenants and the limited availability of financing, the Company began a
restructuring effort that included exploring various strategic alternatives as
to the future of the business. In October 1997, the Company announced a 20%
reduction in its workforce. In November 1997, the Company sold worldwide, non-
exclusive, paid up licenses of its MORI(TM) source and Forcefill(R) PVD
technologies to Applied Materials for $29.5 million. With the sale of the
MORI(TM) source license, the Company began executing a plan to close its Etch
Division located in Chatsworth, California, resulting in the termination of an
additional 13% of its work force. In connection with the closure of the
Chatsworth Etch operations and the sale of the licenses, the Company incurred
during the fourth quarter of 1997, non-cash related charges of approximately
$32.5 million for the write-off of certain accounts receivable, inventories and
long-lived assets which, due to the sale of the licenses and the decision to
close the Etch Division, had become impaired. In addition, due to the continuing
losses, reduced sales and changes in the Company's business, since the
acquisition of Trikon Limited, the Company wrote-off, during the fourth quarter
of 1997, approximately $32.3 million of intangible assets established in the
allocation of the purchase price of Trikon Limited. The Company incurred certain
cash related charges of approximately $18.3 million associated with the
termination of employees of the Etch Division and of the Company's worldwide
operations, closing of the Chatsworth Etch operations and anticipated product
returns.
14
TRIKON TECHNOLOGIES, INC.
During the three and six months ended June 30, 1998, the Company settled
approximately $2.4 million and $3.3 million, respectively, of the accrued
restructuring costs. At June 30, 1998, the Company reserved a further $1.8
million to meet future customer support costs associated with MORI(TM) equipment
supplied to customers prior to closure of the MORI(TM) etch division. The
Company anticipates approximately $3.0 million of the remaining liability at
June 30, 1998 will be paid in 1998 and $11.0 million in 1999, however, actual
payments could vary significantly depending on the Company's cash flows and
continuing negotiations with its customers. As a result of the closure of the
Chatsworth Etch operations, operating costs for the first two quarters of 1998
are significantly reduced by comparison with the same periods of 1997. Costs of
$97.6 million relating to the restructuring of the Company were charged to
earnings for the year ended December 31, 1997. The above described charges to
earnings and reserves reflect the estimates and assumptions of management, and
there can be no assurance that the provisions and allowances are adequate. If
actual costs are greater than the provisions and allowances, then it will
materially and adversely affect its results of operations.
As a result of the restructuring, the remaining business consists primarily of
the worldwide operations of Trikon Limited, the Company acquired by Trikon on
November 15, 1996, with headquarters located in the United Kingdom.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of total
revenue for the periods indicated:
Three Months Ended Six Months Ended
-------------------------- -------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------- -------- -------- --------
Product sales................................... 100.0% 100.0% 60.8% 100.0%
License revenues................................ 0.0 0.0 39.2 0.0
------- -------- -------- --------
Total revenues.................................. 100.0 100.0 100.0 100.0
Cost of goods sold.............................. 78.9 66.0 43.9 72.3
------- -------- -------- --------
Gross margin.................................... 21.1 34.0 56.1 27.7
Operating expenses:
Research and development..................... 28.2 22.2 17.2 29.4
Selling, general and
administrative............................... 65.8 43.7 40.2 49.5
In-process technology........................ 0.0 15.6 0.0 9.6
Restructuring costs.......................... 22.2 0.0 7.2 0.0
Amortization of intangibles.................. 0.0 4.7 0.0 5.8
------- -------- -------- --------
Total operating expenses........................ 116.2 86.2 64.6 94.3
------- -------- -------- --------
Loss from operations............................ (95.1) (52.2) (8.5) (66.6)
Interest expense, net........................... (11.3) (12.7) (11.3) (15.3)
------- -------- -------- --------
Loss before income tax provision
(benefit)................................... (106.4) (64.9) (19.8) (81.9)
Income tax provision (benefit).................. (1.3) (7.5) ( 0.9) (9.4)
--------- --------- -------- ---------
Loss before extraordinary item.................. (105.1)% (57.4)% (18.9)% (72.5)%
========= ========= ======== =========
PRODUCT SALES. Product sales for the second quarter of fiscal 1998 decreased
57% to $8.3 million compared to $19.1 million for the second quarter of fiscal
1997. The decrease was partly attributable to the discontinuance of sales of
MORI(TM) etch equipment. Revenues from sales of MORI(TM) etch products during
the second quarter of fiscal 1997 amounted to $7.2 million. There were no
revenues from those products during the second quarter of fiscal 1998. Excluding
sales of MORI(TM) etch products, product revenues for the second quarter of
fiscal 1998 have
15
TRIKON TECHNOLOGIES, INC.
