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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number:
December 31, 1996 0-26482
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TRIKON TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
California 95-4054321
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9255 Deering Avenue, Chatsworth, California 91311
(Address of principal executive offices)
(818) 886-8000
(Registrant's telephone number, including area code)
PLASMA & MATERIALS TECHNOLOGIES, INC.
(Former name, if changed since last report)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant on March 31, 1997, based on the closing price of the Common Stock as
reported by the Nasdaq National Market on such date, was approximately
$86,920,484. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 31, 1997, the Registrant had outstanding 14,368,045 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TRIKON TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
Page
PART I
Item 1. Business........................................................... 1
Item 2. Properties.........................................................12
Item 3. Legal Proceedings..................................................12
Item 4. Submission of Matters to a Vote of Security Holders................12
PART II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters........................................14
Item 6. Selected Consolidated Financial Data of Trikon.....................16
Selected Combined Financial Data of Electrotech....................24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Trikon...............................................18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Electrotech..........................................25
Item 8. Financial Statements and Supplementary Data........................31
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................31
PART III
Item 10. Directors and Executive Officers of Trikon.........................32
Item 11. Executive Compensation.............................................34
Item 12. Security Ownership of Certain Beneficial
Owners and Management..............................................39
Item 13. Certain Relationships and Related Transactions.....................40
PART IV
Item 14. Exhibits, Financial Statement......................................42
Schedules, and Reports on Form 8-K.................................45
PART I
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). These statements are in "Item 1. Business" in
paragraph 4 under "--Products--Planar 200 Flowfill(TM)," paragraph 3 under "--
Customers," paragraph 8 under "--Research, Development and Engineering,"
paragraph 4 under "--Joint Development Agreements," and the paragraph
under "--Environmental Matters." Such statements can also be found under "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations of Trikon" in paragraphs 3 and 4 under "--Overview," paragraphs 2, 3,
5, 8 and 9 under "--Results of Operations" and paragraphs 7, 10 and 12 under "--
Liquidity and Capital Resources." In addition, such statements can be found in
paragraph 2 under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations of Electrotech--Administrative Expenses."
Forward-looking statements may also be found in various sections of this Annual
Report on Form 10-K that are not specifically set forth above. Actual results
could differ materially from those projected in the forward-looking statements
as a result of a number of factors, including those set forth herein.
ITEM 1. BUSINESS
Introduction
Trikon Technologies, Inc., formerly Plasma & Materials Technologies, Inc.
(together with its subsidiaries, "Trikon" or the "Company"), designs,
manufactures and markets advanced high density, low pressure plasma sources,
process modules and plasma processing systems, and develops, manufactures,
markets and services semiconductor fabrication equipment for the worldwide
semiconductor manufacturing industry. These products are used for etch, physical
vapor deposition (PVD, which is commonly referred to as "sputtering") and
chemical vapor deposition (CVD) applications and are sold to semiconductor
manufacturers worldwide. Trikon currently offers a modular line of etch
equipment which utilizes the Company's patented MORI(TM) source technology for
polysilicon and metal etch applications in the fabrication of semiconductor
devices and other products for the etch market, including its Omega(TM)
Inductively Coupled Plasma (ICP) system. In addition, semiconductor
manufacturers use the Company's patented MORI(TM) source technology for plasma
CVD of silicon dioxide films and photoresist stripping. Certain other
manufacturers also use the MORI(TM) source for the plasma etching of films in
the fabrication of large area active matrix liquid crystal displays. Some of the
customers that have purchased or have placed orders for the Company's plasma
processing systems include Texas Instruments, Dallas Semiconductor, LG Semicon,
Hyundai, Samsung, Toshiba and Canon Sales. Trikon also offers new leading-edge
products including the Sigma sputter system for PVD, with optional Forcefill(TM)
module, and the Planar 200 Flowfill(TM) system for inter-metal dielectric CVD.
Forcefill(TM) technology allows manufacturers to eliminate the use of multistep
CVD tungsten-plug based metallization processes and to utilize an entirely
aluminum-based PVD multi-level metal scheme in sub-0.5 micron Integrated Circuit
(IC) manufacturing. Trikon's new CVD process technology, Flowfill(TM), forms
high quality silicon dioxide layers which possess the properties of both gap
fill and planarization.
Recent Developments
Electrotech Acquisition. On November 15, 1996, Trikon acquired all the
issued and outstanding shares (the "Acquisition") of Electrotech Limited and
Electrotech Equipments Limited (collectively, "Electrotech"). Electrotech
develops, manufactures, markets and services semiconductor fabrication equipment
for the worldwide semiconductor manufacturing industry. The aggregate purchase
price paid by the Company in the Acquisition, excluding $7,976,995 in
acquisition costs, was $145,700,000 consisting of $75,000,000 paid in cash and
the issuance of 5,600,000 shares of common stock of the Company ("Common Stock")
with an estimated fair market value of $70,700,000, based on the last sales
price for the Common Stock on the day prior to the public announcement of the
parties agreement to the terms of the Acquisition. Following consummation of
the Acquisition, Christopher D. Dobson, former majority owner of Electrotech,
and Nigel Wheeler, former President of Electrotech, became the Chairman of the
Board of Directors, and President and Chief Operating Officer, respectively, of
the Company. Unless the context otherwise requires, all references herein to
"Trikon" or the "Company" include Electrotech with respect to all periods on and
after November 15, 1996.
Name Change. On March 31, 1997, the Company changed its name to Trikon
Technologies, Inc. The Company believes that the Trikon name better suits a
company with a multi-continent presence and a number of non-plasma based
products.
Products
Trikon offers a line of modular solutions which are designed to meet the
varying requirements of its customers for etching of polysilicon, metal and
oxide films, stripping of photoresist, metal deposition and CVD of oxide films.
Trikon's line of equipment includes the MORI(TM) plasma source, the MORI(TM)
stand-alone process module for etch, strip or CVD applications, the PINNACLE
8000/*/system and the PINNACLE 8000R(TM) system. In addition, the Electrotech-
originated product line includes the Sigma Forcefill(TM) system, the Delta 201
system, the Planar 200 Flowfill(TM) system and the Omega(TM) 201-2 system.
Etch
PINNACLE 8000/*/ and PINNACLE 8000R(TM)
In December 1995, Trikon introduced its PINNACLE 8000R(TM) cluster tool
platform, a more compact version of its existing PINNACLE 8000/*/system, that
includes certain additional features that enable increased ease in operation.
Each of Trikon's PINNACLE 8000/*/and PINNACLE 8000R(TM) systems is a dual wafer
cassette, vacuum loadlocked cluster tool which can incorporate up to four MESC-
compatible process modules. The dual wafer cassette loadlock configuration
enables the system to continuously process wafers. System throughput varies, and
is primarily dependent on the film application, the operating configuration and
the number of process modules attached to the system. For a typical polysilicon
etch process, with each process module performing the same process, throughput
varies from 40-60 wafers per hour for a two module configuration, to 70-90
wafers per hour for a four module configuration. This compares to a throughput
of 30-40 wafers per hour for competitive two module systems. Floorspace required
for a PINNACLE 8000R(TM) is approximately 44 square feet with two process
modules and 65 square feet with four process modules. By comparison, floorspace
required for a Pinnacle 8000/*/ is approximately 88 square feet with four
process modules. List prices for the PINNACLE 8000/*/ and PINNACLE 8000R(TM)
currently range from $1,800,000 for a standard two module system to $2,800,000
for a four module system, and from $1,900,000 for a standard two module system
to $3,400,000 for a four module system, respectively.
MORI(TM)
Trikon's MORI(TM) plasma source is also sold as a subsystem on a limited
geographic and application basis to OEM licensees of Trikon's MORI(TM)
technology. Trikon currently sells the MORI(TM) source to Leybold of Germany for
incorporation into Leybold's systems that are sold worldwide for etching large
area, active matrix liquid crystal displays. Trikon sells its MORI(TM) source to
Canon Sales for incorporation into Canon Sales' systems for photoresist
stripping that are sold in the Japanese and Korean markets, and to NEC Anelva
for incorporation into NEC Anelva's systems for metal and oxide etching that are
sold in the Japanese market. Trikon's stand-alone process module, common to
Trikon's PINNACLE 8000/*/ and PINNACLE 8000R(TM) systems, incorporates the
MORI(TM) plasma source and can be configured for etch, strip or CVD
applications. The process module can be sold to customers either to increase the
capacity of existing system platforms, or to provide additional process
capability. List price for a standard process module configured for etch
applications is currently $500,000.
Omega(TM) 201-2
Trikon's Omega(TM) 201-2 metal etch system integrates the field-proven 200-
series hardware as used on other current Trikon products with Trikon's ICP
technology. Although mainly targeted at metal interconnect, the technology is
also able to address oxide and polysilicon etch and is compatible with all etch
applications. The Omega(TM) 201-2 metal etch system has been designed to address
the special requirements of metal etch while minimizing the space utilized in
the clean room. The system has a passivation unit which minimizes post-etch
corrosion by combining the use of a downstream plasma with radiant heating of
the wafer backside to maximize photoresist strip rates and drive off involatile
chlorine-containing materials. The Omega(TM) 201-2 also has a wafer temperature
control system which ensures that etch residues are minimized and often
eliminates the need to harden the photoresist using a deep UV process. The price
for Trikon's Omega(TM) etch system ranges from approximately $700,000 to
approximately $1,400,000, depending on the configuration of the system.
Physical Vapor Deposition
Sigma
Layers of metal alloys can be deposited by Trikon's Sigma product line, a
sputtering machine with multiple process chambers. This product deposits a very
thin uniform layer of interconnect metal on the whole surface of the
semiconductor wafer. Subsequent lithography and etching turns this layer into
an intricate pattern of interconnect wiring on the many individual semiconductor
devices, each a complex and integrated functioning circuit. Sigma is designed
to be one of the cleanest PVD systems on the market, with particular application
in multi-layer metallization. Trikon's strategy is to offer semiconductor
manufacturers, who are currently using 0.8 micron to 1.0 micron design rules, a
way to avoid the adoption of CVD tungsten, a relatively difficult, dirty and
expensive process. Trikon offers system configurations which bridge the gap
from non-hole-fill technology, at approximately 1.0 micron, to the adoption of
Trikon's Forcefill(TM) technology onto the Sigma platform, which is capable of
filling holes smaller than 0.25 micron. The selling price for the Sigma system
ranges from approximately $1.5 million to approximately $2.5 million, depending
on the configuration of the system.
Sigma Forcefill(TM)
The Sigma Forcefill(TM) system is being developed to extend Trikon's
standard Sigma metallization product capability into the sub-0.5 micron market.
