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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 0-26482
TRIKON TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4054321
- ------------------------------------------------- -----------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
Ringland Way, Newport, Gwent NP6 2TA, United Kingdom
- ---------------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 441-633-414-000
-----------------------------
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
As of August 12, 1998, the total number of outstanding shares of the
Registrant's common stock was 93,723,829.
1
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TRIKON TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheets
at June 30, 1998 and December 31, 1997..................... 3
Unaudited Condensed Consolidated Statements of
Operations for the Three Months ended June 30, 1998 and
1997 and for Six Months ended June 30, 1998 and 1997....... 6
Unaudited Condensed Consolidated Statements of Cash
Flows for the Six Months ended June 30, 1998 and 1997...... 7
Notes to Unaudited Condensed Consolidated Financial
Statements................................................. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 21
Item 2. Changes in Securities and Use of Proceeds.................. 21
Item 5. Other Information.......................................... 21
Item 6. Exhibits and Reports on Form 8-K........................... 22
SIGNATURE PAGE............................................................ 23
EXHIBITS.................................................................. 24
</TABLE>
2
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TRIKON TECHNOLOGIES, INC.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997(1)
-------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $13,405 $ 9,260
Accounts receivable, net of reserves.......................... 9,460 18,842
Inventories................................................... 18,961 23,870
Other current assets.......................................... 2,650 1,622
------- -------
Total current assets.......................................... 44,476 53,594
Property, equipment and leasehold improvements, net.............. 20,961 22,140
Demonstration systems, net....................................... 3,542 1,227
Bond financing costs, net........................................ 97 2,313
Other assets..................................................... 401 416
------- -------
Total assets..................................................... $69,477 $79,690
======= =======
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
3
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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997(1)
---- ---------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Convertible subordinated notes.................................... $ -- $ 86,250
Accounts payable and accrued expenses............................. 5,169 9,765
Sales returns payable............................................. 11,468 11,468
Restructuring costs............................................... 2,520 3,952
Other current liabilities......................................... 6,420 7,953
--------- ---------
Total current liabilities......................................... 25,577 119,388
Convertible subordinated notes........................................ 4,147 --
Other non-current liabilities ....................................... 6,046 5,245
--------- ---------
Total liabilities..................................................... 35,770 124,633
SHAREHOLDERS' EQUITY (DEFICIENCY):
Preferred Stock
Authorized shares -- 20,000,000
Series G Preferred Stock, no par value, stated at
$6.75 per share liquidation preference
Designated shares - 3,125,000
Issued and outstanding - 0 at June 30, 1998 and
2,962,032 at December 31, 1997............................... -- 19,349
Series H Preferred Stock, no par value, $10 per share
liquidation preference
Designated shares - 3,000,000
Issued and outstanding 2,855,754 at June 30, 1998
and none at December 31, 1997................................ 28,558 --
Series I Junior Participating Preferred Stock, no par
value, $0.001 per share liquidation preference
Designated Shares - 44,000
Issued and outstanding - 43,739.109 at June 30, 1998
and 0 at December 31, 1997................................... 28,868 --
Common Stock, no par value
Authorized shares - 50,000,000
Issued and outstanding - 49,984,726 at June 30,
1998 and 15,147,115 at December 31, 1997..................... 170,104 137,767
Cumulative translation adjustment..................................... (272) (745)
Deferred Compensation................................................. (7,400) --
Accumulated deficit................................................... (186,151) (201,314)
--------- ---------
Total shareholders' equity (deficit).................................. 33,707 (44,943)
--------- ---------
Total liabilities and shareholders' equity (deficit).................. $ 69,477 $ 79,690
========= =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
4
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(1) The Condensed Consolidated Balance Sheet at December 31, 1997 has been
derived from the audited financial statements at that date, but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See Notes to Unaudited Condensed Consolidated Financial Statements
5
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TRIKON TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales........................... $ 8,292 $ 19,111 $ 15,495 $ 31,063
License revenues........................ -- -- 10,000 --
----------- ----------- ----------- -----------
8,292 19,111 25,495 31,063
Costs and expenses:
Cost of goods sold...................... 6,546 12,618 11,181 22,467
Research and development................ 2,337 4,251 4,373 9,154
Selling, general and administrative..... 5,455 8,345 10,257 15,380
In-process technology................... -- 2,974 -- 2,974
Restructuring costs..................... 1,843 -- 1,843 --
Amortization of intangibles............. -- 904 -- 1,808
----------- ----------- ----------- -----------
16,181 29,092 27,654 51,783
----------- ----------- ----------- -----------
Loss from operations....................... (7,889) (9,981) (2,159) (20,720)
Other:
Interest expense, net................... (948) (2,421) (2,889) (4,766)
----------- ----------- ----------- -----------
Loss before income tax
provision (benefit)................... (8,837) (12,402) (5,048) (25,486)
Income tax provision (benefit).......... -- (1,441) (217) (2,906)
----------- ----------- ----------- -----------
Net loss before extraordinary item......... (8,837) (10,961) (4,831) (22,580)
Extraordinary item 20,293 -- 20,293 --
----------- ----------- ----------- -----------
Net income (loss) $ 11,456 $ (10,961) $ 15,462 $ (22,580)
=========== =========== =========== ===========
Net income (loss) applicable
to common shares........................ $ 11,158 $ (10,961) $ 15,164 $ (22,580)
=========== =========== =========== ===========
Earnings (loss) per common share data:
Basic:
Loss applicable to common shares before
extraordinary gain.................... $ (0.18) $ (0.76) $ (0.15) $ (1.57)
Extraordinary gain...................... 0.41 -- 0.62 --
----------- ----------- ----------- -----------
Net income (loss)....................... $ 0.23 $ (0.76) $ 0.47 $ (1.57)
=========== =========== =========== ===========
Diluted:
Loss applicable to common shares before
extraordinary gain..................... $ (0.18) $ (0.76) $ (0.16) $ (1.57)
Extraordinary gain...................... $ 0.40 $ -- $ 0.61 --
----------- ----------- ----------- -----------
Net income (loss)....................... $ 0.22 $ (0.76) $ 0.45 $ (1.57)
=========== =========== =========== ===========
Average common shares used in
the calculation: - Basic................. 49,794 14,433 32,566 14,378
- Diluted............... 51,226 14,433 33,335 14,378
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
6
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TRIKON TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended
------------------------------------
June 30, June 30,
1998 1997
------------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................... $ 15,462 $(22,580)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Extraordinary item.............................................. (20,293) --
Depreciation and amortization of plant, equipment, leasehold
improvements and demonstration systems......................... 1,948 3,359
Amortization of intangibles..................................... 7 1,808
Amortization of financing costs................................. 300 349
Amortization of deferred compensation........................... 185
In-process technology........................................... -- 2,974
Deferred income taxes........................................... -- (3,048)
Changes in operating assets and liabilities:
Accounts receivable............................................. 9,382 (2,339)
Inventories..................................................... 4,909 11,549
Demonstration systems........................................... (2,315) (1,629)
Other current assets............................................ (1,013) 797
Accounts payable, other accrued expenses and other current (4,224) (11,042)
liabilities....................................................
Other liabilities............................................... 704 2,370
Other........................................................... 473 --
-------- --------
Net cash generated (used) in operating activities............... 5,525 (17,432)
INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements.......................................... (520) (6,175)
Proceeds from sales of short-term investments............. -- 824
Purchases of short-term investments....................... -- (2,472)
Other long-term assets.................................... -- (867)
------- --------
Net cash used in investing activities..................... (520) (8,690)
FINANCING ACTIVITIES
Net borrowings (repayments) under bank credit lines....... -- 6,534
Costs relating to Exchange Offer.......................... (700) --
Proceeds from sale of preferred stock..................... -- 15,775
Proceeds from sale of common stock and warrants........... -- 2,260
Payments on capital lease obligations..................... (160) (281)
------- --------
Net cash provided by (used) in financing activities....... (860) 24,288
------- --------
Net increase (decrease) in cash and cash equivalents...... 4,145 (1,834)
Cash and cash equivalents at beginning of period.......... 9,260 20,188
------- --------
Cash and cash equivalents at end of period................ $13,405 $ 18,354
======= ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
7
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TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The operating results for the six months ended June 30, 1998,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in Trikon Technologies,
Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December
31, 1997.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. During 1997, following significant losses
from operations, negative cash flows from operating activities, and violations
of debt covenants, the Company's working capital facility was terminated (see
Note G). The Company does not currently have a credit facility with any
lenders. Management's plans with respect to these conditions include the sale
of licenses, as discussed in Note I, restructuring of its operations,
obtaining a new working capital facility and the Exchange Offer (as defined
below) discussed in Note J. Management believes that the successful
implementation of these actions and the cash flow from future operations will
be sufficient to fund the Company's operations. However any increase in costs
or decrease or elimination of anticipated sources of revenues or the inability
of the Company to successfully implement management's plans would raise
significant doubt as to the Company's ability to fund its operations in the
ordinary course.
NOTE B: INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- -------
<S> <C> <C>
Components.......................... $ 6,665 $ 7,864
Work in process..................... 12,296 13,680
Finished goods...................... -- 2,326
------- -------
$18,961 $23,870
======= =======
</TABLE>
NOTE C: DEMONSTRATION SYSTEMS
Demonstration systems represent completed systems at certain strategic customer
sites. The Company provides these demonstration systems at no charge for a
specified evaluation period. All operating costs incurred during the evaluation
period are paid by the customer. At the conclusion of the agreed upon
evaluation period, provided that the equipment performs to specifications,
management expects that the customer will purchase the system, though they are
not obligated to do so. If the system is returned, it is refurbished for resale
or used for research and development. Demonstration systems are stated at the
lower of cost or estimated net realizable value and are depreciated on a
straight line method over four years, if they are not sold after one year.
NOTE D: PMT CVD PARTNERS, L.P. AGREEMENT
In the first quarter of fiscal 1997, the Company determined that certain
characteristics of the CVD technology of Trikon Limited (as defined below) known
as "Flowfill," were superior to the high density plasma CVD processes then being
pursued by a limited partnership sponsored by the Company (the "Limited
Partnership") pursuant to a R&D Agreement (the "R&D Agreement") entered into as
of March 29, 1996 between the Limited Partnership and the Company (under which
the Company performed all research and development work for the Limited
Partnership). The Company decided to discontinue further research and
development work under the R&D Agreement and instead focus its consolidated
efforts, on its own behalf and not on behalf of the Limited Partnership, upon
the Flowfill(R) CVD technology used in the equipment developed and manufactured
by Trikon Technologies
8
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TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (CONTINUED)
Limited and Trikon Equipments Limited (collectively "Trikon Limited").
Accordingly, a settlement of any and all rights and claims by the limited
partners of the Limited Partnership was made on June 30, 1997 ("CVD Purchase
Agreement") to terminate the R&D Agreement and all related agreements, and
purchase all of the outstanding interests in the Limited Partnership for 679,680
shares of the Company's Common Stock (the "CVD Partnership Shares"). The assets
acquired included approximately $2.2 million of cash and approximately $3.0
million of in-process research and development which was recorded as a one-time
charge as purchased in-process technology expense in the quarter ended June 30,
1997. In connection with the purchase of all of the outstanding interests in the
Limited Partnership, the Company agreed to cause a registration statement
covering the CVD Partnership Shares filed under the Securities Act of 1933, as
amended (the "Securities Act"), to become effective on or prior to September 1,
1997. In the event that the Company did not cause a registration statement to
become effective on or prior to September 1, 1997, the Company originally agreed
to pay the holders of the CVD Partnership Shares liquidated damages comprising a
one-time fee of $75,000 and an amount equal to $2,500 per day for each day after
September 1, 1997, and prior to the effective date of the registration
statement. The Company and the holders of the CVD Partnership Shares amended the
CVD Purchase Agreement on December 12, 1997, to provide for (i) the immediate
payment of liquidated damages accrued through November 1, 1997, of $225,000,
(ii) no further incurrence of liquidated damages should the registration
statement be effective by March 15, 1998, (iii) in the event that Trikon did not
cause the registration statement to become effective by March 15, 1998,
resumption of liquidated damages accruing at a rate of $2,500 for each day
thereafter until the Registration Statement becomes effective, and (iv) should
the registration statement not be effective by April 1, 1998, Trikon would
become obligated to the holders of CVD Partnership Shares for the liquidated
damages for the period between November 1, 1997, and March 15, 1998, in the
amount of $335,000. As of June 30, 1998, the Company had not caused a
registration statement to become effective.