decreased by $3.6 million or 30% from the second quarter of fiscal 1997. During
the second quarter of fiscal 1998, the Company shipped two Sigma PVD and two
Omega etch systems, as compared to one Sigma ForceFill(TM), one Delta CVD, two
Flowfill CVD, two Omega(TM) etch, and four MORI systems during the second
quarter of fiscal 1997. Revenues from product sales for the six month period
ended June 30, 1998 decreased by 50% to $15.5 million as compared to $31.1
million for the six months ended June 30, 1997. Product sales decreased as a
result of the shipment of seven systems, including one MORI etch system, in the
six months ended June 30, 1998, as compared to fourteen systems, including four
MORI etch systems, in the six months ended June 30, 1997.
Sales outside of the United States accounted for approximately 93% of total
revenues in the second quarter of 1998 and 28% of total revenues in the second
quarter of 1997. Sales outside of the United States accounted for approximately
44% and 30% of total revenues in the six months ended June 30, 1998 and 1997,
respectively. Excluding the license revenues, sales outside the United States
accounted for 72% and 30% of product sales for the six months ended June 30,
1998 and 1997, respectively. 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.
LICENSE REVENUES. License revenues in the six months ended June 30, 1998,
comprise the sale of a non-exclusive worldwide license of MORI(TM) source
technology to Lam Research Corporation (see Note I to Notes to Condensed
Consolidated Financial Statements).
GROSS MARGIN ON PRODUCT REVENUES. The Company's gross margin on product sales
for the second quarter of fiscal 1998 was 21% as compared to 34% for the second
quarter of fiscal 1997. For the six months ended June 30, 1998, the gross
margin on product sales was 28% as compared to 28% for the six months ended June
30, 1997. The relatively low gross margin for the second quarter of fiscal 1998
was due to the write-down of inventory with a book value of $0.6 million which
is now considered redundant. The gross margin for the three and six months
ended June 30, 1998, excluding the write down was 28% and 32%, respectively.
The relatively low gross margin in 1997 resulted from the write-up of Trikon
Limited inventory shipped in the first quarter of 1997, 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 ("APB") Opinion No. 16. Gross margins have been negatively
impacted due to issues related to weakened product demand, such as unabsorbed
manufacturing overhead associated with reduced units sold, and will continue to
be adversely affected during remainder of 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
second quarter of fiscal 1998 was $2.3 million, or 28% of total revenues,
compared to $4.3 million, or 22% of total revenues, for the second quarter of
fiscal 1997. Included in research and development expenses during the second
quarter of fiscal 1997 is $2.0 million related to the Chatsworth Etch Division.
For the six months ended June 30, 1998, research and development expenses were
$4.4 million, or 17% of total revenues as compared to $9.2 million, or 29% of
total revenues for the six months ended June 30, 1997. The major focus of the
Company's research and development efforts during the first six months of fiscal
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 EXPENSES. Selling, general and
administrative expenses for the second quarter of fiscal 1998 were $5.5 million,
or 66% of total revenues, compared to $8.3 million, or 44% of total revenues, in
the second quarter of fiscal 1997. In the six months to June 30, 1998, selling
general and administrative expenses were $10.3 million or 40% of total revenues,
compared to $15.4 million or 49.5% of total revenues in the six months ended
June 30,1997. The dollar decreases were primarily due to the reduced overhead
resulting from the closure of the Chatsworth Etch operations.