The Forcefill(TM) technology is used with traditional aluminum techniques and
eliminates the relatively complicated and difficult use of tungsten. The process
can be carried out on a standard Sigma series system with an attached
Forcefill(TM) module, which involves depositing a layer of aluminum such that it
forms a bridge over the holes. When adequate bridging is achieved, the wafer is
transferred under vacuum to the Forcefill(TM) module where the aluminum is
heated and forced under very high pressure into the hole, thus achieving a void-
free fill. Forcefill(TM) allows manufacturers to eliminate the use of CVD
tungsten and to utilize an entirely aluminum-based multi-level metal scheme.
DRAM and logic applications are both target markets for Forcefill(TM), since the
cost saving per layer is substantial, and the interconnect speed is improved.
The average selling price of the Sigma Forcefill(TM) system ranges from
approximately $3.5 million to approximately $4.0 million, depending on the
configuration of the system. Sigma Forcefill(TM) products continue to be subject
to customer review and evaluation and Trikon is presently applying considerable
efforts to attain functionality and reliability levels acceptable to Trikon's
target markets.
Chemical Vapor Deposition
Planar 200 Flowfill(TM)
The planarized intermetal dielectric market requires a suitable insulating
material to protect the microscopic wiring in a chip, a number of which have
various undesirable characteristics. The most common insulating material is
silicon dioxide, which, when deposited by conventional techniques, is unable to
fill the increasingly small gap spacing required by next generation ICs. Trikon
has developed a new CVD process technology, Flowfill(TM), to form high quality
silicon dioxide layers which possess the properties of both gap fill and
planarization. In the Planar 200 Flowfill(TM) multi-chambered cluster system,
the advanced planarization layer consists of three films which are deposited
sequentially. The plasma CVD films are deposited in one module and the CVD
planarizing flow layer is deposited in the Flowfill(TM) module with no vacuum
breaks between the process steps. The flow layer has the ability to fill sub-
micron features less than 0.2 micron wide, with a 5 to 1 height to width ratio,
and achieve typical planarization of 80% for gaps up to 20 microns.
Alternative technologies to Trikon's Flowfill(TM) system include spin on
glass (SOG) and high density plasma (HDP) combined with chemical mechanical
polishing (CMP). SOG is deposited in single or multiple spins. This technique is
complex and slow due to the number of steps involved. In addition, although each
individual step may be clean, the combination can lead to a high number of added
particles, which can decrease yield. HDP gap fills a wafer with silicon dioxide
in one system, but the rough spots on the wafer must be planarized using a CMP
process in a second system.
For a number of reasons, Trikon's initial shipments of the Planar 200
Flowfill(TM) have targeted the DRAM market. First, due to the competitive nature
of the DRAM market, cost is a primary concern to DRAM manufacturers. Certain
DRAM manufacturers have indicated that Flowfill(TM) will offer significant cost
advantages for next generation DRAMs relative to both the SOG and HDP processes.
Second, due to the circuit designs of a DRAM, the maximum distance between metal
lines is 80 to 100 microns; Flowfill(TM) provides a high level of planarity for
gaps of this size. The selling price for the Planar 200 Flowfill(TM) system
ranges from approximately $1.4 million to approximately $2.5 million, depending
on the configuration of the system. Flowfill(TM) systems continue to be subject
to customer review and evaluation and Trikon is presently applying considerable
efforts to attain functionality and reliability levels acceptable to Trikon's
target market.
In February 1997, the Company announced an advance in the depositing of low
dielectric constant (low-k) materials used in IC layering and production using
the Flowfill(TM) technologies (the "Flowfill(TM) CVD Development"). By lowering
the dielectric constant, the speed of an IC increases. Trikon has tested a low-k
material for use in its Flowfill(TM) system that mixes methylsilane gas with
hydrogen peroxide to produce a high quality insulatory layer that is self -
planarizing. While management believes that this low-k process is a significant
advancement in the intermetal dielectric market, additional testing is
necessary. There can be no assurance that this process will result in the
successful manufacture and production of ICs. See Note 12 of Notes to
Consolidated Financial Statements.
Delta 201
Trikon's Delta 201 is a versatile, single-chamber production system for
producing films, including silicon dioxide or silicon nitride. The films
deposited by this system are used to insulate the interconnect wiring of a
semiconductor wafer. The Delta 201 is a relatively low-cost system and its
small dimensions make it attractive to customers, who are often short of
cleanroom space. The Delta 201 also addresses the gallium arsenide
semiconductor market and incorporates a wafer handling mechanism that is suited
to handle fragile and high-cost gallium arsenide wafers. The average selling
price for the Delta 201 system is approximately $600,000.
Customers
The Company sells its systems to semiconductor manufacturers located
throughout the United States, Europe, Asia/Pacific, Korea and Japan. The
following is a list of customers who have purchased, leased or have current
orders for Trikon products either directly with the Company or through its
distribution and OEM relationships:
AT&T LSI Logic Philips
Daewoo Matsushita Ricoh
Dallas Semiconductor Micron Technology Samsung
Fujitsu Mitsubishi Sharp
GEC Plessey Motorola Siemens
Hitachi National Semiconductor Sony
Hyundai NEC TEMIC
IBM OKI Texas Instruments
IC Works Olivetti Toshiba
LG Semicon Orbit Semiconductor TriQuint
Leybold Tower Semiconductor
Trikon's total revenue includes amounts from certain individual customers
that exceed 10% of total revenue. Revenue from Hyundai and Siemens represents
19% and 12% of total revenue, respectively, for the year ended December 31,
1996. Revenue from five customers represented 19%, 15%, 12%, 11% and 11% each
of total revenue for the year ended December 31, 1995 and revenue from six
customers represented 19%, 17%, 17%, 15%, 15% and 12% each of total revenue for
the ten months ended December 31, 1994. During the year ended December 31,
1995, sales to Alcan-Tech, Canon Sales and NEC Anelva in Japan, and to LG
Semicon and Hyundai in Korea, accounted for 25% and 18% of the Company's total
revenue, respectively, for that period. During the ten months ended December
31, 1994, sales to Canon Sales and NEC Anelva in Japan, and to Samsung and
Hyundai in Korea, accounted for 31% and 32% of the Company's total revenue,
respectively, for that period. The Company's operating results could be
materially adversely affected by the loss of business from or the cancellation
of orders by or decreases in the prices of products sold to these or other
customers located in Germany, Japan and Korea. See Note 1 of Notes to
Consolidated Financial Statements.
Sales other than in the United States accounted for approximately 77%, 47%
and 66% of total revenue in the years ended December 31, 1996 and 1995, and the
ten months ended December 31, 1994, respectively. The Company anticipates that
sales outside the United States will continue to account for a significant
portion of its total revenue. In addition, with the acquisition of Electrotech,
which sells primarily to international locations including Germany, Japan and
Israel, the Company expects that sales to Japanese, Korean, and European
semiconductor manufacturers will continue to represent a significant percentage
of the Company's product sales through at least 1997.
All export sales by the Company must be licensed by the Office of Export
Administration of the U.S. Department of Commerce and related U.K. and other
foreign agencies performing similar functions. Although Trikon has experienced
no difficulty in obtaining these licenses, the Company's failure to obtain these
licenses in the future could have a material adverse effect on Trikon's results
of operations. A number of other risks arise in the international market place,
including unexpected changes in regulatory requirements, exchange rates, tariffs
and other barriers, political and economic instability, difficulties in accounts
receivable collections, extended payment terms, the challenges of maintaining a
readily available supply of spare parts, difficulties in managing distributors
or representatives, difficulties in staffing and managing foreign subsidiary
operations, potentially adverse tax consequences, and the fluctuation of foreign
currency exchange rates. Wherever possible, international sales of Trikon's
products are denominated in U.S. dollars in order to reduce the risks associated
with such currency
fluctuation. There can be no assurance that the Company will be able to avoid
these and other risks relating to the conduct of business internationally.
Marketing, Sales and Customer Support
Trikon's long range goal is to market its products and services directly to
all end use customers to the extent it is efficient and cost effective. In the
current stage of Trikon's growth, it is not efficient or cost effective to
market products and services through a direct sales force in all regions.
Consequently, Trikon has established multiple sales channels to market products
and services to match Trikon's efforts in each region. Trikon currently markets
and sells its products primarily through three separate sales channels, direct
sales, distributor arrangements and OEM agreements. In selected regions and
countries, Trikon uses a combination of direct sales, distributor arrangements,
OEM agreements and sales representatives.
As a result of the Acquisition, Trikon expanded its field sales and support
organizations worldwide, focusing on marketing within each product division.
The Company now has sales and marketing offices located in the United States,
United Kingdom, Europe and Asia to enable sales and service personnel to provide
dedicated worldwide support to new and existing customers. The field based
sales, service, and applications personnel now report into a unified management
structure based on country geography. This gains efficiency through cross
training and critical mass for support. Sales staff now represent the full
Trikon product line to its customers, gaining leverage in the selling cycle. In
select international countries, Trikon will continue to use distributor or
representative organizations for sales, but is moving to full direct support
organizations for customer control and satisfaction.
In the United States, Trikon markets and sells its products principally
through its direct sales organization. In Korea, Trikon markets and sells its
products direct through the sales staff of its wholly owned Korean subsidiary.
The Korean market is served by a direct sales group in order to meet Korean
semiconductor manufacturers' requirements of having direct local representation
for sales, customer support and spare parts. In Hong Kong, Taiwan, Singapore
and China, the Company has sales agents which has increased flexibility and
responsiveness to customer needs in those areas. The European market is served
by a direct sales group in the United Kingdom which offers sales, customer
support and spare parts.
Trikon currently believes that the most efficient strategy for penetrating
the Japanese market is to have a distribution agreement with a well established
and experienced sales organization. Trikon has appointed Canon Sales as its
exclusive etch system distributor in Japan, and in July 1995 entered into a
definitive agreement for such appointment. The agreement is year-to-year,
renewable automatically unless either party terminates at least 90 days before
the end of the year, and establishes the price to Canon as a specified
percentage discount from Trikon's then-current published U.S. list price.
Although management believes that it maintains a good relationship with Canon
Sales, there can be no assurance that the relationship will continue. In
addition, PVD and CVD sales in Japan are distributed through Innotech
Corporation. Trikon has also set up a sales staff located at its wholly owned
Japanese subsidiary to help establish its own experienced sales organization.