NOTE E: INCOME TAXES
The tax benefit in the three and six months ended June 30,1998 represents the
combination of a foreign tax benefit associated with Trikon Limited's
operating loss and no tax liability on domestic profits, because they are
fully absorbed by tax losses brought forward. In the first and second fiscal
quarter of 1997, the tax benefit represents the combination of a foreign tax
benefit associated with Trikon Limited's operating loss and the reversal of
deferred tax credits established at November 15, 1996 for the difference in
the tax basis and financial reporting basis of the Trikon Limited assets
acquired. For these reasons, the effective tax rates differ from the statutory
federal tax rate. The Company's ability to use its domestic and foreign net
operating losses and credit carryforwards will depend upon future income and
will be subject to an annual limitation, required by the Internal Revenue Code
of 1986 and similar state provisions.
Upon closing of the Exchange Offer (see Note J), a change of ownership
occurred under section 382 of the Internal Revenue Code, which will
substantially limit the availability of the Company's net operating loss
carryforward. Due to the limitation, a substantial amount of net operating
loss carryforward may expire unused.
The Company has operating subsidiaries in several countries, and each subsidiary
is taxed based on the laws of the jurisdiction in which it operates. Because
taxes are incurred at the subsidiary level, and one subsidiary's tax losses
cannot be used to offset the taxable income of subsidiaries in other
jurisdictions, the Company's consolidated effective tax rate may increase to the
extent it reports tax losses in some subsidiaries and taxable income in others.
The subsidiaries are subject to taxation in countries where they operate, and
such operations generally are taxed at rates similar to or higher than tax rates
in the United States. The payment of dividends or distributions by the
subsidiaries to the United States would be subject to withholding taxes in the
country of domicile and may be mitigated under the terms of relevant double tax
treaties.
NOTE F: NET INCOME (LOSS) PER SHARE
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," which changes the method
previously used to compute earnings per share and requires restating all prior
periods. Under the new requirements, the dilutive effect of stock options are
excluded from the calculation of basic earnings per share and included in the
calculation of diluted earnings per share, when dilutive. Diluted earnings per
share for the three and six months ended June 30, 1998 exclude the effects of
all outstanding stock options because the exercise price of such stock options
exceeded the market price of the underlying stock, exclude the restricted
shares issued to the Company's Chairman of the Board (see Note J) because under
the treasury stock method these shares are anti-dilutive and assume the Series
G Preferred Stock was converted into 2,962,032 shares of
9
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TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (CONTINUED)
Common Stock as of January 1, 1998 under the if-converted method. Diluted
earnings per share for the three and six months ended June 30, 1997 exclude
the effects of all options and convertible preferred stock because such
securities were anti-dilutive for the periods. Basic and diluted earnings
(loss) per share under SFAS No. 128 for the three and six months ending June
30, 1997 were the same as previously reported as primary loss per share. Net
income and the loss before extraordinary item used in computing basic and
diluted per share amounts has been adjusted for the accretion of $298,000 of
dividends on the Series G Preferred Stock. The weighted average shares
outstanding used in the computation of the basic and diluted per share amounts
assumes the Series I Preferred Stock had been converted into Common Stock at
the date of issuance.
NOTE G: LINE OF CREDIT AND LONG-TERM DEBT
During the period from November 14, 1996 to November 12, 1997, the Company had a
senior secured credit facility with certain domestic and U.K. lenders (the
"Working Capital Facility") that permitted the Company and its subsidiaries to
borrow an aggregate of up to $35.0 million, subject to borrowing base
limitations, based upon eligible accounts receivable. The Company was out of
compliance with certain financial ratios and covenants established under the
Working Capital Facility at December 31, 1996, March 31, 1997, June 30, 1997 and
September 30, 1997.
On November 12, 1997, in connection with the sale of licenses to Applied
Materials, Inc. ("Applied Materials") the Company entered into a pay-off
agreement with its domestic and U.K. lenders relating to the Working Capital
Facility (the "Pay-off Agreement). Under the Pay-off Agreement, among other
things, the Company made payments in the aggregate of approximately $12.5
million (which included all outstanding principal and interest due at November
12, 1997) to its lenders under the Working Capital Facility, the lenders under
the Working Capital Facility released all of their liens on the assets of the
Company and the Working Capital Facility was terminated. In addition, in order
to collateralize certain obligations of Trikon Limited relating to bankers'
guarantees and a credit facility with the Company's U.K. lender, the Company
provided cash collateral of approximately $1.4 million to the U.K. lender. As
of June 30, 1998, the cash collateral provided was $1.1 million.
In connection with the acquisition of Trikon Limited, the Company issued
$86,250,000 principal amount of Convertible Subordinated Notes (the "Convertible
Notes"). Interest on the Convertible Notes was 7-1/8%, which was payable in
semi-annual installments beginning on April 15, 1997. From January 1997 to May
14, 1998, the Convertible Notes bore an additional 0.5% interest per annum due
to the Company's noncompliance with certain registration rights of the holders
of the Convertible Notes.
Until May 14,1998, the Convertible Notes contained certain provisions which,
upon the occurrence of an "Event of Default" (as defined in the Convertible
Notes) could cause the Convertible Notes to become due and payable immediately.
Such an Event of Default would occur if, among other things, the Company were to
default on the Working Capital Facility or any other secured indebtedness, as
defined in the Convertible Notes, caused by the failure to pay principal and
interest payments when due or resulting from the acceleration of any such
indebtedness prior to its express maturity in excess of $10.0 million.
On May 14, 1998, the Company accepted for exchange approximately $82.1 million
principal amount of the Convertible Notes duly tendered in the Exchange Offer
described in Note J below.
As outlined in the offering document, disseminated in connection with the
Exchange Offer, the Company did not pay interest of $3.3 million accrued to and
due on April 15, 1998. Interest was paid on May 15, 1998 to the holders of the
Convertible Notes which did not accept the Exchange Offer. In accordance with
the terms of the Exchange Offer, any accrued and unpaid interest on Convertible
Notes accepted in the Exchange Offer will not be paid and has been included in
the calculation of the extraordinary gain arising on the exchange of the
Convertible Notes.
NOTE H: PREFERRED STOCK
During the quarter ended June 30, 1997, the Company commenced a private offering
(the "Private Placement") of shares of its newly-authorized Series G Preferred
Stock together with three-year warrants to purchase Common Stock at an exercise
price of $8.00 per share (the "Warrants"). The Company sold an aggregate of
2,962,032 shares of Series G Preferred Stock (together with Warrants to purchase
an aggregate of 888,610 shares of Common Stock) with net proceeds to the Company
of approximately $19,349,000. Investors in the Private Placement received
10
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TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (CONTINUED)
Warrants exercisable for a number of shares of Common Stock equal to 30% of the
number of shares of Series G Preferred Stock purchased, at a total price of
$6.75 per share of Series G Preferred Stock.
On May 14, 1998, following the expiration of the Exchange Offer (see Note J),
the Company accepted for conversion 2,873,143 shares of Series G Preferred
Stock, or approximately 97% of the outstanding shares, duly tendered in the
Exchange Offer. In accordance with the terms of the Certificate of
Determination of the Company that sets forth the rights, preferences and
privileges of the Series G Preferred Stock, the conversion of more than two-
thirds of the outstanding shares of Series G Preferred Stock caused the
automatic conversion of all other outstanding shares of Series G Preferred
Stock.
NOTE I: LICENSE AGREEMENTS
On November 12, 1997, the Company granted non-exclusive, worldwide, paid-up
licenses of its MORI(TM) source and Forcefill(R) PVD technologies to Applied
Materials. Under the terms of the license agreements and related technology
transfer agreements, Applied Materials paid the Company $29.5 million, $26.5
million of which was paid in 1997 and an additional $3 million of which was paid
in the first quarter of 1998 upon completion of the technology transfer. Under
one of the license agreements, Applied Materials also purchased four MORI(TM)
sources for $0.5 million prior to December 31, 1997.
On March 18, 1998, the Company granted a non-exclusive, worldwide license of its
MORI(TM) source technology to Lam Research. Under the terms of the license
agreement, Lam Research will pay up to $20.0 million, $10.0 million of which was
paid in the first half of 1998 and $10.0 million of which consists of contingent
payments and royalties. License revenue of $10 million has been recognized in
the consolidated income statement for the three months ended March 31, 1998.
The license agreements with Applied Materials and Lam Research do not preclude
Trikon from utilizing, or licensing to other third parties, the licensed
technology.
NOTE J: EXCHANGE OFFER
On April 14, 1998, the Company commenced an exchange offer (the "Exchange
Offer") for all of the outstanding Convertible Notes, Series G Preferred Stock
and Warrants, and filed a Schedule 13E-4 with the Securities and Exchange
Commission. The Exchange Offer expired at 5:00 P.M., New York City time, on May
14, 1998, and immediately thereafter, the Company accepted for exchange or
conversion all validly tendered Convertible Notes, Series G Preferred Stock and
Warrants. $82,103,000 principal amount of Convertible Notes (approximately 95%
of the aggregate principal amount outstanding), 2,873,143 shares of Series G
Preferred Stock (approximately 97% of the total shares outstanding) and 866,388
Warrants (approximately 97% of the Warrants outstanding) had been validly
tendered for exchange. Because more than two-thirds of the outstanding shares of
Series G Preferred Stock tendered, in accordance with the terms of the
Certificate of Determination of the Company establishing the rights, preferences
and privileges of the Series G Preferred Stock, all other outstanding shares of
Series G Preferred Stock automatically converted into shares of Common Stock.
The $82,103,000 principal amount of Convertible Notes tendered have been
exchanged for 22,660,798 new shares of Common Stock, 2,855,754 new shares of
Series H Preferred Stock, $10 stated amount per share, and 29,264.625 new shares
of Series I Junior Participating Preferred Stock. The shares of Series G
Preferred Stock and Warrants have been exchanged for 7,161,002 new shares of
Common Stock and 7,997.489 new shares of Series I Junior Participating Preferred
Stock. The Series H Preferred Stock will be redeemable at the option of the
Company for cash on June 30, 2001, at a redemption price equal to the stated
amount and the holders of the Series H Preferred Stock shall be entitled to
receive dividends at an annual rate of 8-1/8% of the stated amount payable
annually, at the option of the Company, in cash or additional shares of
preferred stock or any combination thereof. The Series H Preferred Stock is
subject to automatic conversion if the Company's Common Stock price reaches
certain levels and accelerated redemption if certain cash flow levels are
achieved.
In connection with the consummation of the Exchange Offer, the Company has
agreed to issue 5,015,811 million shares of restricted Common Stock and
6,476.995 shares of restricted Series I Preferred Stock to the Company's
Chairman of the Board. Subject to certain conditions, the restricted stock will
vest one hundred percent (100%) upon the earlier of (i) May 14, 2003, or (ii)
the sale of all or substantially all of the assets of the Company. The
restricted stock issued
11
<PAGE>
TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (CONTINUED)
to the Chairman of the Board is valued at $7.6 million, based upon average
traded prices immediately before and after the grant. This amount has been
accounted for as an increase to Common Stock and a charge to deferred
compensation within shareholders' equity. The deferred compensation is
being amortized on a straight line basis over a five year period and $0.2
million has been charged to selling, general and administrative expenses
during the three and six months ended June 30, 1998. Upon conversion of all
Series I Preferred Stock into Common Stock, the stock issued to the Chairman
of the Board represented approximately 11,500,000 shares, or 12% of
outstanding Common Stock (after giving effect to the elimination of the
restrictions on the Chairman of the Board's stock).