LOSS FROM OPERATIONS. The Company realized a $7.9 million loss from operations
in the second quarter of fiscal 1998, as compared with a $10.0 million loss from
operations in the second quarter of fiscal 1997. The loss from operations in
the second quarter of fiscal 1998 was due primarily to weak product demand,
resulting in reduced product revenues and lower gross margins. In addition, the
Company has set up a restructuring reserve of $1.8 million in the quarter to
cover future customer support costs relating to MORI(TM) etch products supplied
prior to the closure of the division. For the six months ended June 30, 1998,
the Company realized a $2.2 million loss from operations, compared with a $20.7
million loss from operations for the six months ended June 30, 1997. The
16
TRIKON TECHNOLOGIES, INC.
Company anticipates that operating results will continue to be unfavorably
impacted by weak product demand during the remainder of fiscal 1998.
INTEREST EXPENSE, NET. Interest expense, net decreased to $0.9 million in the
second quarter of fiscal 1998 from $2.4 million in the second quarter of fiscal
1997. The interest expense in the second quarter of 1998 is primarily due to
the accrual of interest payable to the holders of the Convertible Notes. The
reduction in interest expense between the second quarter of 1997 and the second
quarter of 1998 arises from the repayment and non-utilization of the Working
Capital Facility since November 1997. Interest expense for the three months and
six months ended June 30, 1998 is net of interest income of $0.3 million and
$0.4 million, respectively. Interest expense for the three and six months ended
June 30, 1997 is net of interest income of $0.1 million and $0.5 million,
respectively.
INCOME TAXES. The Company recorded a $0.2 million tax benefit in the three
months ended March 31, 1998 and the six months ended June 30, 1998, compared to
a $1.4 million tax benefit in the second quarter of fiscal 1997 and a $2.9
million benefit for the six months ended June 30, 1997. The tax benefit in the
first quarter of 1998 represents the combination of a foreign tax benefit
associated with Trikon Limited's operating loss and no tax liability on domestic
profits, which are fully absorbed by tax losses brought forward. In the first
and second fiscal quarters of 1997, 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 Company's ability to use its domestic and foreign net operating losses and
credit carryforwards 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.
Upon closing of the Exchange Offer (as defined below; see also Note J of Notes
to Unaudited Condensed Consolidated Financial Statements), 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
carryforward. Due to the limitation, a substantial amount of net operating
loss carryforward 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 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.
17
TRIKON TECHNOLOGIES, INC.
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. (See
Note J to Notes to Unaudited Condensed Consolidated Financial Statements
above.) The Convertible Notes were exchanged for 22,660,798 million shares of
Common Stock, 29,264.625 shares of Series I Junior Participating Preferred
Stock and 2,855,754 million 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 Subordinated Notes exchanged $ 82,103
Interest waived 3,635
--------
85,738
Value of Common Stock and Series I Preferred Stock (34,271)
Series H Preferred Stock issued (28,558)
Convertible Subordinated Note issuance costs written-off (1,916)
Costs relating to the Exchange Offer ( 700)
--------
Net gain on exchange $ 20,293
========
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $13.4 million in cash and cash equivalents,
compared to $9.3 million at December 31, 1997. The increase in cash and cash
equivalents principally arose from cash generated from operating activities of
$5.5 million offset by cash used in investing activities of $0.5 million and
cash used in financing activities of $0.9 million.
On March 18, 1998, the Company granted a non-exclusive, worldwide license of its
MORI(TM) source technology to Lam Research. Under the terms of the license
agreement, Lam Research will pay up to $20.0 million, $10.0 million of which was
paid in the first half of 1998, and $10.0 million of which consists of
contingent payments and royalties.