In addition, Trikon has established a distributor relationship with
Techlink for the Taiwan market. Trikon maintains active OEM agreements in Japan
and Europe. Trikon currently sells the MORI(TM) source to Leybold of Germany for
incorporation into Leybold's systems that are sold worldwide for etching large
area, active matrix liquid crystal displays. Trikon sells its MORI(TM) source to
NEC Anelva for incorporation into NEC Anelva's systems for metal and oxide
etching which are sold in the Japanese market, and to Canon Sales for
incorporation into Canon Sales' systems for photoresist stripping that are sold
in the Japanese and Korean markets.
Trikon believes that providing its customers with evaluation systems of its
equipment products is critical to its sales efforts. The ability to evaluate
Trikon's systems on a trial basis is expected by the semiconductor manufacturing
customers to whom Trikon markets. The average duration of a trial period for
systems is
approximately one year. Consequently, as Trikon expands its sales efforts, it
believes that it will need to significantly increase its investment in
demonstration and evaluation systems. The failure or inability of Trikon to
convert a demonstration system placed with a customer to a final sale could have
a material adverse effect on the Company.
Trikon believes that high quality customer support, customer training, and
field consultation are key components in a customer's decision in selecting a
semiconductor equipment supplier. The ability to provide a processing system
with a high degree of reliability, low cost, high yield, high uptime and high
mean time between failure greatly influences a customer's purchase decision.
This requires experienced, responsive local support with quality personnel and
the ready availability of spare parts. Trikon believes that a focused field
support organization that works closely with its customers provides invaluable
feedback from customers with respect to system cost effectiveness, and typically
results in technical advances through continuous design improvement. To further
ensure customer satisfaction, Trikon also provides service and maintenance
training as well as process application training for its customers' personnel on
a fee basis. Trikon maintains an extensive inventory of spare parts which
allows Trikon to provide overnight delivery for many parts.
Research, Development and Engineering
Trikon believes that its future success will depend, in part, upon its
ability to continue to improve its systems and its process technologies and to
develop new technologies and systems that compete effectively on the basis of
total cost of ownership and performance. These technologies and systems will
also need to meet customer requirements and emerging industry standards.
Accordingly, Trikon devotes a significant portion of its personnel and the
financial resources to research and development programs and seeks to maintain
close relationships with its customers in order to remain responsive to their
product needs.
As of December 31, 1996, the Company employed 159 professional and
technical personnel in research, development and engineering. These employees
are organized in the following departments: research and development, hardware
engineering, software engineering, customer specials engineering, systems
engineering, documentation and manufacturing engineering, and customer
applications.
The research and development group is responsible for identifying new
technology applications and developing processes to meet customer requirements.
Major research and development programs currently address PVD and CVD
applications, polysilicon and integrated stack etch applications, metal etch
applications, including aluminum, and oxide etch applications.
Research and development activities for the Company is run by a general
manager of each of the two product divisions. The etch division, which is
managed by a U.S. based general manager, conducts most its development
activities in Chatsworth, California. There are approximately 55 individuals
currently engaged in research and development activities for the etch division,
46 of which work in the U.S. and nine of which work in the UK.
The deposition division is managed by a United Kingdom based General
Manager. Research and development activities for the deposition division are
conducted in the United Kingdom with peripheral support by U.S. personnel.
There are 104 individuals in the U.K. engaged in research in the deposition
division. Coordination of research and development activities for both the etch
and deposition product divisions is managed by Nigel Wheeler, the President and
Chief Operating Officer of Trikon, who resides in the United Kingdom. In
addition, the etch and deposition divisions are run as separate profit centers
with each General Manager having profit and loss responsibility for their
respective operations.
Trikon's research, development and engineering expenses were $10.1 million,
$4.6 million and $3.6 million for the years ended December 31, 1996 and 1995,
and the ten months ended December 31, 1994, respectively, and
represented 24.0%, 21.5% and 41.2% of total revenue for these three periods,
respectively. In addition to direct research and development expenses, the
Company recognized a one-time charge of $86.0 million for acquisition related
in-process research and development, in the year ended December 31, 1996, due to
the Acquisition.
In addition to the Company's direct research, development and engineering
expenses, significant expenditures in research, development and engineering have
been made by Leybold, Canon Sales and NEC Anelva, with whom the Company has
entered into OEM agreements. These arrangements provide the Company with
expanded resources and knowledge to broaden the use of Trikon's MORI(TM) plasma
technology in the etch, PVD and CVD markets. No information on the amount of
these expenditures has been disclosed to the Company, however, the Company
believes that total expenditures exceed the Company's direct expenditures for
the same applications over the same periods identified above.
Although Trikon believes that it has allocated sufficient resources to its
research, development and engineering efforts, the success of new system
introductions is dependent on a number of factors, including timely completion
of new system designs and market acceptance. There can be no assurance that the
Company will be able to improve its existing systems and process technologies or
develop new technologies or systems. In addition, the Company may incur
substantial unanticipated costs to establish the functionality and reliability
of its future product introductions early in the product's life cycle.
Joint Development Arrangements
In April 1996, Trikon entered into an agreement with NEC Anelva to jointly
develop a high density plasma dielectric CVD system. Pursuant to the agreement,
the two companies intended to jointly develop, market, and manufacture such CVD
system based upon Trikon's MORI(TM) source. As a result of the Flowfill(TM) CVD
Development, the Company and NEC Anelva have jointly determined to discontinue
their joint development effort in this area.
On March 29, 1996, Trikon entered into a number of agreements with PMT CVD
Partners, L.P. (the "CVD Partnership") and the limited partners thereof (the
"Limited Partners"). The CVD Partnership was sponsored by Trikon to fund
research and development costs and expenses relating to CVD technology and
applications using MORI(TM) source technology. An aggregate of approximately
$5,350,000 was invested by the Limited Partners in the CVD Partnership to fund
such research and development efforts, which were performed by Trikon under an
agreement with the CVD Partnership. Trikon has been paid for such services in
an amount equal to its actual direct costs, as defined, plus a stated percentage
of such costs. During the year ended December 31, 1996, the amount of such
research and development payments to Trikon by the CVD Partnership was
$2,841,427. Under the applicable agreement, Trikon is obligated to pay stated
royalties to the CVD Partnership on sales of developed CVD products, and the
royalty percentage will vary based on the geographic location of the sale.
In connection with the Flowfill(TM) CVD Development, the Company announced
that it would henceforth focus all of its CVD resources to further evaluate and
develop products based on the Flowfill(TM) technology. In that regard, Trikon
advised the Limited Partners that it had decided to discontinue the research and
development efforts of the CVD Partnership. One of the Limited Partners has
indicated that it believes such action was inconsistent with the terms of the
research and development agreement entered into between the Company and the CVD
Partnership, and that, accordingly, a settlement of any and all claims that the
Limited Partners may have in connection with such discontinuance is appropriate.
The parties have had only preliminary discussions regarding the resolution of
this dispute, though all funding by the CVD Partnership of MORI(TM) source-based
CVD research and development has been discontinued. See Notes 6 and 12 to
Consolidated Financial Statements.
Trikon and LG Semicon have agreed to jointly develop an oxide etch process
utilizing Trikon's PINNACLE 8000R(TM) cluster tool. Trikon's wholly owned Korean
subsidiary will manage the process development work, which will be conducted at
LG Semicon's Cheong-Ju research and development facility in South Korea and at
Trikon's
headquarters in California. Trikon believes that this joint development project
will help Trikon's PINNACLE 8000R(TM) system achieve acceptance in the oxide
etch market. Although management believes that it maintains a good relationship
with LG Semicon, there can be no assurance that the relationship will remain
positive, or that the joint development project will be successfully completed.
In the event of a termination of Trikon's agreement with LG Semicon, or the
failure by the parties to successfully develop an oxide etch process based on
Trikon's PINNACLE 8000R(TM) cluster tool, Trikon's ability to penetrate the
oxide etch market would be adversely affected.
Manufacturing
In order to maintain close control of its manufacturing processes, Trikon's
deposition division operates in a vertically integrated manner at the Company's
South Wales facility, taking full responsibility for the manufacturing of
virtually all components for Trikon's systems. This approach has enabled the
Company to ensure quality control and reduce dependence on third party suppliers
for its PVD and CVD products. On the other hand, the manufacturing operations
of Trikon's etch division, located in Chatsworth, California, is a horizontally
integrated structure consisting of materials planning and procurement, assembly,
system integration and final test.
Trikon's modular product line, which is designed around the SEMI MESC
industry standard, enables the Company to use a large number of components and
sub-assemblies which are common not only to the Company's product line but also
to systems manufactured by other companies in the industry, both competitive and
non-competitive. Examples of common sub-assemblies are wafer aligners and
vacuum cassette elevators obtained from Brooks Automation in Massachusetts, and
RF power supplies obtained from RF Power Products in New Jersey. Examples of
sub-assemblies obtained from outside suppliers that are unique to the Company's
systems products include gas box assemblies and fabricated vacuum chambers.
Trikon's Chatsworth, California operations rely on outside suppliers to
manufacture substantially all of the components and a portion of sub-assemblies
used in their plasma processing systems. Certain of these are obtained from a
sole supplier or a limited group of suppliers. For example, the wafer cassette
elevator load locks used in the Company's PINNACLE 8000/*/ and PINNACLE
8000R(TM) plasma processing systems are sole sourced from Brooks Automation. The
Company relies on outside suppliers generally, and a sole or limited group of
suppliers an adequate supply of required components, as well as reduced control
over pricing and timely delivery of components. Because the manufacture of
certain of these components and sub-assemblies is a complex process and can
require long lead times, there can be no assurance that delays or shortages
caused by suppliers will not occur. Any inability to obtain adequate deliveries
or any other circumstance that would require the Company to seek alternate
sources of supply or to manufacture such components internally could delay the
Company's ability to ship its systems and could have a materially adverse effect
on the Company.
Competition
The markets served by Trikon's products are highly competitive and subject
to rapid technological change. Significant competitive factors include system
performance, cost of ownership (which is dependent upon yield, throughput and
reliability), size of installed base, depth and breadth of product line and
customer support.
Trikon faces significant competition from various suppliers of systems that
utilize alternative technologies, including other manufactures of HDP systems.
In the etch market, the Company faces competition from suppliers of reactive ion
etch (RIE) systems, including Applied Materials, Lam Research and Tokyo
Electron. Trikon's MORI(TM) based etch systems also face competition from ICP
based etch systems marketed by Applied Materials and Lam Research, as well as
the electron cyclotron resonance (ECR) based etch system marketed by Hitachi.