On July 28, 1998, at the Company's Annual Meeting of Shareholders, the
shareholders approved, among other things, an amendment (the "Charter
Amendment") to the Articles of Incorporation of the Company to provide for an
increase in the number of authorized shares of Common Stock. Upon approval of
the Charter Amendment, each share of Series I Preferred Stock automatically
converted into 1,000 shares of Common Stock.
After June 30, 1998 the Company agreed to exchange the remaining 22,222
Warrants on the same terms as those already tendered.
As outlined in the Exchange Offer documents, the Company did not pay interest of
$3.3 million accrued to and due on April 15, 1998. Interest was paid to the
holders of Convertible Notes which did not accept the Exchange Offer on May 15,
1998. In accordance with the terms of the Exchange Offer, any accrued and
unpaid interest on Convertible Notes accepted in the Exchange Offer will not be
paid and has been included in the calculation of the extraordinary gain arising
on the exchange of the Convertible Notes.
The Exchange Offer has been accounted for under SFAS No. 15, "Troubled Debt
Restructuring."
NOTE K: EMPLOYMENT AGREEMENTS
In connection with the negotiation of the Applied Materials and Lam Research
licenses, restructuring the Company and future licensing efforts, the Board of
Directors authorized a $1,500,000 bonus payable to the Chairman of the Board.
The bonus is not payable prior to June 30, 1999 and is conditional, amongst
other matters, upon the Company having at least $8,000,000 of EBITDA during and
for its two most recently completed fiscal quarters, taken as one period. This
bonus has not been reflected in the financial statements at June 30, 1998 and
will be charged to future earnings when it is probable that the financial and
other conditions relating to the bonus will be met.
NOTE L: RESTRUCTURING
At December 31, 1997, the Company recorded a liability for certain restructuring
costs related to the closure of its Chatsworth operations. For the three and
six months ended June 30, 1998, the restructuring liability has been reduced by
actual payments, as anticipated by the Company. At June 30, 1998, the Company
set up an additional reserve of $1.843 million for future support costs relating
to MORI equipment supplied to customers prior to the commencement of the
restructuring.
As a result of the Company's decision to substantially exit the MORI Etch
business, the Company anticipates certain MORI(TM) Etch related product returns.
Although the Company is not required to accept all such returns, the Company
believes it may be necessary to maintain certain customer relationships.
Accordingly, the sales return reserve recorded as of June 30, 1998 is
management's estimate of the liability for MORI(TM) Etch products that may be
returned due to the Company's decision to substantially exit the MORI Etch
business. There have been no payments made for sales returns in the six months
ended June 30, 1998.
Dallas Semiconductor Corporation ("Dallas Semiconductor") filed on April 9, 1998
an action against the Company in state court in Dallas County, Texas. The
complaint alleges breach of warranty, fraud, negligent misrepresentation, and
breach of contract regarding the purchase of two PMT Pinnacle Polysilicon Etch
Systems from the Company. Dallas Semiconductor seeks damages of $8.0 million and
exemplary damages of $16.0 million. The lawsuit was removed on May 7, 1998 to
federal court in the Northern District Court of Texas. The Company filed a
motion to dismiss the claims in federal court on May 27, 1998. In response,
Dallas Semiconductor decided not to oppose the merits of the motion but instead
exercise its "one time" right to amend its pleading under applicable law. On
June 26, 1998, Dallas Semiconductor filed a first amended complaint setting
forth its claims with greater specificity. The Company filed a motion to
dismiss the amended claims on July 30, 1998. The Company believes that the
claims are without merit and intends to vigorously defend them. At this early
stage, the Company cannot determine the total expense or the ultimate outcome
of the lawsuit. Although the Management does not believe the claim will have a
material adverse effect on the Company's financial position, results of its
operations or cash flow, there can be no assurance to that effect.
In the ordinary course of business and in connection with the Company's
restructuring, the Company is involved in various types of claims and legal
proceedings which will result in litigation or other legal proceedings. The
12
<PAGE>
TRIKON TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (CONTINUED)
Company does not anticipate that any of the proceedings will have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
NOTE M: EXTRAORDINARY GAIN
On May 14, 1998, the Company accepted for exchange approximately $82.1 million
principal amount of Convertible Notes tendered in the Exchange Offer (See Note
J). The Convertible Notes were exchanged for 22,660,798 million shares of
Common Stock, 29,264.625 shares of Series I Junior Participating Preferred Stock
and 2,855,754 million shares of Series H Preferred Stock. The shares of Common
Stock and equivalents had an average value of $0.66 each following the exchange.
The extraordinary gain arising on the exchange is as follows (in thousands):
<TABLE>
<S> <C>
Principal amount of Convertible Subordinated Notes exchanged $ 82,103
Interest waived 3,635
--------
85,738
Value of Common Stock and Series I Preferred Stock (34,271)
Series H Preferred Stock issued (28,558)
Convertible Subordinated Note issuance costs written-off (1,916)
Costs relating to the Exchange Offer (700)
--------
Net gain on exchange $ 20,293
========
</TABLE>
NOTE N: COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130.
During the six months of 1998 and 1997, total comprehensive income (loss)
amounted to $15.9 million and ($24.2) million, respectively.
During the three months ended June 30, 1998 and 1997, total comprehensive income
(loss) amounted to $4.6 million and $(13.9) million, respectively.
13
<PAGE>
TRIKON TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth below contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 with respect to the financial condition, results
of operations and business of the Company. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially and adversely from those set forth in the forward-looking
statements, including, without limitation, the availability of financial
resources adequate for the Company's short-, medium- and long-term needs, the
Company's ability to successfully implement its strategy of reorganizing its
product lines and overall business, varying customer demand for the Company's
new products and system products, potential material adverse effects on such
demand resulting from the Company's licensing of its MORI(TM) source and
Forcefill(R) physical vapor deposition ("PVD") technologies to Applied Materials
and Lam Research, supply and manufacturing constraints and costs, dependence on
outside suppliers, the various effects on revenue, margins, inventories and
operating expenses of reorganizing in the Company's product lines and overall
business, the Company's ability to build and maintain adequate staff
infrastructure in the area of PVD and chemical vapor deposition ("CVD") design,
product engineering and development, sales and marketing, and administrations,
customer warranty claims, slowing growth in the demand for semiconductors,
challenges from the Company's competition, general economic conditions,
including the economic downturn in Asia, potential delisting from the Nasdaq
National Market if the Company cannot meet the listing requirements, year 2000
problems, and the other risks and uncertainties described from time to time in
the Company's public announcements and SEC filings, including without limitation
the Company's Quarterly and Annual Reports on Form 10-Q and 10-K, respectively.
The Company cautions that the foregoing list of important factors is not
exclusive. In addition, such list of important factors speaks only as of the
date hereof and the Company does not undertake to update any written or oral
forward-looking statement that may be made from time to time by or on behalf of
the Company.
OVERVIEW
The Company develops, manufactures, markets and services semiconductor equipment
for the worldwide semiconductor manufacturing industry.
On November 15, 1996, the Company acquired (the "Acquisition") Electrotech
Limited and Electrotech Equipments Limited, privately-owned United Kingdom
companies founded in 1968, for an aggregate consideration of $75.0 million in
cash and 5.6 million shares of Common Stock, with an estimated fair market value
of $70.7 million, based on the closing sale price of a share of Common Stock on
the Nasdaq National Market on the last day prior to the public announcement of
the parties' agreement to the terms of the Acquisition. During the second
quarter of 1997, Electrotech Limited and Electrotech Equipments Limited changed
their names to Trikon Limited and Trikon Equipments Limited (collectively
"Trikon Limited"). Trikon Limited develops, manufactures, markets and services
semiconductor fabrication equipment with products and technologies for CVD, PVD
and etch applications. The Acquisition expanded the Company's product lines and
its sales and service organization which has enabled the Company to have a
greater presence throughout the United States, Europe and Asia.
In the second half of 1997, in response to continuing losses, violations of debt
covenants and the limited availability of financing, the Company began a
restructuring effort that included exploring various strategic alternatives as
to the future of the business. In October 1997, the Company announced a 20%
reduction in its workforce. In November 1997, the Company sold worldwide, non-
exclusive, paid up licenses of its MORI(TM) source and Forcefill(R) PVD
technologies to Applied Materials for $29.5 million. With the sale of the
MORI(TM) source license, the Company began executing a plan to close its Etch
Division located in Chatsworth, California, resulting in the termination of an
additional 13% of its work force. In connection with the closure of the
Chatsworth Etch operations and the sale of the licenses, the Company incurred
during the fourth quarter of 1997, non-cash related charges of approximately
$32.5 million for the write-off of certain accounts receivable, inventories and
long-lived assets which, due to the sale of the licenses and the decision to
close the Etch Division, had become impaired. In addition, due to the continuing
losses, reduced sales and changes in the Company's business, since the
acquisition of Trikon Limited, the Company wrote-off, during the fourth quarter
of 1997, approximately $32.3 million of intangible assets established in the
allocation of the purchase price of Trikon Limited. The Company incurred certain
cash related charges of approximately $18.3 million associated with the
termination of employees of the Etch Division and of the Company's worldwide
operations, closing of the Chatsworth Etch operations and anticipated product
returns.
14
<PAGE>
TRIKON TECHNOLOGIES, INC.
During the three and six months ended June 30, 1998, the Company settled
approximately $2.4 million and $3.3 million, respectively, of the accrued
restructuring costs. At June 30, 1998, the Company reserved a further $1.8
million to meet future customer support costs associated with MORI(TM) equipment
supplied to customers prior to closure of the MORI(TM) etch division. The
Company anticipates approximately $3.0 million of the remaining liability at
June 30, 1998 will be paid in 1998 and $11.0 million in 1999, however, actual
payments could vary significantly depending on the Company's cash flows and
continuing negotiations with its customers. As a result of the closure of the
Chatsworth Etch operations, operating costs for the first two quarters of 1998
are significantly reduced by comparison with the same periods of 1997. Costs of
$97.6 million relating to the restructuring of the Company were charged to
earnings for the year ended December 31, 1997. The above described charges to
earnings and reserves reflect the estimates and assumptions of management, and
there can be no assurance that the provisions and allowances are adequate. If
actual costs are greater than the provisions and allowances, then it will
materially and adversely affect its results of operations.