On November 12, 1997, the Company granted non-exclusive, worldwide, paid-up
licenses of its MORI(TM) source and Forcefill(R) PVD technologies to Applied
Materials. Under the terms of the license agreements and related technology
transfer agreements, Applied Materials paid the Company $29.5 million, $26.5
million of which was paid in 1997 and an additional $3 million of which was paid
in the first quarter of 1998 upon completion of the technology transfer. Under
one of the license agreements, Applied Materials also purchased four MORI
sources for $0.5 million prior to December 31, 1997. The license agreements
with Applied Materials and Lam Research do not preclude Trikon from utilizing,
or licensing to other third parties, the licensed technology.
During the period from November 14, 1996 to November 12, 1997, the Company had a
senior secured credit facility with certain domestic and U.K. lenders (the
"Working Capital Facility") that permitted the Company and its subsidiaries to
borrow an aggregate of up to $35.0 million, subject to borrowing base
limitations, based upon eligible accounts receivable. The Company was out of
compliance with certain financial ratios and covenants established under the
Working Capital Facility at December 31, 1996, March 31, 1997, June 30, 1997 and
September 30, 1997.
On November 12, 1997, in connection with the sale of licenses to Applied
Materials, the Company entered into a pay-off agreement (the "Pay-off"
Agreement) with its domestic and U.K. lenders relating to 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 its lenders under the
Working Capital Facility, the lenders under the Working Capital Facility
released all of their liens on the assets of the Company and the Working Capital
Facility and all of the Company's obligations under the Working Capital
Agreement were terminated. 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
$1.4 million to the U.K. lender. As of June 30, 1998, the cash collateral
provided was $1.1 million.
The $29.5 million in proceeds from the sale of the license agreements to Applied
Materials was used to pay off the $12.5 million balance on the Working Capital
Facility and $3.1 million in interest due on the Convertible Notes. The Company
used the remainder to fund the closure of the Chatsworth, California, Etch
operations, including the employee termination cost and debt service
requirements.
During the quarter ended June 30, 1998, Trikon Limited made the final repayment
on a term-loan from Lloyd's Bank PLC which was secured by property in Bristol,
United Kingdom.
In connection with the Acquisition of Trikon Limited, the Company issued
$86,250,000 of 7-1/8% Convertible Subordinated Notes due 2001 (the "Convertible
Notes").
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 warrants to purchase its Common Stock issued in connection with the
placement of the Series G Preferred Stock (the "Warrants"). The Exchange Offer
expired at 5:00 P.M,, New York City time, on May 14, 1998, and immediately
thereafter, the Company accepted for exchange or conversion all
18
TRIKON TECHNOLOGIES, INC.
validly tendered Convertible Notes, its Series G Preferred Stock and Warrants.
$82,103,000 principal amount of 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 Warrants
(approximately 97% of the Warrants outstanding) had been validly tendered for
exchange. $4,147,000 principal amount of Convertible Notes did not accept the
Exchange Offer and remain outstanding. As outlined in the offering document
issued in connection with the Exchange Offer, the Company did not pay interest
of $3.3 million accrued to and due on April 15, 1998. Interest was paid to the
holders of the Convertible Notes which did not accept the Exchange Offer on May
15, 1998. In accordance with the terms of the Exchange Offer, any accrued and
unpaid interest on Convertible Notes, accepted in the Exchange Offer, will not
be paid and has been included in the calculation of the profit or loss arising
on the exchange of the Convertible Notes. Since June 30, 1998, the Company has
agreed to exchange the remaining 22,222 Warrants which had not previously been
tendered.