In the high density plasma CVD market, Trikon's primary competitors are Applied
Materials, Novellus and Lam Research. In the PVD market, Trikon's Forcefill(TM)
technology faces competition from suppliers of aluminum and tungsten-plug PVD
systems, such as Applied Materials, and a number of other competitors, including
NEC Anelva, MRC,
Novellus, Varian and Ulvac. Trikon's Flowfill(TM) technology faces competition
from other CVD manufacturers, including Applied Materials, Lam Research,
Novellus and Watkins-Johnson.
Virtually all of the Company's primary competitors are substantially larger
companies with broader product lines, and have well established reputations in
the etch, PVD, CVD and SOG markets, longer operating histories, greater
experience with high volume manufacturing, broader name recognition,
substantially larger customer bases, and substantially greater financial,
technical, manufacturing and marketing resources than the Company. Trikon also
faces potential competition from new entrants in the market, including
established manufacturers in other segments of the semiconductor capital
equipment market, who may decide to diversify into the Company's market segment.
There can be no assurance that Trikon's competitors will not develop
enhancements to or future generations of competitive products that will offer
price and performance features that are superior to those offered by the
Company's systems.
Intellectual Property
Trikon relies on a variety of types of intellectual property protection to
protect its proprietary technology, including patent, copyright, trademark and
trade secret laws, non-disclosure agreements, and other intellectual property
protection methods. Although the Company believes that its patents and
trademarks may have value, the Company believes that its future success will
also depend on the innovation, technical expertise and marketing abilities of
its personnel. The Company currently holds eleven patents in the United States,
two patents in the United Kingdom, two patents in Taiwan, one patent in each of
Germany, France, Italy and the Netherlands. The Company currently has
approximately 49 patent applications pending worldwide and intends to file
additional patent applications, as appropriate. The Company's patents and patent
applications pending are all in the field of semiconductor manufacture and are
predominantly concerned with inductively coupled plasma etching (ICP),
deposition of dielectric layers by plasma and thermal means and in particular to
Trikon's MORI(TM) plasma source, the global planarization by a dielectric film
(Flowfill(TM)) and the process of filling semiconductor contact holes by
deformation of interconnect metal by high pressure (Forcefill(TM)) and the
equipment related to these processes. The Company also holds a copyright on its
MACSE(TM) proprietary software. The Company also has five trademarks that are
registered with the United States patent and trademark office, including
PINNACLE 8000/*/and PINNACLE 8000R(TM) and uses a number of trademarks that are
registered or for which an application for registration has been filed in the
United States and certain other countries, including Forcefill(TM) and
Flowfill(TM).
There can be no assurance that patents will be issued on the pending
applications or that competitors will not be able to legitimately ascertain
proprietary information embedded in the Company's products which is not covered
by patent or copyright. In such case, the Company may be precluded from
preventing the competitor from making use of such information. In addition,
should the Company wish to assert its patent rights against a particular
competitor's product, there can be no assurance that any claim in a Company
patent will be sufficiently broad nor, if sufficiently broad, any assurance that
the Company's patent will not be challenged, invalidated or circumvented, or
that the Company will have sufficient resources to prosecute its rights. The
Company's policy is to vigorously protect and defend its patents, trademarks and
trade secrets.
The Company has abandoned its ICP patent in Europe and does not intend to
renew the related patents in the United States. Trikon is opposing an issued
German patent held by a competitor which relates to a process similar to
Forcefill(TM). The Company's management and its advisors believe this patent is
too broadly worded and as presently worded there is some possibility that an
infringement by Trikon might be alleged. There can be no assurance as to the
outcome of these proceedings.
The Company's involvement in any patent or other intellectual property
dispute or in any action to protect trade secrets and know-how, even if
successful, could have a material adverse effect on the Company and its
business. Adverse determinations in any such action could subject the Company
to significant liabilities, require the Company to seek licenses from third
parties, which might not be available, and possibly prevent the Company
from manufacturing and selling its products, any of which could have a material
adverse effect on the Company and its business.
Environmental Matters
The Company is subject to a variety of federal, state and local laws, rules
and regulations relating to the use, storage, discharge and disposal of
hazardous chemicals and gases used during its customer demonstrations and in
research and development activities. Public attention has increasingly been
focused on the environmental impact of operations which use hazardous materials.
In 1995, the United Kingdom adopted a new and comprehensive environmental law
known as the Environmental Act of 1995 (the "Environmental Act"), which, among
other things, deals with the allocation of responsibility for the cleanup of
contaminated property and expands potential liability with respect to the
remediation of such contamination. Trikon owns or leases a number of facilities
in the United Kingdom, and compliance with the Environmental Act is anticipated
to result in certain expenses. A reserve of $435,000 for the estimated
potential liability of these expenses has been recorded in connection with the
Acquisition. There can be no assurance that such expenses will not exceed
present estimates. Failure to comply with present or future regulations could
result in substantial liability to the Company, suspension or cessation of the
Company's operations, restrictions on the Company's ability to expand at its
present locations, or requirements for the acquisition of significant equipment
or other significant expense. To date, compliance with environmental rules and
regulations has not had a material effect on the Company's operations. At the
present time, the Company believes that it is in material compliance with all
applicable environmental rules and regulations.
Backlog
As of December 31, 1996, the Company's backlog was $23.5 million, as
compared to $8.7 million at December 31, 1995. The Company's backlog at
December 31, 1996 consisted primarily of orders for its PVD, CVD and etch
products, a substantial majority of which consisted of Electrotech products.
The Company includes in its backlog all purchase orders that provide for
delivery within twelve months. The Company's business is characterized by large
purchase contracts for standard products with related customized options. All
orders are subject to cancellation or delay by the customer with limited or no
penalty. Because of possible changes in delivery schedules and cancellations of
orders, the Company's backlog at any particular date is not necessarily
representative of actual sales for any succeeding periods.
Employees
At December 31, 1996, the Company had 678 regular employees, including 159
engaged in research, development and 44 in sales and marketing, 171 in customer
support, 255 in manufacturing, and 49 in general administration and finance. In
March 1997, the Company announced an approximate 8% workforce reduction
affecting all such employee groups.
The Company believes its future success will depend in large part on its
ability to attract and retain highly skilled employees, particularly those
highly skilled design, process and test engineers involved in the manufacture of
existing systems and the development of new systems and processes. The
competition for such personnel is intense. The Company faces the task of
quickly identifying, recruiting, training and integrating new employees. There
can be no assurances that the Company will be successful in doing so or, if
successful, in retaining such employees.
None of the employees of the Company are covered by a collective bargaining
agreement, and the Company has not entered into employment agreements with any
of its employees, with the exception of a three-year employment agreement
entered into with Nigel Wheeler, the Company's President and Chief Operating
Officer, as of November 15, 1996. The Company considers its relationships with
its employees to be good.
Financial Information Relating to Foreign and Domestic Operations and Export
Sales
See Note 3 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
Certain information concerning the Company's principal properties at
December 31, 1996 is set forth below:
Location Type Principal Use Square Footage Ownership
- -------------- --------------- ------------------------ -------------- ---------
Chatsworth, CA Office, plant & Headquarters, Marketing, 34,000 leased
warehouse Manufacturing, Research 20,000 leased
and Engineering 2,540 leased
Newport, Gwent, Office, plant & European Headquarters, 102,000 leased
United Kingdom warehouse Manufacturing, Sales and
Customer Support
Bristol, United Office & Research and Engineering 55,700 owned
Kingdom laboratories
The Company has a number of smaller properties and field offices located in
the United States, the United Kingdom, Germany, Japan and Korea. The Company
believes that its properties adequately serve the Company's present needs.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company may be involved in
legal proceedings from time to time. As of the date hereof, there are no
material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 10, 1996, the Company held its 1996 Annual Meeting of
Shareholders (the "Annual Meeting"). The following proposals were submitted to
the shareholders at the Annual Meeting for them to:
1. Consider and vote to approve the Share Purchase Agreement dated as of
July 17, 1996, as amended (the "Share Purchase Agreement"), entered into among
the Company, Electrotech, Christopher D. Dobson and the other shareholders of
Electrotech, and all transactions contemplated thereby. Pursuant to the terms
of the Share Purchase Agreement, the Company acquired 100% of the outstanding
capital stock of Electrotech and, directly or indirectly, each subsidiary
thereof for an aggregate consideration of $145,700,000 consisting of $75,000,000
paid in cash and the issuance of 5,600,000 shares of Common Stock with an
estimated fair market value of $70,700,000, based on the last sales price for
the Common Stock on the day prior to the public announcement of the parties'
agreement to the terms of the Acquisition. This proposal was approved by the
shareholders with 5,678,048 shares voted in favor, 23,887 shares voted against,
10,185 shares withheld as abstentions and 1,966,892 broker non-vote and unvoted
shares.
2. Elect each of Dr. Gregor A. Campbell, John A. Rollwagen, Brian D.
Jacobs, G. Bradford Jones, Charles Thompson and Dr. Hiroyuki Mizuno as a
director of the Company to serve from such time through the
following year until their respective successor is duly elected and qualified.
Each of Dr. Campbell, Dr. Mizuno and Messrs. Rollwagen, Jones and Jacobs was
reelected as director with 7,625,387 shares voted in favor and 53,625 shares
withheld. Mr. Thompson was reelected as director with 7,625,387 shares voted in
favor and 53,625 shares withheld.
3. Consider and vote to approve the amendment of the Company's 1991 Stock
Option Plan (the "Option Plan") to increase the number of shares of Common Stock
which may be issued thereunder from 900,000 to 1,300,000 (and to 2,400,000 if
the Acquisition occurs). This proposal was approved by the shareholders with
7,030563 shares voted in favor, 286,240 shares voted against, 30,376 shares
withheld as abstentions and 331,833 broker non-vote and unvoted shares. Because
the Acquisition was consummated, the number of shares of Common Stock reserved
for issuance under the Option Plan was increased to 2,400,000.
4. Consider and vote to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending December 31, 1996.
This proposal passed with 7,670,127 shares voted in favor, 3,850 shares voted
against, and 5,035 shares withheld as abstentions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Market for the Registrant's Common Equity
The Company's Common Stock began trading in the over-the-counter market on
August 23, 1995 upon effectiveness of the registration statement relating to the
Company's initial public offering (the "Initial Public Offering"), and is quoted
on the Nasdaq National Market ("Nasdaq") under the symbol "TRKN". The quarterly
high and low sale prices for the Company's Common Stock as reported on Nasdaq
for each full quarterly period since August 23, 1995 are as follows:
High Low
------ ------
1995
Fourth quarter.................................. $17.50 $ 9.00
1996
First quarter................................... 16.00 8.10
Second quarter.................................. 20.00 11.00
Third quarter................................... 15.50 10.50
Fourth quarter.................................. 16.75 11.25
As of March 31, 1997, there were 132 shareholders of record of the
Company's Common Stock.