As a result of the restructuring, the remaining business consists primarily of
the worldwide operations of Trikon Limited, the Company acquired by Trikon on
November 15, 1996, with headquarters located in the United Kingdom.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of total
revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- -------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
Product sales................................... 100.0% 100.0% 60.8% 100.0%
License revenues................................ 0.0 0.0 39.2 0.0
------- -------- -------- --------
Total revenues.................................. 100.0 100.0 100.0 100.0
Cost of goods sold.............................. 78.9 66.0 43.9 72.3
------- -------- -------- --------
Gross margin.................................... 21.1 34.0 56.1 27.7
Operating expenses:
Research and development..................... 28.2 22.2 17.2 29.4
Selling, general and
administrative............................... 65.8 43.7 40.2 49.5
In-process technology........................ 0.0 15.6 0.0 9.6
Restructuring costs.......................... 22.2 0.0 7.2 0.0
Amortization of intangibles.................. 0.0 4.7 0.0 5.8
------- -------- -------- --------
Total operating expenses........................ 116.2 86.2 64.6 94.3
------- -------- -------- --------
Loss from operations............................ (95.1) (52.2) (8.5) (66.6)
Interest expense, net........................... (11.3) (12.7) (11.3) (15.3)
------- -------- -------- --------
Loss before income tax provision
(benefit)................................... (106.4) (64.9) (19.8) (81.9)
Income tax provision (benefit).................. (1.3) (7.5) ( 0.9) (9.4)
--------- --------- -------- ---------
Loss before extraordinary item.................. (105.1)% (57.4)% (18.9)% (72.5)%
========= ========= ======== =========
</TABLE>
PRODUCT SALES. Product sales for the second quarter of fiscal 1998 decreased
57% to $8.3 million compared to $19.1 million for the second quarter of fiscal
1997. The decrease was partly attributable to the discontinuance of sales of
MORI(TM) etch equipment. Revenues from sales of MORI(TM) etch products during
the second quarter of fiscal 1997 amounted to $7.2 million. There were no
revenues from those products during the second quarter of fiscal 1998. Excluding
sales of MORI(TM) etch products, product revenues for the second quarter of
fiscal 1998 have
15
<PAGE>
TRIKON TECHNOLOGIES, INC.
decreased by $3.6 million or 30% from the second quarter of fiscal 1997. During
the second quarter of fiscal 1998, the Company shipped two Sigma PVD and two
Omega etch systems, as compared to one Sigma ForceFill(TM), one Delta CVD, two
Flowfill CVD, two Omega(TM) etch, and four MORI systems during the second
quarter of fiscal 1997. Revenues from product sales for the six month period
ended June 30, 1998 decreased by 50% to $15.5 million as compared to $31.1
million for the six months ended June 30, 1997. Product sales decreased as a
result of the shipment of seven systems, including one MORI etch system, in the
six months ended June 30, 1998, as compared to fourteen systems, including four
MORI etch systems, in the six months ended June 30, 1997.
Sales outside of the United States accounted for approximately 93% of total
revenues in the second quarter of 1998 and 28% of total revenues in the second
quarter of 1997. Sales outside of the United States accounted for approximately
44% and 30% of total revenues in the six months ended June 30, 1998 and 1997,
respectively. Excluding the license revenues, sales outside the United States
accounted for 72% and 30% of product sales for the six months ended June 30,
1998 and 1997, respectively. The quantity of product shipped will fluctuate
significantly from quarter to quarter and the individual customers to which
these products are sold can also change from quarter to quarter. Given the
significance of each individual sale, the percentage of sales made outside of
the United States will also fluctuate significantly from quarter to quarter.
LICENSE REVENUES. License revenues in the six months ended June 30, 1998,
comprise the sale of a non-exclusive worldwide license of MORI(TM) source
technology to Lam Research Corporation (see Note I to Notes to Condensed
Consolidated Financial Statements).
GROSS MARGIN ON PRODUCT REVENUES. The Company's gross margin on product sales
for the second quarter of fiscal 1998 was 21% as compared to 34% for the second
quarter of fiscal 1997. For the six months ended June 30, 1998, the gross
margin on product sales was 28% as compared to 28% for the six months ended June
30, 1997. The relatively low gross margin for the second quarter of fiscal 1998
was due to the write-down of inventory with a book value of $0.6 million which
is now considered redundant. The gross margin for the three and six months
ended June 30, 1998, excluding the write down was 28% and 32%, respectively.
The relatively low gross margin in 1997 resulted from the write-up of Trikon
Limited inventory shipped in the first quarter of 1997, on hand as of November
15, 1996, to the fair market value of such inventory, resulting from the
allocation of the purchase price of Trikon Limited as required under Accounting
Principles Board ("APB") Opinion No. 16. Gross margins have been negatively
impacted due to issues related to weakened product demand, such as unabsorbed
manufacturing overhead associated with reduced units sold, and will continue to
be adversely affected during remainder of 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
second quarter of fiscal 1998 was $2.3 million, or 28% of total revenues,
compared to $4.3 million, or 22% of total revenues, for the second quarter of
fiscal 1997. Included in research and development expenses during the second
quarter of fiscal 1997 is $2.0 million related to the Chatsworth Etch Division.
For the six months ended June 30, 1998, research and development expenses were
$4.4 million, or 17% of total revenues as compared to $9.2 million, or 29% of
total revenues for the six months ended June 30, 1997. The major focus of the
Company's research and development efforts during the first six months of fiscal
1998 was on the development of new processes in further advancing its
proprietary PVD, CVD and etch technologies as well as adding enhancements to its
existing products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the second quarter of fiscal 1998 were $5.5 million,
or 66% of total revenues, compared to $8.3 million, or 44% of total revenues, in
the second quarter of fiscal 1997. In the six months to June 30, 1998, selling
general and administrative expenses were $10.3 million or 40% of total revenues,
compared to $15.4 million or 49.5% of total revenues in the six months ended
June 30,1997. The dollar decreases were primarily due to the reduced overhead
resulting from the closure of the Chatsworth Etch operations.
LOSS FROM OPERATIONS. The Company realized a $7.9 million loss from operations
in the second quarter of fiscal 1998, as compared with a $10.0 million loss from
operations in the second quarter of fiscal 1997. The loss from operations in
the second quarter of fiscal 1998 was due primarily to weak product demand,
resulting in reduced product revenues and lower gross margins. In addition, the
Company has set up a restructuring reserve of $1.8 million in the quarter to
cover future customer support costs relating to MORI(TM) etch products supplied
prior to the closure of the division. For the six months ended June 30, 1998,
the Company realized a $2.2 million loss from operations, compared with a $20.7
million loss from operations for the six months ended June 30, 1997. The
16
<PAGE>
TRIKON TECHNOLOGIES, INC.
Company anticipates that operating results will continue to be unfavorably
impacted by weak product demand during the remainder of fiscal 1998.
INTEREST EXPENSE, NET. Interest expense, net decreased to $0.9 million in the
second quarter of fiscal 1998 from $2.4 million in the second quarter of fiscal
1997. The interest expense in the second quarter of 1998 is primarily due to
the accrual of interest payable to the holders of the Convertible Notes. The
reduction in interest expense between the second quarter of 1997 and the second
quarter of 1998 arises from the repayment and non-utilization of the Working
Capital Facility since November 1997. Interest expense for the three months and
six months ended June 30, 1998 is net of interest income of $0.3 million and
$0.4 million, respectively. Interest expense for the three and six months ended
June 30, 1997 is net of interest income of $0.1 million and $0.5 million,
respectively.
INCOME TAXES. The Company recorded a $0.2 million tax benefit in the three
months ended March 31, 1998 and the six months ended June 30, 1998, compared to
a $1.4 million tax benefit in the second quarter of fiscal 1997 and a $2.9
million benefit for the six months ended June 30, 1997. The tax benefit in the
first quarter of 1998 represents the combination of a foreign tax benefit
associated with Trikon Limited's operating loss and no tax liability on domestic
profits, which are fully absorbed by tax losses brought forward. In the first
and second fiscal quarters of 1997, the tax benefit represents the combination
of a foreign tax benefit associated with Trikon Limited's operating loss and the
reversal of deferred tax credits established at November 15, 1996 for the
difference in the tax basis and financial reporting basis of the Trikon Limited
assets acquired.
The Company's ability to use its domestic and foreign net operating losses and
credit carryforwards will depend upon future income and will be subject to an
annual limitation, required by the Internal Revenue Code of 1986 and similar
state provisions.
Upon closing of the Exchange Offer (as defined below; see also Note J of Notes
to Unaudited Condensed Consolidated Financial Statements), a change of
ownership occurred under section 382 of the Internal Revenue Code, which will
substantially limit the availability of the Company's net operating loss
carryforward. Due to the limitation, a substantial amount of net operating
loss carryforward may expire unused.
The Company has operating subsidiaries in several countries, and each subsidiary
is taxed based on the laws of the jurisdiction in which it operates. Because
taxes are incurred at the subsidiary level, and one subsidiary's tax losses
cannot be used to offset the taxable income of subsidiaries in other
jurisdictions, the Company's consolidated effective tax rate may increase to the
extent it reports tax losses in some subsidiaries and taxable income in others.
The subsidiaries are subject to taxation in countries where they operate, and
such operations generally are taxed at rates similar to or higher than tax rates
in the United States. The payment of dividends or distributions by the
subsidiaries to the United States would be subject to withholding taxes in the
country of domicile and may be mitigated under the terms of relevant double tax
treaties.
17
<PAGE>
TRIKON TECHNOLOGIES, INC.
EXTRAORDINARY GAIN
On May 14, 1998, the Company accepted for exchange approximately $82.1 million
principal amount of Convertible Notes tendered in the Exchange Offer. (See
Note J to Notes to Unaudited Condensed Consolidated Financial Statements
above.) The Convertible Notes were exchanged for 22,660,798 million shares of
Common Stock, 29,264.625 shares of Series I Junior Participating Preferred
Stock and 2,855,754 million shares of Series H Preferred Stock. The shares of
Common Stock and equivalents had an average value of $0.66 each following the
exchange. The extraordinary gain arising on the exchange is as follows (in
thousands):
<TABLE>
<S> <C>
Principal amount of Convertible Subordinated Notes exchanged $ 82,103
Interest waived 3,635
--------
85,738
Value of Common Stock and Series I Preferred Stock (34,271)
Series H Preferred Stock issued (28,558)
Convertible Subordinated Note issuance costs written-off (1,916)
Costs relating to the Exchange Offer ( 700)
--------
Net gain on exchange $ 20,293
========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $13.4 million in cash and cash equivalents,
compared to $9.3 million at December 31, 1997. The increase in cash and cash
equivalents principally arose from cash generated from operating activities of
$5.5 million offset by cash used in investing activities of $0.5 million and
cash used in financing activities of $0.9 million.
On March 18, 1998, the Company granted a non-exclusive, worldwide license of its
MORI(TM) source technology to Lam Research. Under the terms of the license
agreement, Lam Research will pay up to $20.0 million, $10.0 million of which was
paid in the first half of 1998, and $10.0 million of which consists of
contingent payments and royalties.
On November 12, 1997, the Company granted non-exclusive, worldwide, paid-up
licenses of its MORI(TM) source and Forcefill(R) PVD technologies to Applied
Materials. Under the terms of the license agreements and related technology
transfer agreements, Applied Materials paid the Company $29.5 million, $26.5
million of which was paid in 1997 and an additional $3 million of which was paid
in the first quarter of 1998 upon completion of the technology transfer. Under
one of the license agreements, Applied Materials also purchased four MORI
sources for $0.5 million prior to December 31, 1997. The license agreements
with Applied Materials and Lam Research do not preclude Trikon from utilizing,
or licensing to other third parties, the licensed technology.
During the period from November 14, 1996 to November 12, 1997, the Company had a
senior secured credit facility with certain domestic and U.K. lenders (the
"Working Capital Facility") that permitted the Company and its subsidiaries to
borrow an aggregate of up to $35.0 million, subject to borrowing base
limitations, based upon eligible accounts receivable. The Company was out of
compliance with certain financial ratios and covenants established under the
Working Capital Facility at December 31, 1996, March 31, 1997, June 30, 1997 and
September 30, 1997.
On November 12, 1997, in connection with the sale of licenses to Applied
Materials, the Company entered into a pay-off agreement (the "Pay-off"
Agreement) with its domestic and U.K. lenders relating to the Working Capital
Facility. Under the terms of the Pay-off Agreement, the Company made payments in
the aggregate of approximately $12.5 million (including all outstanding
principal and interest due at November 12, 1997) to its lenders under the
Working Capital Facility, the lenders under the Working Capital Facility
released all of their liens on the assets of the Company and the Working Capital
Facility and all of the Company's obligations under the Working Capital
Agreement were terminated. In order to collateralize certain obligations of
Trikon Limited, relating to bankers guarantees and a credit facility with the
Company's U.K. lender, the Company provided cash collateral of approximately
$1.4 million to the U.K. lender. As of June 30, 1998, the cash collateral
provided was $1.1 million.