As previously disclosed, in early 1997 the Company determined that certain
characteristics of the chemical vapor deposition ("CVD") technology of Trikon
Limited known as "Flowfill" are superior to the high density plasma CVD
processes which were being pursued by PMT CVD Partners, L.P. (the "Limited
Partnership"), a limited partnership sponsored by the Company for MORI(TM) CVD
development pursuant to an R&D agreement (the "R&D Agreement") entered into as
of March 29, 1997 between the Limited Partnership and the Company (under which
the Company agreed to perform all research and development work for the Limited
Partnership). Accordingly, during the first quarter of 1997, the Company
decided to discontinue further research and development work under the R&D
Agreement and instead focus its consolidated efforts, on its own behalf and not
on behalf of the Limited Partnership, upon the FlowFill(R) CVD technology used
in the Trikon Limited equipment. Certain of the limited partners of the Limited
Partnership asserted that this decision was inconsistent with the R&D Agreement
and representations made by the Company in connection with the Limited
Partnership and that, accordingly, a settlement of any and all claims that the
limited partners of the Limited Partnership might have in connection with such
discontinuation was appropriate.
Effective June 30, 1997, the Company acquired all of the outstanding limited
partnership interests of the Limited Partnership and all of the shares of the
Limited 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 (the
"CVD Partnership Shares") pro rata to the limited partners of the Limited
Partnership (excluding the Company) (the "CVD Purchase Agreement").Pursuant to
this transaction, all CVD technology which had been developed by the Limited
Partnership prior to such discontinuation, together with approximately $2.2
million of unspent funds of the Limited Partnership, are now owned solely by the
Company, and any and all claims that the limited partners of the Limited
Partnership may have had in connection with the termination of the research and
development project thereunder or otherwise relating to the Limited Partnership
have been resolved. 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 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 comprising 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
holders of CVD Partnership Shares for the liquidated damages for the period
between November 1, 1997, and March 15, 1998, in the amount of $335,000. As of
June 30, 1998, the Company had not caused a registration statement to become
effective.
The Company anticipates that it will spend up to $2.0 million for capital
expenditures for the months remaining in fiscal 1998. This is expected to
include investments in demonstration and test equipment, information systems,
leasehold improvements and other capital items that should enable the Company to
expand its ability to support and develop new products and services.
19
TRIKON TECHNOLOGIES, INC.
During 1997, following significant losses from operations, negative cash flows
from operating activities, and violations of debt covenants, the Company's
working capital facility was terminated. (See Note G to Notes to Unaudited
Condensed Consolidated Financial Statements above.) The Company does not
currently have a credit facility with any lenders. Management's plan with
respect to these conditions includes the sale of licenses, restructuring of its
operations, obtaining a new working capital facility and the Exchange Offer
discussed in Note J to the Notes to the Unaudited Condensed Consolidated
Financial Statements. Management believes that the successful implementation of
these actions 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.
Year 2000
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior to
the year 2000 in order to maintain functionality. The Company is assessing both
the internal readiness of its computer systems and the compliance of its
products sold to customers for handling the year 2000. The Company expects to
implement successfully the systems and programming changes necessary to address
year 2000 issues and 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.
20
PART II
OTHER INFORMATION
ITEM 1. 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 the 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 1998, the Company commenced an exchange offer
(the "Exchange Offer") for all of its outstanding 7-1/8% Convertible
Subordinated Notes due 2001 (the "Convertible Notes") Series G Preferred Stock
(the "Series G Preferred Stock") and warrants issued in connection with the
issuance of Series G Preferred Stock (the "Warrants"). The Exchange Offer
expired at 5:00 p.m., New York City time, on May 14, 1998, and immediately
thereafter, the Company accepted for exchange or conversion all validly tendered
Convertible Notes, Series G Preferred Stock and 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 Warrants (approximately 97% of the
Warrants outstanding) were 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 $82,103,000 principal amount of Convertible Notes tendered were exchanged
for 22,660,798 shares of the Company's Common Stock (the "Common Stock"),
2,855,754 shares of the Company's Series H Preferred Stock, $10 stated amount
per share (the "Series H Preferred Stock"), and 29,264.625 shares of Series I
Junior Participating Preferred Stock (the "Series I Preferred Stock"). The
shares of Series G Preferred Stock were converted and exchanged for 6,294,614
shares of Common Stock and 7,997.489 shares of Series I Preferred Stock. The
Warrants were converted and exchanged for 866,388 shares of Common Stock.