The Company has not declared or paid cash dividends to its shareholders.
The Company anticipates that all of its earnings in the near future will be
retained for the development and expansion of its business and, therefore, does
not anticipate paying dividends on its Common Stock in the foreseeable future.
Declaration of dividends on the Common Stock will depend, among other things,
upon levels of indebtedness, future earnings, the operating and financial
condition of the Company, its capital requirements and general business
conditions. The agreements governing the Company's indebtedness contain
provisions which prohibit the Company from paying dividends on its Common Stock.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations of Trikon--Liquidity and Capital Resources."
Unregistered Sales of the Registrant's Equity Securities During Last Fiscal Year
Convertible Notes. On October 7, 1996, in connection with the Acquisition,
the Company issued and sold $86,250,000 in principal amount of 7-1/8%
Convertible Subordinated Notes Due 2001 (the "Convertible Notes"), in reliance
upon the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), and Regulations D and S thereunder, as
transactions exempt from the registration requirements of the Securities Act to
persons reasonably believed by Salomon Brothers Inc and Unterberg Harris, as the
initial purchasers (the "Initial Purchasers") of the Convertible Notes, to be
"qualified institutional buyers" (as defined by Rule 144A under the Securities
Act), other institutional "accredited investors" (as defined in Rule 501(a)(1),
(2), (3) or (7) under the Securities Act) or in transactions complying with the
provisions of Regulation S under the Securities Act. The Convertible Notes were
sold by the Company at a discount of 3.75% to the Initial Purchasers. The
Convertible Notes are traded in the Private Offerings, Resales and Trading
through Automated Linkages ("PORTAL") Market. See Note 5 to the Notes to
Consolidated Financial Statements.
The Convertible Notes are convertible, at the option of the holder, at any
time prior to maturity, unless previously redeemed or repurchased, into a
maximum of 5,516,470 shares of Common Stock at a conversion price of $15.635 per
share, subject to adjustment in certain events. This conversion price was
determined by arms-length negotiation between the Company and the Initial
Purchasers based upon current conversion premiums then in effect for similar
transactions by similar issuers.
Pursuant to its agreement with the purchasers of the Convertible Notes, the
Company filed with the Commission a registration statement covering resales by
such purchasers of the Convertible Notes and the Common stock issuable upon
conversion thereof (the "Shelf Registration Statement"). The Shelf Registration
Statement has not yet become effective pending the filing of this Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 and subsequent
Commission examination and comment, if applicable. The Convertible Notes
provide that, because the Shelf Registration Statement did not become effective
on or prior to January 15, 1997, the Convertible Notes have since that date
borne additional interest at the rate of 0.5% per annum and will continue to
bear such additional interest until the Shelf Registration Statement becomes
effective.
Warrants. On March 29, 1996, Trikon entered into a number of agreements
with PMT CVD Partners, L.P. (the "CVD Partnership") and the limited partners
thereof (the "Limited Partners"). The CVD Partnership was sponsored by Trikon
to fund research and development costs and expenses relating to CVD technology
and applications using MORI(TM) source technology. See "Item 1. Business--Joint
Development Agreements." In connection with the formation of the CVD
Partnership, the Limited Partners received warrants to purchase an aggregate of
277,662 shares of Trikon's Common Stock at an exercise price of $12.75 per
share. The warrants become exercisable for a one-year period following exercise
of the option (the "Option") held by Trikon to purchase all of the Limited
Partners' interests in the CVD Partnership, but only if the Option is actually
exercised by Trikon. No value has been assigned to the warrants because they
only become exercisable upon the exercise by the Company of the Option. Upon
the exercise of the Option, the warrants would be valued and recorded as part of
the purchase price of the technology. The Company issued such warrants in
reliance on the exemption provided by Section 4(2) of the Securities Act in
reliance upon representations by each such investor that it was an "accredited
investor" as defined in Rule 501(a) under the Securities Act and otherwise in
reliance on Regulation D under the Securities Act.
The Note Purchase Agreement. On December 16, 1996, the Company entered
into an agreement with five investors, confirming a commitment to provide an
unsecured subordinated debt in the amount of $6,250,000 (the "Note Purchase
Agreement"). See "Item 13. Certain Relationships and Related Transactions." On
the date of execution of the Note Purchase Agreement, each investor received a
warrant to acquire up to 49,020 shares of Common Stock with an exercise price of
$12.75. Each such warrant became exercisable with respect to 50% of such shares
on the commitment by such investors to provide financing to the Company under
the Note Purchase Agreement. Any advances made under the Note Purchase
Agreement will trigger the exercisability of the warrants with respect to the
remaining shares covered by such warrants. At December 31, 1996, warrants with
respect to an aggregate of 122,550 shares of Common Stock at an exercise price
of $12.75 were exercisable by such investors. All such warrants expire on
December 16, 2001. The Company issued such warrants in reliance on the
exemption provided by Section 4(2) of the Securities Act in reliance upon
representations by each such investor that it was an "accredited investor" as
defined in Rule 501(a) under the Securities Act and otherwise in reliance on
Regulation D under the Securities Act.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA OF TRIKON
The following selected consolidated financial data of the Company is
qualified by reference to and should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K. The selected consolidated financial data set forth below for the ten
months ended December 31, 1994, and as of and for the years ended December 31,
1995 and 1996, has been derived from the audited financial statements of the
Company included elsewhere in this Form 10-K. The selected consolidated
financial data set forth below as of and for the fiscal year ended February 28,
1993, 1994, and as of December 31, 1994 have been derived from audited financial
statements of the Company not included in this Form 10-K. The selected
consolidated financial data for the ten months ended December 31, 1993 and for
the twelve months ended December 31, 1994 have been derived from unaudited
consolidated financial statements of the Company, but include all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the results of operations for the periods
presented.
Year Ended Ten Months ended Year ended
December 31 Twelve months December 31 February 28
----------- ended ---------------- --------------
December 31,
1996(1) 1995(2) 1994(3) 1994 1993(3) 1994 1993
------- ------- ----------- ---- ------- ---- ----
(in thousands, except per share amounts)
Statements of Operations:
Revenues:
Product sales.............................. $ 39,386 $20,890 $ 9,813 $ 8,005 $ 4,435 $ 6,244 $ 4,215
Contract revenue........................... 2,841 -- -- -- -- -- --
License revenue............................ -- 400 700 700 1,900 1,900 --
-------- ------- ------- ------- ------- ------- -------
Total revenues........................... 42,227 21,290 10,513 8,705 6,335 8,144 4,215
Costs and expenses:
Cost of goods sold......................... 24,596 11,144 6,444 5,404 3,218 4,259 2,442
Research and development................... 10,145 4,567 4,210 3,584 2,186 2,812 2,218
Selling, general andadministrative......... 16,592 5,943 3,917 3,382 1,688 2,224 1,806
Amortization of intangibles................ 482 -- -- -- -- -- --
In-process technology...................... 86,029 -- -- -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Total costs and expenses:................ 137,844 21,654 14,571 12,370 7,092 9,295 6,466
-------- ------- ------- ------- ------- ------- -------
Loss before interest and income tax
provision (benefit)........................ (95,617) (364) (4,058) (3,665) (757) (1,151) (2,251)
Interest:
Interest expense........................... (1,821) (294) (159) (146) (213) (227) (94)
Interest income............................ 1,628 777 143 125 15 32 26
-------- ------- ------- ------- ------- ------- -------
Income (loss) before income tax provision
(benefit).................................. (95,810) 119 (4,074) (3,686) (955) (1,346) (2,319)
Income tax provision (benefit).............. (1,335) 1 54 54 51 51 --
-------- ------- ------- ------- ------- ------- -------
Net income (loss)........................... $(94,475) $ 118 $(4,128) $(3,740) $(1,006) $(1,397) $(2,319)
======== ======= ======= ======= ======= ======= =======
Net income (loss) per share (4)............. $(10.03) $0.02 $(0.82) $(0.75)
======== ======= ======= =======
Number of shares used in per share
computation (4)........................... 9,420 6,593 5,013 5,013
======== ======= ======= =======
December 31 February 28
------------------------------- --------------
1996(1) 1995(2) 1994(3) 1994 1993
------- ------- ------- ---- ----
(in thousands)
Balance Sheet Data:
Working capital........................................................ $ 56,515 $47,670 $ 6,171 $ 5,926 $ 609
Total assets........................................................... 183,180 59,293 16,631 12,080 5,032
Long-term obligations (including long-term debt and capital lease
obligations, less current portion, income taxes payable and pension
obligation)........................................................... 5,095 686 733 145 387
Convertible subordinated notes......................................... 86,250 -- -- -- --
Redeemable convertible preferred stock.................................
-- -- 14,205 8,705 1,250
Shareholders' equity (deficit), excluding redeemable convertible
preferred stock....................................................... 31,248 53,413 (4,419) (646) 820
____________________
(1) Includes the assets and liabilities, as of December 31, 1996, and the
results of operation from November 15, 1996 to December 31, 1996 of
Electrotech Equipments Limited and Electrotech Limited (collectively,
"Electrotech") acquired on November 15, 1996 (see Note 2 of the Notes to the
Consolidated Financial Statements).
(2) On August 29, 1995, the Company completed its Initial Public Offering,
resulting in $40,093,235 of net proceeds to the Company. These funds have
been used to cover the Company's working capital needs, its investment in
demonstration systems and capital expenditures, and to pay a portion of the
cash paid in the Acquisition.
(3) During 1994, the Company changed its fiscal year end from the last day of
February to December 31. Information for the twelve months ended December
31, 1994 (unaudited) is provided for comparison to the information for the
year ended December 31, 1995. Information for the ten months ended December
31, 1993 (unaudited) is provided for comparison to the information for the
ten months ended December 31, 1994.
(4) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute per
share amounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF TRIKON
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto and "Selected Consolidated
Financial Data of Trikon" included elsewhere in this Form 10-K. This discussion
contains forward looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. These statements are subject
to certain risks and uncertainties, including slowing growth in the demand for
semiconductors and challenges from the Company's competition that could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof.
Overview
The Company develops, manufactures, markets and services semiconductor
equipment for the worldwide semiconductor manufacturing industry. These products
are used for etch, CVD, and PVD applications. The etch systems consist of the
PINNACLE 8000(R) and PINNACLE 8000R(TM) systems (selling price between
$1,800,000 for a standard two-module system to $3,400,000 for a four-module
system), the Omega(TM) 201-2 system (selling price between $700,000 and
$1,400,000, depending on the configuration of the system), and a stand-alone
MORI(TM) plasma source process module which lists for approximately $500,000.