The $29.5 million in proceeds from the sale of the license agreements to Applied
Materials was used to pay off the $12.5 million balance on the Working Capital
Facility and $3.1 million in interest due on the Convertible Notes. The Company
used the remainder to fund the closure of the Chatsworth, California, Etch
operations, including the employee termination cost and debt service
requirements.
During the quarter ended June 30, 1998, Trikon Limited made the final repayment
on a term-loan from Lloyd's Bank PLC which was secured by property in Bristol,
United Kingdom.
In connection with the Acquisition of Trikon Limited, the Company issued
$86,250,000 of 7-1/8% Convertible Subordinated Notes due 2001 (the "Convertible
Notes").
On April 14, 1998, the Company commenced an exchange offer (the "Exchange
Offer") for all of the outstanding Convertible Notes, Series G Preferred Stock
and warrants to purchase its Common Stock issued in connection with the
placement of the Series G Preferred Stock (the "Warrants"). The Exchange Offer
expired at 5:00 P.M,, New York City time, on May 14, 1998, and immediately
thereafter, the Company accepted for exchange or conversion all
18
<PAGE>
TRIKON TECHNOLOGIES, INC.
validly tendered Convertible Notes, its Series G Preferred Stock and Warrants.
$82,103,000 principal amount of Notes (approximately 95% of the aggregate
principal amount outstanding), 2,873,143 shares of Series G Preferred Stock
(approximately 97% of the total shares outstanding) and 866,388 Warrants
(approximately 97% of the Warrants outstanding) had been validly tendered for
exchange. $4,147,000 principal amount of Convertible Notes did not accept the
Exchange Offer and remain outstanding. As outlined in the offering document
issued in connection with the Exchange Offer, the Company did not pay interest
of $3.3 million accrued to and due on April 15, 1998. Interest was paid to the
holders of the Convertible Notes which did not accept the Exchange Offer on May
15, 1998. In accordance with the terms of the Exchange Offer, any accrued and
unpaid interest on Convertible Notes, accepted in the Exchange Offer, will not
be paid and has been included in the calculation of the profit or loss arising
on the exchange of the Convertible Notes. Since June 30, 1998, the Company has
agreed to exchange the remaining 22,222 Warrants which had not previously been
tendered.
As previously disclosed, in early 1997 the Company determined that certain
characteristics of the chemical vapor deposition ("CVD") technology of Trikon
Limited known as "Flowfill" are superior to the high density plasma CVD
processes which were being pursued by PMT CVD Partners, L.P. (the "Limited
Partnership"), a limited partnership sponsored by the Company for MORI(TM) CVD
development pursuant to an R&D agreement (the "R&D Agreement") entered into as
of March 29, 1997 between the Limited Partnership and the Company (under which
the Company agreed to perform all research and development work for the Limited
Partnership). Accordingly, during the first quarter of 1997, the Company
decided to discontinue further research and development work under the R&D
Agreement and instead focus its consolidated efforts, on its own behalf and not
on behalf of the Limited Partnership, upon the FlowFill(R) CVD technology used
in the Trikon Limited equipment. Certain of the limited partners of the Limited
Partnership asserted that this decision was inconsistent with the R&D Agreement
and representations made by the Company in connection with the Limited
Partnership and that, accordingly, a settlement of any and all claims that the
limited partners of the Limited Partnership might have in connection with such
discontinuation was appropriate.
Effective June 30, 1997, the Company acquired all of the outstanding limited
partnership interests of the Limited Partnership and all of the shares of the
Limited Partnership's corporate general partner, in exchange for the Company's
issuance of an aggregate of 679,680 shares of Common Stock of the Company (the
"CVD Partnership Shares") pro rata to the limited partners of the Limited
Partnership (excluding the Company) (the "CVD Purchase Agreement").Pursuant to
this transaction, all CVD technology which had been developed by the Limited
Partnership prior to such discontinuation, together with approximately $2.2
million of unspent funds of the Limited Partnership, are now owned solely by the
Company, and any and all claims that the limited partners of the Limited
Partnership may have had in connection with the termination of the research and
development project thereunder or otherwise relating to the Limited Partnership
have been resolved. In connection with the purchase of all of the outstanding
interests in the Limited Partnership and its corporate general partner, the
Company agreed to cause a registration statement covering the CVD Partnership
Shares under the Securities Act of 1933, as amended (the "Securities Act"), to
become effective on or prior to September 1, 1997. In the event that the
Company did not cause a registration statement to become effective on or prior
to September 1, 1997, the Company originally agreed to pay the holders of the
CVD Partnership Shares liquidated damages comprising a one-time fee of $75,000
and an amount equal to $2,500 per day for each day after September 1, 1997, and
prior to the effective date of the registration statement. The Company and the
holders of the CVD Partnership Shares amended the CVD Purchase Agreement on
December 12, 1997, to provide for (i) the immediate payment of liquidated
damages accrued through November 1, 1997, of $225,000, (ii) no further
incurrence of liquidated damages should the registration statement be effective
by March 15, 1998, (iii) in the event that Trikon does not cause the
registration statement to become effective by March 15, 1998, resumption of
liquidated damages accruing at a rate of $2,500 for each day thereafter until
the Registration Statement becomes effective, and (iv) should the registration
statement not be effective by April 1, 1998, Trikon will become obligated to the
holders of CVD Partnership Shares for the liquidated damages for the period
between November 1, 1997, and March 15, 1998, in the amount of $335,000. As of
June 30, 1998, the Company had not caused a registration statement to become
effective.
The Company anticipates that it will spend up to $2.0 million for capital
expenditures for the months remaining in fiscal 1998. This is expected to
include investments in demonstration and test equipment, information systems,
leasehold improvements and other capital items that should enable the Company to
expand its ability to support and develop new products and services.
19
<PAGE>
TRIKON TECHNOLOGIES, INC.
During 1997, following significant losses from operations, negative cash flows
from operating activities, and violations of debt covenants, the Company's
working capital facility was terminated. (See Note G to Notes to Unaudited
Condensed Consolidated Financial Statements above.) The Company does not
currently have a credit facility with any lenders. Management's plan with
respect to these conditions includes the sale of licenses, restructuring of its
operations, obtaining a new working capital facility and the Exchange Offer
discussed in Note J to the Notes to the Unaudited Condensed Consolidated
Financial Statements. Management believes that the successful implementation of
these actions and the cash flow from future operations will be sufficient to
fund the Company's operations. However, any increase in costs or decrease or
elimination of anticipated sources of revenues or the inability of the Company
to successfully implement management's plans would raise significant doubt as to
the Company's ability to fund its operations in the ordinary course.
Year 2000
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior to
the year 2000 in order to maintain functionality. The Company is assessing both
the internal readiness of its computer systems and the compliance of its
products sold to customers for handling the year 2000. The Company expects to
implement successfully the systems and programming changes necessary to address
year 2000 issues and does not believe that the cost of such actions will have a
material effect on the Company's results of operations or financial condition.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
future results of operations.
20
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Dallas Semiconductor Corporation ("Dallas Semiconductor") filed on April 9, 1998
an action against the Company in state court in Dallas County, Texas. The
complaint alleges breach of warranty, fraud, negligent misrepresentation, and
breach of contract regarding the purchase of two PMT Pinnacle Polysilicon Etch
Systems from the Company. Dallas Semiconductor seeks damages of $8.0 million and
exemplary damages of $16.0 million. The lawsuit was removed on May 7, 1998 to
federal court in the Northern District Court of Texas. The Company filed a
motion to dismiss the claims in federal court on May 27, 1998. In response,
Dallas Semiconductor decided not to oppose the merits of the motion but instead
exercise its "one time" right to amend its pleading under applicable law. On
June 26, 1998, Dallas Semiconductor filed a first amended complaint setting
forth its claims with greater specificity. The Company filed a motion to
dismiss the amended claims on July 30, 1998. The Company believes that the
claims are without merit and intends to vigorously defend them. At this early
stage, the Company cannot determine the total expense or the ultimate outcome
of the lawsuit. Although the Management does not believe the claim will have
a material adverse effect on the Company's financial position, results of its
operations or cash flow, there can be no assurance to that effect.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 1998, the Company commenced an exchange offer
(the "Exchange Offer") for all of its outstanding 7-1/8% Convertible
Subordinated Notes due 2001 (the "Convertible Notes") Series G Preferred Stock
(the "Series G Preferred Stock") and warrants issued in connection with the
issuance of Series G Preferred Stock (the "Warrants"). The Exchange Offer
expired at 5:00 p.m., New York City time, on May 14, 1998, and immediately
thereafter, the Company accepted for exchange or conversion all validly tendered
Convertible Notes, Series G Preferred Stock and Warrants. $82,103,000 principal
amount of Convertible Notes (approximately 95% of the aggregate principal amount
outstanding), 2,873,143 shares of Series G Preferred Stock (approximately 97% of
the total shares outstanding) and 866,388 Warrants (approximately 97% of the
Warrants outstanding) were validly tendered for exchange. Because more than
two-thirds of the outstanding shares of Series G Preferred Stock tendered, in
accordance with the terms of the Certificate of Determination of the Company
establishing the rights, preferences and privileges of the Series G Preferred
Stock, all other outstanding shares of Series G Preferred Stock automatically
converted into shares of Common Stock.
The $82,103,000 principal amount of Convertible Notes tendered were exchanged
for 22,660,798 shares of the Company's Common Stock (the "Common Stock"),
2,855,754 shares of the Company's Series H Preferred Stock, $10 stated amount
per share (the "Series H Preferred Stock"), and 29,264.625 shares of Series I
Junior Participating Preferred Stock (the "Series I Preferred Stock"). The
shares of Series G Preferred Stock were converted and exchanged for 6,294,614
shares of Common Stock and 7,997.489 shares of Series I Preferred Stock. The
Warrants were converted and exchanged for 866,388 shares of Common Stock.
The Exchange Offer was made by the Company in reliance on the exemption from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), afforded by Section 3(a)(9) thereof. This exemption was made
available because all the securities exchanged were with existing security-
holders of the Company and the Company did not pay any commission or other
remuneration to any broker, dealer, salesman or other person for soliciting
tenders of Notes, Series G Preferred Stock or Warrants.
Each share of Series H Preferred Stock is subject to automatic conversion into
1.4285 shares of Common Stock if and when the closing price of the Common Stock
on a United States national securities exchange or on an established automated
over-the-counter trading market in the United States is at a price in excess of
$7.00 for a period of 30 consecutive trading days.
On July 28, 1998, at the Company's Annual Meeting of Shareholders, the
shareholders approved, among other things, an amendment (the "Charter
Amendment") to the Articles of Incorporation of the Company to provide for an
increase in the number of authorized shares of Common Stock. Upon approval of
the Charter Amendment, each share of Series I Preferred Stock, pursuant to its
terms, automatically converted into 1,000 shares of Common Stock (the
"Conversion Ratio").
ITEM 5. OTHER INFORMATION
As disclosed in the Company's latest proxy statement, the deadline for
submitting proposals to be considered for inclusion in the Company's Proxy
Statement for the 1999 Annual Meeting is March 4, 1999.
Pursuant to recent amendments to Rule 14a-4(c)(1) under the Securities Exchange
Act of 1934, as amended, the Company will have discretionary voting authority if
a proponent does not notify the Company by May 22, 1999 of their intent to
present a proposal from the floor at the 1999 Annual Meeting of Shareholders or
of their intent to commence a proxy solicitation for the 1999 Annual Meeting of
Shareholders.
21
<PAGE>
TRIKON TECHNOLOGIES, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
4.5* Certificate of Determination establishing the rights, preferences and privileges of the
Series H Preferred Stock
4.6* Certificate of Determination establishing the rights, preferences and privileges of the
Series I Junior Participating Preferred Stock
4.7* First Supplemental Indenture, dated as of May 14, 1998, between the Company and U.S.