The Exchange Offer was made by the Company in reliance on the exemption from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), afforded by Section 3(a)(9) thereof. This exemption was made
available because all the securities exchanged were with existing security-
holders 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 Notes, Series G Preferred Stock or Warrants.
Each share of Series H Preferred Stock is subject to automatic conversion into
1.4285 shares of Common Stock if and when the closing price of the Common Stock
on a United States national securities exchange or on an established automated
over-the-counter trading market in the United States is at a price in excess of
$7.00 for a period of 30 consecutive trading days.
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, pursuant to its
terms, automatically converted into 1,000 shares of Common Stock (the
"Conversion Ratio").
ITEM 5. OTHER INFORMATION
As disclosed in the Company's latest proxy statement, the deadline for
submitting proposals to be considered for inclusion in the Company's Proxy
Statement for the 1999 Annual Meeting is March 4, 1999.
Pursuant to recent amendments to Rule 14a-4(c)(1) under the Securities Exchange
Act of 1934, as amended, the Company will have discretionary voting authority if
a proponent does not notify the Company by May 22, 1999 of their intent to
present a proposal from the floor at the 1999 Annual Meeting of Shareholders or
of their intent to commence a proxy solicitation for the 1999 Annual Meeting of
Shareholders.
21
TRIKON TECHNOLOGIES, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Number Description
------ -----------
4.5* Certificate of Determination establishing the rights, preferences and privileges of the
Series H Preferred Stock
4.6* Certificate of Determination establishing the rights, preferences and privileges of the
Series I Junior Participating Preferred Stock
4.7* First Supplemental Indenture, dated as of May 14, 1998, between the Company and U.S.
Trust Company of California, N.A.
10.1 Employment Agreement, dated as of May 14, 1998, among Christopher D. Dobson, the
Company and Trikon Technologies Limited
10.2 Letter Agreement, dated as of May 14, 1998, between Christopher D. Dobson and the
Company
10.3 Employment Agreement, dated as of May 28, 1998 between the Company and Thomas C.
McKee
27.1 Financial Statement Data
*Filed as an exhibit to the Company's Current Report on Form 8-K on May 28, 1998
and incorporated herein by reference.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K (the "Form 8-K") with the
Securities and Exchange Commission on May 28, 1998. The Form 8-K reported that
the Company had consummated the Exchange Offer. The Company, at its option,
provided unaudited pro forma financial information pursuant to Item 5 of the
Form 8-K.
22
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: August 13, 1998 /s/ Thomas C. McKee
-------------------
Thomas C. McKee
Chief Executive Officer and Director
Date: August 13, 1998 /s/ Jeremy Linnert
------------------
Jeremy Linnert
Chief Financial Officer
23
TRIKON TECHNOLOGIES, INC.
TRIKON TECHNOLOGIES, INC.
EXHIBIT INDEX
Exhibit No. Page No. Description
----------- -------- -----------
4.5* Certificate of Determination establishing the rights, preferences and
privileges of the Series H Preferred Stock
4.6* Certificate of Determination establishing the rights, preferences and
privileges of the Series I Junior Participating Preferred Stock
4.7* First Supplemental Indenture, dated as of May 14, 1998, between the
Company and U.S. Trust Company of California, N.A.
10.1 Employment Agreement, dated as of May 14, 1998, among Christopher D.
Dobson, the Company and Trikon Technologies Limited
10.2 Letter Agreement, dated as of May 14, 1998, between Christopher D.
Dobson and the Company
10.3 Employment Agreement, dated as of May 28, 1998 between the Company and
Thomas C. McKee
27.1 Financial Statement Data
*Filed as an exhibit to the Company's Current Report on Form 8-K on May 28, 1998
and incorporated herein by reference.