The Company's CVD products consist of the Delta 201 (selling price approximately
$600,000), and the Planar 200 Flowfill (TM) system, selling price ranging
between $1,400,000 and $2,500,000, depending on the configuration of the system.
The Company's PVD products are the Sigma system (selling price ranges from
$1,500,000 to $2,500,000) and the Sigma Forcefill(TM) whose selling price ranges
from $3,500,000 to $4,000,000, depending on the configuration of the system.
The Omega(TM) 201-2 system, the Delta 201, the Planar 200 Flowfill(TM)
and the Sigma and Sigma Forcefill(TM) products were obtained with the
acquisition of Electrotech on November 15, 1996.
Electrotech Acquisition. On November 15, 1996, the Company acquired
Electrotech Limited and Electrotech Equipments Limited, privately-owned United
Kingdom companies founded in 1968, for an aggregate consideration of $75.0
million in cash and 5,600,000 shares of Common Stock, with an estimated fair
market value of $70.7 million, based on the closing sales price of a share of
Common Stock on Nasdaq on the last day prior to the public announcement of the
parties' agreement to the terms of the Acquisition. Electrotech develops,
manufactures, markets and services semiconductor fabrication equipment with
products and technologies for etch, CVD and PVD applications. The Acquisition
expanded the Company's product lines and its sales and service organization
which will enable the Company to have a greater presence throughout the United
States, Europe and Asia.
Semiconductor Industry Downturn. The semiconductor industry is highly
cyclical and has historically experienced periodic downturns, which have been
characterized by diminished product demand and production overcapacity. During
1996, the semiconductor industry experienced a downturn which created a volatile
market that resulted in the semiconductor manufacturers rescheduling and pushing
out orders due to diminished product demand and production overcapacity. The
Company believes that such downturn will continue through at least the third
quarter of 1997. As a result, the Company anticipates reporting lower sales for
the first quarter of 1997 than the fourth quarter of 1996 and anticipates
incurring a significant loss during the quarter. In certain instances, industry
downturns have lasted for extended periods of time. Each of Trikon's operations
have been and will continue to be dependent on the current and anticipated
market demand for integrate circuits (IC's) and products utilizing IC's that are
produced by semiconductor manufacturers. The current weakness in demand in the
semiconductor industry, and any continuation of this weakness in the future, is
likely to materially and adversely affect the Company's business and results of
operations.
Results of Operations
The following table sets forth certain consolidated operating data as a
percentage of total revenue for the periods indicated:
Twelve months
Year ended December 31 ended
---------------------- December 31,
1996(1) 1995(2) 1994(3)
------- ------- -------
Revenues:
Product sales............................................. 93.3% 98.1% 93.3%
Contract revenue.......................................... 6.7 -- --
License revenue........................................... -- 1.9 6.7
----- ----- -----
Total revenues........................................... 100.0 100.0 100.0
Costs and Expenses:
Cost of goods sold....................................... 58.2 52.3 61.3
Research and development................................. 24.0 21.5 40.0
Selling, general and administrative...................... 39.4 27.9 37.3
Amortization of intangibles.............................. 1.1 -- --
In-process technology.................................... 203.7 -- --
----- ----- -----
Total costs and expenses................................ 326.4 101.7 138.6
----- ----- -----
Loss before interest and income tax provision (benefit)... (226.4) (1.7) (38.6)
Interest income (expense), net............................ (0.5) 2.3 (0.2)
----- ----- -----
Income (loss) before income tax provision (benefit)....... (226.9) 0.6 (38.8)
Income tax provision (benefit)............................ (3.2) -- 0.5
----- ----- -----
Net income (loss)......................................... (223.7)% 0.6% (39.3)%
===== ===== =====
Gross margin on product sales............................. 37.5% 46.7% 34.3%
____________________
(1) Includes the results of operations from November 15, 1996 to December 31,
1996 of Electrotech, acquired on November 15, 1996. See Note 2 of the Notes
to the Consolidated Financial Statements.
(2) On August 29, 1995, the Company completed its Initial Public Offering,
resulting in $40,093,235 of net proceeds to the Company. The funds have
been used to cover the Company's working capital needs, its investment in
demonstration systems and capital expenditures, and to pay a portion of the
cash paid in the acquisition of Electrotech.
(3) During 1994, the Company changed its fiscal year end from the last day of
February to December 31. Information for the twelve months ended December
31, 1994 (unaudited) is provided for comparison to the information for the
year ended December 31, 1995.
Product Sales. Product sales increased to approximately $39.4 million for
fiscal 1996 from approximately $20.9 million for 1995, an increase of 89%.
Product sales in 1994 were $8.0 million. The increase in 1996 product sales was
attributable to the increased sales of the Company's PINNACLE 8000R(TM) systems
and the six week revenues achieved following the Company's acquisition of
Electrotech on November 15, 1996. Shipments increased to twelve PINNACLE
8000R(TM) systems, one PINNACLE 8000(R) system, six process modules and eight
MORI(TM) sources in fiscal 1996 compared to eight PINNACLE 8000(R) systems, one
PINNACLE 8000R(TM) system, five process modules, and
twenty MORI(TM) sources shipped in fiscal 1995, and three PINNACLE 8000(R)
systems and three APEX 7000(R) systems during the twelve months ended December
31, 1994. Included in the 1996 sales figures is $8.8 million in product sales
from Electrotech from the sales of three Omega(TM) 201-2 etch systems, two Sigma
Forcefill(TM) systems, and spare parts for the six week period from November 15,
1996 to December 31, 1996. The Company had no sales of Apex systems during 1995
and 1996, and expects that most of its product sales in the near term will be
derived primarily from sales of its Flowfill(TM) and Forcefill(TM) products and
its advanced PINNACLE 8000R(TM) systems.
Sales outside of the United States accounted for approximately 77%, 47% and
66% of total revenue in the years ended December 31, 1996 and 1995, and for the
twelve months ended December 31, 1994. The Company anticipates that sales
outside of the United States will continue to account for a significant portion
of its total revenue. In addition, with the acquisition of Electrotech, which
sells primarily to international locations including Germany, Japan and Israel,
the Company expects that sales to Japanese, Korean and European semiconductor
manufacturers will continue to represent a significant percentage of the
Company's product sales through at least 1997. In addition, because of the
large unit price associated with the Company's systems, the Company anticipates
that its product sales will continue to be made to a small number of customers
in any given quarter. See Note 1 of Notes to Consolidated Financial Statements.
Contract Revenue. For fiscal 1996, the Company received $2.8 million in
contract revenue as compared to no contract revenue for fiscal 1995 and the
twelve months ended December 31, 1994. This increase was due to the March 1996
agreement between Trikon and PMT CVD Partners, L.P. See Notes 1 and 6 to Notes
to Consolidated Financial Statements.
License Revenue. The Company has entered into licensing agreements with
Leybold, Canon Sales, NEC, Anelva and Watkins-Johnson which grant certain rights
for the use of the Company's MORI(TM) technology. These agreements provide for
an initial lump-sum license payment and generally provide the licensee with the
right, upon making further payments, to expand the scope of the license. For
fiscal 1996, the Company received no license revenue, as all these licenses were
fully paid. In fiscal 1995, license revenue was $0.4 million compared to $0.7
million for the twelve months ended December 31, 1994. The Company does not
anticipate the receipt of any additional license revenue from its licensing
agreements for at least the next twelve months. However, the Company may enter
into additional license agreements as it deems appropriate in order to broaden
the applications of its technologies, or to improve the Company's market
penetration.
Gross Margin on Product Sales. The Company's gross margin on product sales
for the year ended December 31, 1996, was 37.5%, as compared to 46.7% and 34.3%
for fiscal 1995 and the twelve months ended December 31, 1994, respectively.
The decrease in gross margin from 1995 to 1996 was primarily due to a low gross
margin of 14% on Electrotech's products shipped for the period from November 15,
1996 to December 31, 1996. The low gross margin was due to the write-up of
Electrotech's inventory on hand to the fair market value of such inventory as of
November 15, 1996, resulting from the allocation of the Electrotech purchase
price as required under Accounting Principles Board Opinion No. 16 ("APB No.
16"). The write-up increased cost of goods sold by approximately $3.0 million
for the period from November 15, 1996 to December 31, 1996, as the related
products were shipped. There is approximately $7.6 million in inventory that,
as of December 31, 1996, relates to the write-up of inventory to the fair market
value at the Acquisition date, based on APB No. 16. The $7.6 million write-up
will affect cost of goods sold as products are shipped from Electrotech in
fiscal year 1997. Gross margins have also been negatively impacted due to
issues related to the slower industry conditions noted above, and will continue
to be adversely affected in 1997.
Research and Development Expenses. Research and development expenses were
$10.1 million or 24.0% of total revenue for fiscal year 1996. This compared to
$4.6 million or 21.5% of total revenue on research and development related
activities in fiscal 1995, and $4.2 million or 40.0% of total revenue in the
twelve months ended December 31, 1994. Electrotech incurred $1.7 million in
research and development expenses for the period from
November 15, 1996 to December 31, 1996, which is included in research and
development expenses of $10.1 million noted above. The major focus of the
Company's research and development efforts during fiscal 1996 was in the
development of new processes and advancing its proprietary plasma source
technology, as well as adding enhancements to its existing products. In
addition, expenses in 1996 included reimbursed costs incurred associated with
the contract revenue from PMT CVD Partners, L.P. with respect to CVD
applications of the Company's technology. See Note 6 of Notes to Consolidated
Financial Statements. Electrotech's research and development efforts were
focused on increasing the development of its Forcefill(TM) and Flowfill(TM)
technologies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $16.6 million or 39.4% of total revenue in fiscal
1996, as compared to $5.9 million or 27.9% of total revenue in fiscal 1995 and
$3.9 million or 37.3% of total revenue in the twelve months ended December 31,
1994. Included in fiscal 1996 expenses is $3.1 million in selling, general and
administrative expenses related to Electrotech for the period from November 15,
1996 to December 31, 1996. The year-to-year dollar increases were primarily due
to the continued expansion of the Company's foreign operations. In addition,
the Company recorded additional expenses in 1996, including the establishment of
a $3.4 million reserve for doubtful accounts related to two shipments recorded
during 1996 to a distributor whose ability to pay is in question. The Company
has also added employees over the past two years to its sales and administration
and customer support areas to accommodate increased sales. The Company
anticipates that selling, general and administration expenses will continue to
grow in relation to the growth in revenue.