Trust Company of California, N.A.
10.1 Employment Agreement, dated as of May 14, 1998, among Christopher D. Dobson, the
Company and Trikon Technologies Limited
10.2 Letter Agreement, dated as of May 14, 1998, between Christopher D. Dobson and the
Company
10.3 Employment Agreement, dated as of May 28, 1998 between the Company and Thomas C.
McKee
27.1 Financial Statement Data
</TABLE>
*Filed as an exhibit to the Company's Current Report on Form 8-K on May 28, 1998
and incorporated herein by reference.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K (the "Form 8-K") with the
Securities and Exchange Commission on May 28, 1998. The Form 8-K reported that
the Company had consummated the Exchange Offer. The Company, at its option,
provided unaudited pro forma financial information pursuant to Item 5 of the
Form 8-K.
22
<PAGE>
TRIKON TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIKON TECHNOLOGIES, INC.
Date: August 13, 1998 /s/ Thomas C. McKee
-------------------
Thomas C. McKee
Chief Executive Officer and Director
Date: August 13, 1998 /s/ Jeremy Linnert
------------------
Jeremy Linnert
Chief Financial Officer
23
<PAGE>
TRIKON TECHNOLOGIES, INC.
TRIKON TECHNOLOGIES, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Page No. Description
----------- -------- -----------
<S> <C>
4.5* Certificate of Determination establishing the rights, preferences and
privileges of the Series H Preferred Stock
4.6* Certificate of Determination establishing the rights, preferences and
privileges of the Series I Junior Participating Preferred Stock
4.7* First Supplemental Indenture, dated as of May 14, 1998, between the
Company and U.S. Trust Company of California, N.A.
10.1 Employment Agreement, dated as of May 14, 1998, among Christopher D.
Dobson, the Company and Trikon Technologies Limited
10.2 Letter Agreement, dated as of May 14, 1998, between Christopher D.
Dobson and the Company
10.3 Employment Agreement, dated as of May 28, 1998 between the Company and
Thomas C. McKee
27.1 Financial Statement Data
</TABLE>
*Filed as an exhibit to the Company's Current Report on Form 8-K on May 28, 1998
and incorporated herein by reference.
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT made as of the 14th day of May, 1998 by and
between Trikon Technologies, Inc., a California corporation (the "Corporation"),
Trikon Technologies Limited, an English corporation and a wholly owned
subsidiary of the Corporation ("Trikon Limited"), and CHRISTOPHER D. DOBSON
("Executive").
WHEREAS, the Corporation, Trikon Limited and Executive wish to enter
into a formal employment contract which will govern the terms and conditions
applicable to Executive's employment with the Corporation and the payout of the
special bonus to which Executive may become entitled in connection with the
restructuring of the Corporation's capital structure.
NOW, THEREFORE, the parties hereto agree as follows:
PART ONE -- DEFINITIONS
For purposes of this Agreement, the following definitions shall be in
effect:
Board shall mean the Corporation's Board of Directors.
-----
Cause shall mean the termination of Executive's employment by the
-----
Corporation for (i) a material breach of Section 7 of this Agreement
or (ii) any other intentional misconduct by Executive adversely
affecting the pecuniary interests of the Corporation in a material
manner.
Disability shall mean the Executive's inability, by reason of any
----------
physical or mental injury or illness, to substantially perform the services
required of him hereunder for a period in excess of ninety (90) consecutive
days, and Executive shall be deemed to have terminated employment by reason
of Disability on the last day of such ninety (90)-day period.
EBITDA shall mean the Corporation's earnings, determined before
------
deduction of the following expenses: interest, taxes, depreciation and
amortization. EBITDA shall be computed at the close of each fiscal quarter
in accordance with generally accepted accounting principles, consistently
applied. However, EBITDA shall, solely for purposes of this Agreement, be
subject to the following special adjustments: (i) any up-front technology
license fees paid to the Corporation shall be treated as if paid in twelve
(12) successive equal monthly installments, beginning with the month in
which such fees are paid to the Corporation, and (ii) any incremental
license fees paid to the Corporation in connection with the Corporation's
MORI source technology (other than the fees paid under the Licenses), to
the extent paid to the Corporation in fiscal year 1998, shall be deemed to
be paid in fiscal year 1999 in a series of twelve (12) successive equal
monthly installments during that year.
<PAGE>
Employment Period shall mean the period of Executive's employment
-----------------
with the Corporation pursuant to the terms and provisions of this
Agreement. Such Employment Period will begin as of the date hereof and
will end when Executive's employment is terminated in accordance with
Paragraph 10 of this Agreement.
Exchange Offer shall mean the following formal offers,
--------------
collectively, made by the Company: (i) the offer to exchange each $1,000
principal amount of its 7-1/8% Convertible Subordinated Notes due October
15, 2001 (the "Notes"), into (a) 262.7339 shares of Common Stock, (b)
34.7826 shares of Series G Preferred Stock and (c) 0.3393 shares of Series
I Preferred Stock; (ii) the solicitation of the conversion of each share of
Series G Preferred Stock into one share of Common Stock in exchange for a
conversion payment of 1.1251 shares of Common Stock and 0.0027 shares of
Series I Preferred Stock; and (iii) the offer to exchange each warrant to
purchase its Common Stock issued in connection with the issuance of its
Series G Preferred Stock into one share of its Common Stock.
Full Business Time shall mean the Executive's performance of at
------------------
least 320 hours of service for the Corporation per quarter, which shall
include all of Executive's efforts devoted to the Company's research and
development projects and other matters wherever conducted.
Incentive Award Agreement shall mean that agreement of even date
-------------------------
herewith between the Corporation and Executive pursuant to which Executive
has been awarded special incentives in the form of a restricted stock grant
and a participating interest in certain proceeds payable in connection with
a change in ownership or control of Corporation partially as an additional
incentive for him to remain in the Corporation's employ.
Licenses shall mean (i) the license of the Corporation's MORI
--------
source technology to Applied Materials, Inc. pursuant to the MORI Source
Technology License Agreement dated November 12, 1997 and the (ii) license
of the Corporation's MORI source technology to Lam Research Corporation
pursuant to the MORI Source Technology License Agreement dated March 18,
1998.
Pik Preferred shall mean dividends paid from time to time on the
-------------
Series H Preferred Stock issued in the Exchange Offer, to the extent those
dividends are paid in the form of additional shares of the preferred stock
of the Corporation.
Proprietary Information and Inventions Agreement shall have the
------------------------------------------------
meaning set forth in Paragraph 8.
Restructuring shall mean the restructuring of the Corporation's
-------------
capital structure effected through the consummation of the Exchange Offer,
the
<PAGE>
consolidation of Corporation's business operations in the United
Kingdom and relocation of the corporate offices to Newport, Gwent, United
Kingdom.
PART TWO -- TERMS AND CONDITIONS OF EMPLOYMENT
1. DUTIES AND RESPONSIBILITIES.
---------------------------
A. Executive shall serve as the Chief Executive Officer and Chief
Science Officer of the Corporation and shall in such capacities report directly
to the Board. As Chief Executive Officer, Executive shall have primary
responsibility for the formulation, implementation and execution of strategic
policies relating to the Corporation's business operations, financial objectives
and market growth and shall accordingly have overall responsibility for the
formulation of the business plan for each fiscal year to be submitted for Board
approval. As Chief Science Officer, Executive shall have primary responsibility
for the design and implementation of the Corporation's research and development
projects and the development, enhancement and commercialization of the
Corporation's technology worldwide. Executive shall continue to serve as
Chairman of the Board during the Employment Period, and the Corporation shall
use its best efforts to maintain him as Chairman of the Board throughout such
period by taking all action necessary to nominate him for re-election to such
position at each shareholders meeting at which Board members are to be elected.
B. During the Employment Period, Executive shall perform in good
faith and to the best of his ability all services which may be reasonably
required of Executive hereunder and to be available to render such services at
all reasonable times and places in accordance with such reasonable directives
and requests made by the Corporation acting by majority vote of the Board.
C. Executive shall, during the Employment Period, devote his Full
Business Time to the performance of his duties and responsibilities hereunder.
Executive shall be based at the Corporation's principal offices in Newport,
Gwent, United Kingdom, but he may also perform his duties hereunder from his
office at Cambridge University in Cambridge, England. In addition, Executive
may be required to travel to other geographic locations in connection with the
performance of his executive duties hereunder. Notwithstanding the foregoing,
after a new Chief Executive Officer has been successfully recruited and
commences Employment as such (the "New Chief Executive Officer"), Executive may
devote less than his Full Business Time.
2. PERIOD OF EMPLOYMENT.
--------------------
A. Executive's employment with the Corporation shall be governed by
the provisions of this Agreement during the Employment Period. Executive shall
continue to serve as the Corporation's Chief Executive Officer until such time
as the New Chief Executive Officer commences employment as such. Thereafter,
Executive shall continue to serve as Chief Science Officer of the Corporation
without any reduction in his compensation hereunder, provided he devotes his
Full Business Time to the performance of his
duties in such capacity. If after the commencement of the employment of the New
Chief Executive Officer as such, Executive devotes less than seventy-five
percent (75%) of his Full Business Time to the performance of his
<PAGE>
duties, his base salary shall be reduced to fifty percent (50%) of the amount
set forth in Paragraph 3.A.
3. COMPENSATION.
------------
A. BASE SALARY. Executive shall be paid by Trikon Limited a base
salary at the annual rate of One Hundred Ninety-Two Thousand British Pounds
((Pounds)192,000). Base salary shall be paid at periodic intervals in
accordance with Trikon Limited's payroll practices for salaried employees.
B. SPECIAL BONUS. In consideration for the services Executive has
rendered the Corporation in connection with (i) the negotiation and closing of
the Licenses, (ii) the consummation of the Exchange Offer and (iii) the
Restructuring, the Board has authorized a special bonus for the Executive in the
amount of One Million Five Hundred Thousand Dollars (U.S.$1,500,000) (the
"Bonus"). The Bonus shall become fully vested and earned upon the consummation
of the Exchange Offer, and no further services shall be required of Executive as
a condition to his entitlement to the Bonus. However, the Bonus shall not
actually be paid to Executive until the Corporation's is deemed to be in a
sufficiently sound financial condition to make such payment, as measured by the
Corporation's attainment of the following performance milestones:
- the Corporation shall have paid all accrued and unpaid dividends
on the Series H Preferred Stock issued in the Exchange Offer and redeemed
for cash all outstanding shares of Pik Preferred; and
- the Corporation shall have had at least Eight Million Dollars
(U.S $8,000,000) of cumulative EBITDA for the two fiscal quarters
immediately preceding the payment date of the Bonus.
Payment of the Bonus shall be made by Trikon Limited within thirty
(30) business days after the close of such fiscal period, but in no event shall
the Bonus be paid prior to June 30, 1999.
C. Executive shall not be entitled to any additional bonuses with
respect to future licenses of the Corporation's MORI source technology.
D. Trikon Limited shall deduct and withhold from the compensation
payable to Executive hereunder any and all applicable withholding taxes and any
other amounts required to be deducted or withheld by the Corporation under
applicable statutes, regulations, ordinances or orders governing the withholding
or deduction of amounts otherwise payable as compensation or wages to employees.
4. EXPENSE REIMBURSEMENT. Executive shall be entitled to
---------------------
reimbursement from the Corporation, in accordance with the Corporation's
reimbursement policies as in effect from time to time, for all reasonable
business expenses incurred by Executive in the performance of his duties
hereunder, provided Executive furnishes the Corporation with vouchers, receipts
--------
and other details of such expenses in the form required by the Corporation
sufficient to substantiate a deduction for such business expenses under
applicable rules and regulations of the
<PAGE>
taxing authorities. In no event, however, shall Executive be entitled to any
reimbursement or other dollar allowance in connection with the use of his
personal automobile for business purposes.
5. FRINGE BENEFITS.
---------------
A. Executive shall, throughout the Employment Period, be eligible to
participate in all employee benefit programs and other executive perquisites
which are made available to the Corporation's executives and for which Executive
qualifies.
B. Executive shall accrue paid vacation benefits during the
Employment Period at the rate at which he accrued such benefits immediately
prior to the date of this Agreement and may take his accrued vacation at such
times as are mutually convenient to Executive and the Corporation.
6. DEATH OR DISABILITY. Upon Executive's death or Disability during
-------------------
the Employment Period, the employment relationship created pursuant to this
Agreement shall immediately terminate, and no further compensation shall become
payable to Executive pursuant to Paragraph 3. However, Trikon Limited shall pay
Executive or his estate (i) any unpaid base salary earned under Paragraph 3 for
services rendered through the date of his death or Disability, (ii) the value of
all accrued and unused vacation benefits based upon Executive's most recent
level of base salary and (iii) any other incentive compensation which becomes
due and payable for the calendar year of the Executive's death or Disability,
pro-rated in amount for the portion of the year completed prior to Executive's
death or Disability. In addition, Trikon Limited shall remain liable for
payment of the Bonus to the Executive or his estate, and such Bonus shall be
paid when due and payable in accordance with the terms and conditions of
Paragraph 3.B.
7. NON-COMPETITION.
---------------
A. During the Employment Period, Executive shall not directly or
indirectly own, manage, operate, join, control or participate in the ownership,
management, operation or control of, or be employed by or connected in any
manner with, any enterprise which is engaged in the semiconductor equipment
manufacturing industry; provided, however, that such restriction shall not apply
--------
to (i) any investment representing an interest of less than two percent (2%) of
an outstanding class of publicly-traded securities of any corporation or other
enterprise or (ii) his professorial duties at Cambridge University.
B. During the Employment Period and for an additional two (2)-year
period thereafter, Executive shall not, directly or indirectly,
(i) encourage or solicit any of the Corporation's employees to leave
the Corporation's employ for any reason or interfere in any other
manner with employment relationships at the time existing between the
Corporation and its current or prospective employees; or
(ii) solicit the business of any licensor, licensee or customer of the
Corporation, induce any of the Corporation's licensors,
<PAGE>
licensees or customers to terminate their existing business
relationships with the Corporation or interfere in any other manner
with any existing business relationship between the Corporation and
any licensor, licensee, customer or other third party.
Executive hereby acknowledges that monetary damages may not be
sufficient to compensate the Corporation for any economic loss which may be
incurred by reason of his breach of the foregoing restrictive covenants.
Accordingly, in the event of any such breach, the Corporation shall, in addition
to the termination of this Agreement and any remedies available to the
Corporation at law, be entitled to obtain equitable relief in the form of an
injunction precluding Executive from continuing such breach.
8. PROPRIETARY INFORMATION AND OWNERSHIP RIGHTS. Executive shall
--------------------------------------------
sign the Corporation's Proprietary Information and Inventions Agreement in
substantially the form attached hereto as Exhibit A (the "Proprietary
---------
Information and Inventions Agreement"), and nothing in this Agreement shall be
deemed to modify or affect Executive's duties and obligations under that other
agreement.
10. TERMINATION OF EMPLOYMENT.
-------------------------
A. The Corporation, acting by majority vote of the Board, may
terminate Executive's employment under this Agreement at any time for any
reason, with or without cause, by giving at least thirty (30) days prior written
notice of such termination to the Executive. However, such thirty (30)-day
notice requirement shall not apply to the termination of Executive's employment
for Cause under Paragraph C below. The Corporation may, at the time such
termination notice is given to Executive, immediately relieve Executive of some
or all of his duties hereunder.
B. Executive may terminate his employment under this Agreement at any
time by giving the Corporation at least thirty (30) days prior written notice of
such termination.
C. The Corporation, acting by majority vote of the Board, may at any
time, upon written notice, terminate the Executive's employment with the
Corporation hereunder for Cause. Such termination shall be effective
immediately upon such notice.
D. Upon the termination of Executive's employment for any reason
during the Employment Period, Executive shall be paid all salary and unused
vacation earned through the date of such termination. In addition, upon
termination of Executive's employment by the Corporation for any reason other
than Cause prior to the date three years after the date of this Agreement (the
"Severance Date"), Executive shall be paid an amount equal to the Executive's
salary (as of the date of termination) from the date of termination through the
Severance Date, such amount to be payable in regular installments in accordance
with Trikon Limited's payroll practices for salaried employees. Upon
termination of Executive's employment for any reason, Executive shall remain
entitled to the Bonus which shall be paid by Trikon Limited when due and payable
in accordance with the terms and conditions of Paragraph 3.B.
PART THREE -- MISCELLANEOUS PROVISIONS
<PAGE>
11. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
----------------------
inure to the benefit of, and shall be binding upon, the Corporation, its
successors and assigns, Trikon Limited, its successors and assigns, and the
Executive, the personal representative of his estate and his heirs and legatees;
provided, however, that this Agreement shall not be assignable by the Company or
Trikon Limited without the written consent of Executive.
13. NOTICES.
-------
A. Any and all notices, demands or other communications required or
desired to be given hereunder by any party shall be in writing and shall be
validly given or made to another party if served either personally or if
deposited in the local post, certified or registered mail, postage prepaid,
return receipt requested. If such notice, demand or other communication shall
be served personally, service shall be conclusively deemed made at the time of
such personal service. If such notice, demand or other communication is given
by local post, such notice shall be conclusively deemed given forty-eight (48)
hours after the deposit thereof in the mail, addressed to the party to whom such
notice, demand or other communication is to be given as hereinafter set forth:
To the Corporation: Trikon Technologies, Inc.
Ringland Way
Newport, Gwent NP6 2TA
UNITED KINGDOM
Attention: President
With a copy to: Michael J. Kennedy, Esq.
Brobeck, Phleger & Harrison LLP
Spear Street Tower
One Market
San Francisco, CA 94105
To Trikon Limited: Trikon Technologies Limited
Ringland Way
Newport, Gwent NP6 2TA
UNITED KINGDOM
Attention: President
To Executive: Christopher Dobson
Elberton Manor
Elberton
Bristol BS35 3AA
UNITED KINGDOM
With a copy to: Rory Greiss, Esq.
Kaye, Scholer, Fierman, Hays & Handler, LLP
425 Park Avenue
New York, NY 10022-3598
<PAGE>
B. Any party hereto may change its address for the purpose of
receiving notices, demands and other communications as herein provided by a
written notice given in the manner aforesaid to the other party hereto.
14. GOVERNING DOCUMENT. This Agreement, together with (i) the
------------------
Proprietary Information and Inventions Agreement, and (ii) the Incentive Award
Agreement, constitutes the entire agreement and understanding of the
Corporation, Trikon Limited and Executive with respect to the terms and
conditions of Executive's employment with the Corporation, including the
compensation payable to him, and supersedes all prior and contemporaneous
written or verbal agreements and understandings among Executive, the Corporation
and Trikon Limited relating to such subject matter. This Agreement may only be
amended by written instrument signed by Executive and an authorized officer of
the Corporation and Trikon Limited. Any and all prior agreements,
understandings or representations relating to the Executive's employment with
the Corporation are hereby terminated and cancelled in their entirety and are of
no further force or effect.
15. GOVERNING LAW. The provisions of this letter agreement will be
-------------
construed and interpreted under the laws of California applicable to agreements
executed and to be wholly performed within California, except to the extent any
law of the United Kingdom is mandatorily applicable. If any provision of this
Agreement as applied to any party or to any circumstance should be adjudged by a
court of competent jurisdiction to be void or unenforceable for any reason, the
invalidity of that provision shall in no way affect (to the maximum extent
permissible by law) the application of such provision under circumstances
different from those adjudicated by the court, the application of any other
provision of this Agreement, or the enforceability or invalidity of this
Agreement as a whole. Should any provision of this Agreement become or be
deemed invalid, illegal or unenforceable in any jurisdiction by reason of the
scope, extent or duration of its coverage, then such provision shall be deemed
amended to the extent necessary to conform to applicable law so as to be valid
and enforceable or, if such provision cannot be so amended without materially
altering the intention of the parties, then such provision will be stricken and
the remainder of this Agreement shall continue in full force and effect.
16. REMEDIES. All rights and remedies provided pursuant to this
--------
Agreement or by law shall be cumulative, and no such right or remedy shall be
exclusive of any other. A party may pursue any one or more rights or remedies
hereunder or may seek damages or specific performance in the event of another
party's breach hereunder or may pursue any other remedy by law or equity,
whether or not stated in this Agreement.
17. COUNTERPARTS. This Agreement may be executed in more than one
------------
counterpart, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year written above.
TRIKON TECHNOLOGIES, INC.
By:
----------------------------------
Title:
-------------------------------
TRIKON TECHNOLOGIES LIMITED
By:
----------------------------------
Title:
-------------------------------
-------------------------------------
CHRISTOPHER D. DOBSON, EXECUTIVE
<PAGE>
EXHIBIT A
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<PAGE>
EXHIBIT 10.2
TRIKON TECHNOLOGIES, INC.
RINGLAND WAY
NEWPORT, GWENT NP6 2TA
UNITED KINGDOM
May 14, 1998
Dear Chris:
It is my pleasure to inform you that the Board of Directors has
recently approved two special awards for you which are partially designed to
encourage you to continue in the Company's service. The first award is a
restricted stock award which will vest upon your continued service following the
restructuring of the Company. The second award will entitle you to receive a
special cash bonus in the event the Company is acquired during your period of
service. The bonus amount will be based upon the price at which the Company is
acquired.
The terms and conditions of each of your incentive awards are
summarized below. All capitalized terms which appear in this letter agreement
have the meanings indicated for those terms in the definitional section which
follows:
PART ONE -- DEFINITIONS
For purposes of this letter agreement, the following definitions shall
apply:
ACQUISITION shall mean any of the following transactions pursuant to
which assets or securities of the Company are acquired for consideration paid in
cash, securities or other property:
(i) any merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting power
of the Company's outstanding securities are transferred to person or
persons different from the persons holding those securities immediately
prior to the merger or consolidation, or
(ii) the sale, transfer or other disposition of all or
substantially all (more than eighty percent (80%) of the fair market value
of the total assets) of the Company's assets in liquidation or dissolution
of the Company, or
(iii) the direct sale by the Company's stockholders of
securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities to person or persons
different from the persons holding those securities immediately prior to
such sale.
<PAGE>
May 14, 1998
Page 2
ACQUISITION PROCEEDS shall mean the following items of consideration
(in cash, securities or other property) paid by the acquiring person or persons
in effecting the Acquisition less fees and expenses associated with the
Acquisition:
(i) the aggregate amount of consideration (valued at fair
market value) payable to the holders of the Company's outstanding equity
securities in acquisition of their stockholder interests, to the extent the
Acquisition is effected by a merger or consolidation or by the direct
purchase of the Company's outstanding securities, or
(ii) the aggregate amount of consideration (valued at fair
market value) paid to the Company in acquiring the Company's assets, to the
extent the Acquisition is effected by the purchase of all or substantially
all of the Company's assets.
No liability of the Company assumed or discharged by the acquiring
person or persons in the Acquisition (other than the liability for your bonus
award under this letter agreement) shall be taken into account in determining
the amount of Acquisition Proceeds. However, the Acquisition Proceeds shall
include any and all Earn-Out Payments made after the effective date of the
Acquisition.
BOARD shall mean the Company's Board of Directors.
COMMON STOCK shall mean shares of the Company's common stock, no par
value per share.
COMPANY shall mean Trikon Technologies, Inc., a California
corporation.
DISABILITY shall mean your inability, by reason of any physical or
mental injury or illness, to substantially perform the services required of you
hereunder for a period in excess of ninety (90) consecutive days, and you shall
be deemed to have terminated employment by reason of Disability on the last day
of such ninety (90) day period.