Loss From Operations. The Company realized a $95.6 million loss from
operations in fiscal 1996 as compared to a $0.4 million loss from operations in
fiscal 1995 and a $4.1 million loss from operations for the twelve months ended
December 31, 1994. The loss from operations in fiscal 1996 was due primarily to
a one-time acquisition related in-process research and development charge of
$86.0 million, a charge for the allowance for doubtful accounts of $3.4 million
and lower margins on Electrotech sales due to the $3.0 million charge resulting
from the allocation of the purchase price to write-up inventory values, in
accordance with APB No. 16 which was recorded in cost of goods sold as the
related inventory was shipped. The Company anticipates that operating results
will also be unfavorably impacted by approximately $7.6 million in fiscal 1997,
due to the write-up of Electrotech's inventory upon consummation of the
Acquisition to its fair market value.
Interest Income/Expense. Interest income increased to $1.6 million in
fiscal 1996 from $0.8 million in fiscal 1995 and $0.1 million in the twelve
months ended December 31, 1994. This was due to income derived from the
Company's short and long-term investments of the proceeds from the Convertible
Notes issued and sold during 1996, until such proceeds were spent in connection
with the Acquisition, and the proceeds of the public offering of the Company's
Common Stock, completed in the third quarter of fiscal 1995. Interest income in
1995 resulted in the Company's profitability in fiscal 1995, notwithstanding a
$0.4 million loss from operations.
Interest expense increased to $1.8 million in fiscal 1996 from $0.3 million
in fiscal 1995 and $0.2 million in the twelve months ended December 31, 1994.
This was due to the accrual of interest payable to the bondholders of the
convertible debt raised to fund part of the Acquisition. In addition, interest
expense was recorded for the utilization of the Company's $35.0 million working
capital facility from November 15, 1996 through December 31, 1996.
Income Taxes. The Company recorded a $1.3 million income tax benefit in
fiscal 1996 in comparison to accruing only the minimum state requirements in
fiscal 1995 and the minimum state requirements along with certain foreign
withholding taxes for the twelve months ended December 31, 1994. The $1.3
million benefit represents the combination of a foreign tax benefit associated
with the Electrotech operating loss and the reversal of deferred tax credits
established at November 15, 1996 for the difference in the tax basis and
financial reporting basis of the Electrotech assets acquired. The effective tax
rate differs from the statutory tax rate due to certain one-time non-deductible
charges (i.e., primarily the write-off of the in-process technology) and losses
for which no benefit has been provided. The Company's utilization of its
domestic and foreign net operating losses and credit carryforwards depends
upon future income and may be subject to an annual limitation, required by the
Internal Revenue Code of 1986 and similar state provisions. See Note 7 of Notes
to Consolidated Financial Statements.
The Company has operating subsidiaries in several countries, and each
subsidiary is taxed based on the laws of the jurisdiction in which it operates.
Because taxes are incurred at the subsidiary level, and one subsidiary's tax
losses cannot be used to offset the taxable income of subsidiaries in other
jurisdictions, the Company's consolidated effective tax rate may increase to the
extent it reports tax losses in some subsidiaries and taxable income in others.
The subsidiaries are subject to taxation in countries where they operate, and
such operations generally are taxed at rates similar to or higher than tax rates
in the United States. The payment of dividends or distributions by the
subsidiaries to the United States would be subject to withholding taxes in the
country of domicile and may be mitigated under the terms of relevant double tax
treaties.
Liquidity and Capital Resources
At December 31, 1996 the Company had $21.7 million in cash, cash
equivalents and short-term investments, compared to $38.7 million at December
31, 1995. The decrease in cash, cash equivalents and short-term investments
resulted from the use of cash in operating activities of $9.4 million and use of
cash in investing activities of $74.5 which was offset by cash provided by
financing activities of $78.0 million. The use of cash in operating activities
primarily represents investments in operating assets and liabilities amounting
to approximately $5.7 million related to sales volume increases and cash
operating losses of approximately $3.7 million.
Cash provided by financing activities resulted primarily from the offering
of Convertible Subordinated Notes (the "Convertible Notes") completed on October
7, 1996. The Convertible Notes raised gross proceeds of $86,250,000, which
amount was used in the acquisition of Electrotech. The Convertible Notes carry
interest that is payable semi-annually at an annual interest rate of 7-1/8%. The
Convertible Notes have a maturity date of October 15, 2001 and are convertible
at any time at the option of the holder into Common Stock at the conversion rate
of $15.635 per share.
On November 15, 1996, the Company entered into a three-year senior secured
credit facility with certain domestic and U.K. lenders (the "Working Capital
Facility") that permits the Company and its subsidiaries to borrow an aggregate
of up to $35.0 million, subject to borrowing base limitations, based upon
eligible accounts receivable. As of December 31, 1996, the Company had $17.1
million available under the Working Capital Facility, of which $14.5 million in
borrowings was outstanding. The Working Capital Facility places certain
restrictions on the Company, which among other things prohibit the Company from
paying cash dividends, limits the amount of capital expenditures and require the
Company to comply with certain financial ratios and covenants.
On November 14, 1996, the Company received a commitment of terms from five
investors for an unsecured subordinated debt commitment. On December 16, 1996,
the Company entered into a Note Purchase Agreement (the "Note Purchase
Agreement") with the five investors confirming such commitment for unsecured
subordinated debt in the amount of $6,250,000. The interest rate on amounts
drawn under the Note Purchase Agreement will be the bank's prime rate plus 4%.
Interest is payable quarterly. The ability to borrow under the Note Purchase
Agreement expires January 1, 1998 and amounts borrowed under the Note Purchase
Agreement plus accrued but unpaid interest is due on January 1, 2000.
Amounts drawn under the Note Purchase Agreement are unsecured obligations
of the Company. No amounts were outstanding under the Note Purchase Agreement as
of December 31, 1996. The Note Purchase Agreement contains covenants that are
comparable to those contained in the Convertible Notes.
On November 15, 1996, Trikon consummated the acquisition of Electrotech for
an aggregate consideration, excluding acquisition costs of $8.0 million, of
$145.7 million consisting of $75.0 million in cash and 5.6 million shares of
newly-issued Common Stock having a fair market value of $70.7 million, based on
the $12.625 per share closing
price of Common Stock on July 17, 1996, the last day prior to the public
announcement of the acquisition of Electrotech. The net proceeds from the sale
of the Convertible Notes, borrowings under the Working Capital Facility, and
cash and short term investments were used to fund the acquisition of Electrotech
and to pay off $17.6 million of short-term debt assumed as part of such
acquisition.
At December 31, 1996 and March 31, 1997, the Company was out of compliance
with the covenants established under the Working Capital Facility. Its lenders
have granted the Company a waiver of such covenant violations as of December 31,
1996 and as of March 31, 1997. The Company is negotiating with its lenders to
make various amendments to the loan agreement, including revising its covenants
for the duration of the Working Capital Facility such that the Company will be
able to remain in compliance with such amended covenants during the coming year.
Company management anticipates completing the amendment and executing such
agreement in the second quarter of 1997. The Company anticipates the amended
Working Capital Facility to contain terms similar to those currently in place.
The Convertible Notes contain certain provisions which provide that, upon
the occurrence of an "Event of Default", as defined, could cause the
Convertible Notes to become due and payable immediately. Such an Event of
Default would occur if, among other things, the Company were to default on the
Working Capital Facility or any other secured indebtedness, as defined, caused
by the failure to pay principal and interest payments when due or resulting in
the acceleration of such indebtedness prior to its express maturity in excess of
$10.0 million. The Convertible Notes and the Working Capital Facility have been
classified as long-term debt under the presumption that the Working Capital
Facility will be amended such that the Company will be able to comply with the
applicable financial covenants over the coming year.
During 1996, $10.0 million was invested in capital equipment, as the
Company used funds to expand its applications laboratory to support process
development and customer demonstrations and Electrotech finalized development of
a new corporate facility in South Wales.
The Company anticipates that it will spend approximately $16 million for
capital expenditures during fiscal 1997. This is expected to include
investments in demonstration and test equipment, information systems, leasehold
improvements and other capital items that should enable the Company to expand
its ability to support and develop new products and services. In addition, the
Company expects to increase its investment in inventory of demonstration systems
at customer sites.
In March 1996, Trikon sponsored a partnership with certain third-party
investors to fund research and development costs and expenses relating to CVD
technology and applications. Third-party investors invested an aggregate of
approximately $5,350,000 in the partnership, which aggregate amount was
available to fund such costs and expenses. At December 31, 1996, approximately
$2,133,038 remained available for future funding of such research and
development. As noted above, the Company does not anticipate that any of such
remaining funds will be made available for such research and development. See
Notes 6 and 12 to Notes to Consolidated Financial Statements.
The Company believes that cash provided or available from operations, the
Working Capital Facility, borrowings under the Note Purchase Agreement and other
sources of cash available to the Company, including cash, cash equivalents and
short-term investments on hand, will be sufficient to support the Company's
liquidity needs over the next 12 months. However, if the Company is unable to
amend the Working Capital Facility under similar terms as currently exists, the
Company's ability to generate adequate cash may be substantially affected.
Impact of Inflation
Although the Company cannot accurately anticipate the effect of inflation
on its operations, to date inflation has not had a material effect on the
Company's product sales or results of operations.
ITEM 6. (continued) SELECTED COMBINED FINANCIAL DATA OF ELECTROTECH
The selected combined financial data presented below for the fiscal year
ended June 30, 1993, and as of and for each of the three fiscal years ended June
30, 1994, 1995, and 1996 are derived from audited combined financial statements
of Electrotech, which have been audited by Ernst & Young Chartered Accountants,
independent auditors, and, except with respect to the June 30, 1993 financial
statements, are contained elsewhere herein. The selected combined financial
data presented below as of June 30, 1993 and as of and for the year ended June
30, 1992 and as of September 30, 1996 and for the three months ended September
30, 1996 and 1995 are derived from unaudited combined financial statements of
Electrotech, which are not contained herein. The combined financial statements
below are presented in British pounds sterling. For reference purpose, the Noon
Buying Rate was U.S. $1.65 = (Pounds)1 on December 12, 1996. All of the
selected combined financial data below is prepared under accounting principles
generally accepted in the United Kingdom ("UK GAAP"), which differ in certain
respects from United States generally accepted accounting principles ("US
GAAP"). The selected combined financial data set forth below is qualified in
its entirety by, and should be read in conjunction with, Electrotech's combined
financial statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Electrotech," which
are included in this Form 10-K.
Three Months
Ended
September 30 Year Ended June 30
------------------------------ ---------------------------------------------
1996 1995 1996 1995 1994
-------------- -------------- ------------- -------------- -------------
(in thousands of British pounds)
Combined Profit and Loss Accounts Data:
Sales.......................................... (Pounds)10,197 (Pounds)7,761 (Pounds)49,012 (Pounds)34,496 (Pounds)23,807
Cost of sales.................................. 5,218 3,760 23,406 17,014 11,496
-------------- ------------- -------------- -------------- --------------
Gross profit................................... 4,979 4,001 25,606 17,482 12,311
Operating expenses:
Research and development costs................. 1,702 1,239 6,674 4,421 3,332
Administrative expenses........................ 2,321 1,861 8,295 8,615 7,161
-------------- ------------- -------------- -------------- --------------
Total operating expenses....................... 4,023 3,100 14,969 13,036 10,493
-------------- ------------- -------------- -------------- --------------
Operating profit (loss)........................ 956 901 10,637 4,446 1,818)
Profit on disposal of businesses(1)............ -- -- -- 5,040 --
-------------- ------------- -------------- -------------- --------------
Profit on ordinary activities before interest.. 956 901 10,637 9,486 1,818
Interest payable, net.......................... (211) (146) (609) (438) (255)
-------------- ------------- -------------- -------------- --------------
Profit on ordinary activities before taxation.. 745 755 10,028 9,048 1,563
Tax on profit on ordinary activities........... 332 344 3,721 3,530 574
-------------- ------------- -------------- -------------- --------------
Profit for the period.......................... (Pounds)413 (Pounds)411 (Pounds)6,307 (Pounds)5,518 (Pounds)989
============== ============= ============== ============== ==============
1993 1992
-------------- -------------
Combined Profit and Loss Accounts Data:
Sales.......................................... (Pounds)16,547 (Pounds)13,919
Cost of sales.................................. 7,967 6,790
------------- --------------
Gross profit................................... 8,580 7,129
Operating expenses:
Research and development costs................. 2,365 2,207
Administrative expenses........................ 4,659 6,764
------------- --------------
Total operating expenses....................... 7,024 8,971
------------- --------------
Operating profit (loss)........................ 1,556 (1,842)
Profit on disposal of businesses(1)............ -- 4,652
------------- --------------
Profit on ordinary activities before interest.. 1,556 2,810
Interest payable, net.......................... (95) (376)
------------- --------------
Profit on ordinary activities before taxation.. 1,461 2,434
Tax on profit on ordinary activities........... 627 1,110
------------- --------------
Profit for the period.......................... (Pounds)834 (Pounds)1,324
============= ==============
As of As of June 30
September 30, ---------------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- -------------- --------------
Combined Balance Sheet Data:
Working capital................. (Pounds)15,847 (Pounds)16,422 (Pounds)14,035 (Pounds)10,547 (Pounds)10,075 (Pounds) 8,173
Total assets.................... 47,427 51,030 38,339 28,005 22,093 18,173
Long-term obligations........... 977 948 1,339 1,932 2,559 1,097
Total shareholder's equity...... 27,013 26,621 20,401 14,844 13,836 12,884
- ----------------------------
(1) Represents the profits, before taxes, recognized on the sales of Surface
Technology Systems Limited during the fiscal year ended June 30, 1995 and
the sale of the business of Plasma Products Limited during the fiscal year
ended June 30, 1992.
ITEM 7. (continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ELECTROTECH
The following discussion should be read in conjunction with the combined
financial statements of Electrotech and notes thereto and "Selected Combined
Financial Data of Electrotech" included elsewhere in this Form 10-K. The
combined financial statements of Electrotech combine the consolidated financial
statements of each of Electrotech Equipments Limited (ETE) and Electrotech
Limited (ET), which are subject to common control. The financial information
for Electrotech has been prepared in accordance with UK GAAP and in British
pounds. See Note 29 of the notes to the Electrotech combined financial
statements for a reconciliation to US GAAP for selected financial information
Background
A privately-owned company, Electrotech was founded in 1968 by three
scientists from the European research division of ITT as a small manufacturer of
vacuum accessories. By 1980, the core technologies of Electrotech had been
developed to address plasma etch (1975), plasma enhanced CVD (1978) and PVD
(1980). Electrotech opened sales offices in the U.S. and continental Europe
markets in the 1970's, appointed its first sales agents in Japan in 1983 and,
thereafter, expanded into other areas of the Asia/Pacific region.
In 1995, Electrotech sold its Surface Technology Systems Limited ("STS")
subsidiary to Sumitomo Precision Products Co. Limited, resulting in a gain of
(Pounds)5.0 million, before taxes, in the fiscal year ended June 30, 1995. The
proceeds from the sale of STS were used to fund a portion of a major expansion
program which included a move in 1996 into new corporate and manufacturing
headquarters in Newport, South Wales.
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain line items in the combined profit and loss
accounts related to the operations of Electrotech:
Three Months
Ended
September 30 Year Ended June 30
--------------- ------------------------
1996 1995 1996 1995 1994
------- ------ ----- ------- -----
Sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................... 51.2 48.4 47.8 49.3 48.3
------- ------ ----- ------- -----
Gross margin.................................... 48.8 51.6 52.2 50.7 51.7
Research and development expenses............... 16.7 16.0 13.6 12.8 14.0
Administrative expenses......................... 22.8 24.0 16.9 25.0 30.1
------- ------ ----- ------- -----
Total operating expenses........................ 39.5 40.0 30.5 37.8 44.1
Profit on disposal of business.................. -- -- -- 14.6 --
------- ------ ----- ------- -----
Profit on ordinary activities before interest... 9.3 11.6 21.7 27.5 7.6
Interest payable, net........................... (2.0) (1.9) (1.2) (1.3) (1.1)
------- ------ ----- ------- -----
Profit on ordinary activities before taxation... 7.3 9.7 20.5 26.2 6.5
Tax charge on profit on ordinary activities..... 3.3 4.4 7.6 10.2 2.4
------- ------ ----- ------- -----
Profit for the period........................... 4.0% 5.3% 12.9% 16.0% 4.1%
======= ====== ===== ======= =====
Comparison Of The Three Months Ended September 30, 1996 To The Three Months
Ended September 30, 1995
Revenues
Total revenues were (Pounds)10.2 million for the three months ended
September 30, 1996 compared to (Pounds)7.8 million for the three months ended
September 30, 1995, an increase of 30.8%. Notwithstanding such period-to-period
increase, revenues for the quarter ended September 30, 1996 decreased from
(Pounds)15.2 million, or 33%, as compared to revenues for the quarter ended June
30, 1996.
The period-to-period increase in revenues is primarily due to increased
sales of PVD products (Forcefill(TM) and Sigma). Units shipped increased to four
Sigma systems and two Forcefill(TM) modules in the three months ended September
30, 1996, compared to two Sigma systems and one Forcefill(TM) module in the
three months ended September 30, 1995. Revenues from these products were
(Pounds)7.8 million, representing 76.6% of total revenues in the three months
ended September 30, 1996 compared to revenues of (Pounds)2.9 million,
representing 37.1% of total revenues in the three months ended September 30,
1995. Revenues from the sales of PVD products increased by 169% between the two
quarters. The increase in revenues from the sale of Sigma products from quarter
to quarter was primarily due to higher unit selling prices and a reduction in
the number of sales made through distributors.
There were no sales of CVD products (Flowfill(TM), Delta and ND) during the
quarter ended September 30, 1996. During the quarter ended September 30, 1995,
there were sales of one Flowfill(TM), one Delta and one ND system, resulting in
total revenues of (Pounds)1.4 million.
Revenues from sales of Omega(TM) etch products were (Pounds)600,000 for the
three months ended September 30, 1996 and (Pounds)1.5 million for the three
months ended September 30, 1995, a decrease of 60% between the two periods.
During the three months ended September 30, 1996, two Omega(TM) etch systems
were shipped, compared to three Omega(TM) systems, during the three months ended
September 30, 1995.
Gross Margin
Electrotech's gross margin was 48.8% in the three months ended September
30, 1996 and 51.6% in the three months ended September 30, 1995. The decrease
in gross margin is primarily due to the effect of exchange rate fluctuations on
conversion to pounds sterling of revenues earned in other currencies.
Research and Development Expenses
Research and development expenses include costs associated with the
definition, design and development of new products. Research and development
expenses were (Pounds)1.7 million for the three months ended September 30, 1996,
compared to (Pounds)1.2 million for the three months ended September 30, 1995,
an increase of 41.7%. This increase is primarily due to increased development
costs on Forcefill(TM) and Flowfill(TM) technologies.
Electrotech considers its research and development activities to be crucial
to its future success and, therefore, expects its research and development
expenditures to continue to rise in monetary terms, although not necessarily as
a percentage of sales.
Administrative Expenses
Administrative expenses consist of personnel costs and overhead for
administration, finance, sales and marketing, information systems, human
resources and general management. Administrative expenses were (Pounds)2.3
million during the three months ended September 30, 1996 compared to (Pounds)1.9
million during the three months ended September 30, 1995, an increase of 21.0%
over such periods. Significant variations in expenditure between the two
periods were in payroll costs, which increased to (Pounds)945,000 from
(Pounds)827,000, an increase of 14.3%, and automobile and
travel costs which increased to (Pounds)580,000 from (Pounds)365,000, an
increase of 58.9%. Included in administrative expenses for the three months
ended September 30, 1996 were currency exchange gains of (Pounds)303,000
compared to currency exchange gains of (Pounds)150,000 for the three months
ended September 30, 1995.
In January 1996, Electrotech commenced partial occupation of new leased
premises in Newport, South Wales. Electrotech anticipates that the property
will be fully occupied by early 1997. Following full occupation of the property
the rental charge and depreciation of improvements will increase administrative
expenses by approximately (Pounds)1.2 million per annum. Management anticipates
that general and administrative expenses will continue to increase in support of
planned business expansion in markets outside the United Kingdom.
Interest Expense, Net
Net interest expense was (Pounds)211,000 in the three months ended
September 30, 1996 compared to (Pounds)146,000 in the three months ended
September 30, 1995, an increase of 44.5% over such periods. The increase was
primarily due to increased working capital requirements necessary to fund the
expansion of the business.
Income Tax Expense
Income tax expense was (Pounds)332,000 in the three months ended September
30, 1996 compared to (Pounds)344,000 in the three months ended September 30,
1995, a decrease of 3.5% over such periods. The effective tax rates were 44.6%
and 45.5%, respectively. The high effective tax rate for both periods was
primarily due to a larger portion of earnings arising in countries with a higher
effective tax rate than the U.K.
Worldwide Tax Expense