EARN-OUT shall mean any portion of the Acquisition Proceeds which is
not determinable at the time of the Acquisition by reason of any earn-out
provision or other contingent pay-out feature based upon the financial
performance of the Company following the effective date of such Acquisition.
EARN-OUT PAYMENT shall mean the portion of the Acquisition Proceeds
which becomes payable pursuant to the Earn-Out on one or more dates following
the effective date of the Acquisition.
EXCHANGE OFFER shall mean the following formal offers, collectively,
made by the Company: (i) the offer to exchange each $1,000 principal amount of
its 7-l/8% Convertible Subordinated Notes due October 15, 2001 (the "Notes"),
into (a) 262.7339 shares of Common Stock, (b) 34.7826 shares of Series G
Preferred Stock and (c) 0.3393 shares of Series I Preferred Stock; (ii) the
solicitation of the conversion of each share of Series G Preferred Stock into
one
<PAGE>
May 14, 1998
Page 3
share of Common Stock in exchange for a conversion payment of 1.1251 shares
of Common Stock and 0.0027 shares of Series I Preferred Stock; and (iii) the
offer to exchange each warrant to purchase its Common Stock issued in connection
with the issuance of its Series G Preferred Stock into one share of its Common
Stock.
SERVICE shall mean your performance of services for the Company (or
any successor entity) as (i) an employee, (ii) a non-employee member of the
Board or (iii) an independent consultant. Includes all of your efforts devoted
to the Company's research and development projects and other matters at
Cambridge University and elsewhere.
SERIES I PREFERRED STOCK shall mean shares of series I preferred
stock, no par value per share.
TERMINATION FOR CAUSE shall mean the Company's termination of your
Service for (i) any material breach of Section 7 of the Employment Agreement
between you, the Company and Trikon Technologies Limited and (ii) any other
intentional misconduct by you adversely affecting the pecuniary interests of the
Company in a material manner.
PART TWO -- RESTRICTED STOCK AWARD
You are hereby awarded 5,015,811 shares of Common Stock and 6,476.995
shares of Series I Preferred Stock, subject to the terms and conditions of this
Part Two. The date of issuance of such shares shall be as of May 24, 1998. All
shares of Common Stock and Series I Preferred Stock hereby awarded to you, and
all shares of Common Stock issuable upon conversion of Series I Preferred Stock
awarded hereby, shall hereinafter be referred to as "Restricted Stock."
You will have full stockholder rights with respect to all the shares
of Restricted Stock (including voting, dividend and liquidation rights).
However, the shares will be unvested when issued and will vest upon the earlier
to occur of the following events (the "Vesting Events"):
(i) the expiration of the five (5)-year period measured from
the closing date of the Exchange Offer,
(ii) the consummation of an Acquisition.
If prior to a Vesting Event (i) you voluntarily cease Service or (ii) you are
subject to Termination for Cause (each, a "Forfeiture Event"), the Restricted
Stock is subject to immediate forfeiture to the Company upon payment of $0.001
per share of Common Stock and $1.00 per share of Series I Preferred Stock (the
"Repurchase Price"). Cessation of Service by you due to death or Disability
shall not constitute a Forfeiture Event. For purposes of determining whether you
have voluntarily ceased Service during the first two years following the closing
date, you will be deemed to have voluntarily ceased Service if during either of
such years you provide less than 750 hours of Service and your employment has
not been terminated by the Company prior to such time.
<PAGE>
May 14, 1998
Page 4
Accordingly, should a Forfeiture Event occur prior to the occurrence
of a Vesting Event, you will cease to have any further stockholder rights
(including voting, dividend or liquidation rights) with respect to the
Restricted Stock issued or issuable to you hereunder. The Company will hold the
stock certificate for those shares in escrow on your behalf until you vest in
those shares. During such period, the Company will take all actions necessary to
allow you to exercise your full stockholder rights, including voting your shares
and receiving dividends. However, those shares will be immediately cancelled by
the Company upon a Forfeiture Event prior to a Vesting Event and payment of the
Repurchase Price.
At your election, you may transfer up to twenty percent (20%) of the
shares of Restricted Stock to other members of the Company's senior management,
subject to forfeiture as set forth above. The individuals to whom shares of
Restricted Stock are transferred will vest in the shares of Restricted Stock
transferred to them at the same time you vest in your remaining shares. No other
transfers of your restricted shares will be permitted.
PART THREE -- SPECIAL ACQUISITION BONUS
Provided that you are not subject to Termination for Cause and you do
not voluntarily cease Service (which shall not include cessation of Service due
to death or Disability) prior to the date of an Acquisition that results in
Acquisition Proceeds of not less than $250 million, you will receive a special
bonus in an amount equal to a specified percentage of those Acquisition Proceeds
(the "Bonus Percentage"). The applicable Bonus Percentage shall be based upon
the amount of the Acquisition Proceeds and shall be determined in accordance
with the table below.
<TABLE>
<CAPTION>
ACQUISITION PROCEEDS BONUS PERCENTAGE
---------------------------------------------------------------------
<S> <C>
At Least $250 Million 0.5%
At Least $260 Million 1.0%
At Least $270 Million 2.0%
At Least $280 Million 2.5%
$300 Million or More 3.0%
</TABLE>
Your bonus will be paid in cash upon receipt of Acquisition Proceeds
by the Company or other stockholders, as applicable, by wire transfer or
immediately available funds to an account designated by you. However, should all
or any portion of the Acquisition Proceeds be paid in the form of freely-
tradable securities, then the payment of your bonus amount may, in the Board's
sole discretion, be made in whole or in part in those securities. To the extent
any portion of the Acquisition Proceeds is to be paid in the form of a
promissory note or other debt security, a portion of the bonus amount due to you
will be paid in the form of a participating interest in that promissory note or
other debt security in the same proportion as the principal amount of such note
or debt security bears to the total amount of the Acquisition Proceeds. The
amount of your participating interest in the promissory note or other debt
security will only be paid to the you as and when the note or debt security is
paid down.
<PAGE>
May 14, 1998
Page 5
Should any portion of the Acquisition Proceeds become payable after
the Acquisition pursuant to an Earn-Out feature, then the applicable Bonus
Percentage shall be applied separately to the Acquisition Proceeds paid at the
time of the Acquisition and to each subsequent Earn-Out Payment as follows:
* The Bonus Percentage applied at the time the initial Acquisition
Proceeds are paid shall be based upon the fixed and determinable
amount of the Acquisition Proceeds at that time.
* As each subsequent Earn-Out Payment is made, that payment will be
aggregated with all other Acquisition Proceeds paid to date, and the
Bonus Percentage shall be based on that aggregate amount. If the
applicable Bonus Percentage increases as a result of any Earn-Out
Payment, the resulting deficiency in the bonus amounts paid to date to
you by reason of the application of the lower Bonus Percentage to one
or more earlier payments made to you will be immediately corrected.
Accordingly, the total bonus amount due you pursuant to this letter
agreement will be equal to the product of (i) the highest Bonus
Percentage to which you become entitled by reason of all the Earn-Out
Payments made in connection with the Acquisition and (ii) the total
Acquisition Proceeds, including the Earn-Out Payments, realized in the
Acquisition.
The bonus to which you become entitled on the basis of the Acquisition
Proceeds paid at the time of the Acquisition will be paid to you within thirty
(30) days after the effective date of the Acquisition, and the bonus
attributable to any subsequent Earn-Out Payment will be paid to you within
thirty (30) days after the date of each such Earn-Out Payment.
Very truly yours,
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT made as of the 28th day of May, 1998 by and among
Trikon Technologies, Inc., a California corporation (the "Corporation"), Trikon
Technologies Limited, a corporation ("Trikon Limited") organized under the laws
of the United Kingdom and a wholly owned subsidiary of the Corporation, and
THOMAS MC KEE ("Executive").
WHEREAS, the Corporation, Trikon Limited and Executive wish to enter
into a formal employment contract which will govern the terms and conditions
applicable to Executive's employment with the Corporation.
NOW, THEREFORE, the parties hereto agree as follows:
PART ONE -- DEFINITIONS
For purposes of this Agreement, the following definitions shall be in
effect:
Board shall mean the Corporation's Board of Directors.
-----
Cause shall mean the termination of Executive's employment by the
-----
Corporation by reason of (i) a material breach of his obligations
under Paragraph 8, 9 or 10 of this Agreement, (ii) any other
intentional misconduct on his part adversely affecting the pecuniary
interests of the Corporation in a material manner, (iii) Executive's
material dereliction of the major duties, functions and
responsibilities of his executive position after written warning from
the Board Corporation or (iv) a material breach by Executive of any of
Executive's fiduciary obligations as an officer of the Corporation.
Disability shall mean the Executive's inability, by reason of any
----------
physical or mental injury or illness, to perform substantially the
services required of him hereunder for a period in excess of ninety
(90) consecutive days, and Executive shall be deemed to have
terminated employment by reason of Disability on the last day of such
ninety (90)-day period.
Employment Period shall mean the period of Executive's employment
-----------------
with the Corporation set forth in Paragraph 2.
Required Documentation for reimbursable expenses shall mean
----------------------
vouchers, receipts and other details of such expenses in the form
required by the Corporation sufficient to substantiate a deduction for
such expenses under applicable rules and regulations of the taxing
authorities (regardless of whether such deduction is actually
available for the particular expense).
Start Date shall be June 1, 1998, the date the Executive
----------
commences employment with the Corporation as Chief Executive Officer.
<PAGE>
Trikon Entities shall mean the Corporation, Trikon Limited and
---------------
any other majority-owned subsidiary of the Corporation or Trikon Limited.
PART TWO -- TERMS AND CONDITIONS OF EMPLOYMENT
1. DUTIES AND RESPONSIBILITIES.
---------------------------
A. Executive shall serve as the Chief Executive Officer of the
Corporation and shall in such capacity report directly to the Board. As Chief
Executive Officer, Executive shall have primary responsibility for the
formulation, implementation and execution of strategic policies relating to the
Corporation's business operations, financial objectives and market growth and
shall accordingly have overall responsibility for the formulation of the
business plan for each fiscal year to be submitted for Board approval.
Executive shall be appointed to the Board on his Start Date, and the Corporation
shall use its best efforts to maintain him on the Board throughout the
Employment Period by taking all action necessary to nominate him for re-election
to such position at each shareholders meeting at which Board members are to be
elected. Executive shall also perform such executive duties and functions for
Trikon Limited, including service as an executive officer, as the Board may
reasonably request of him.
B. During the Employment Period, Executive shall perform in good
faith and to the best of his ability all services which may be reasonably
required of Executive hereunder and to be available to render such services at
all reasonable times and places in accordance with such reasonable directives
and requests made by the Corporation acting by majority vote of the Board.
C. Executive shall, during the Employment Period, devote his full
time, ability, energy and skill to the performance of his duties and
responsibilities hereunder. Executive shall be based at the Corporation's
principal offices in Newport, Gwent, United Kingdom, but may be required to
travel to other geographic locations in connection with the performance of his
executive duties hereunder.
2. PERIOD OF EMPLOYMENT. Executive's employment with the
--------------------
Corporation shall be governed by the provisions of this Agreement for the period
commencing June 1, 1998 and continuing through December 31, 1999, unless sooner
terminated in accordance with the provisions of Paragraph 11 of this Agreement.
Should Executive's employment pursuant to this Agreement otherwise continue
through December 31, 1999, then this Agreement shall automatically be renewed
from calendar year to calendar year thereafter, until either Executive or the
Corporation elects to terminate this Agreement as of the start of any subsequent
calendar year by providing not less than thirty (30) days prior written notice
to the other party. The period during which Executive's employment continues in
effect hereunder shall constitute the Employment Period.
3. CASH COMPENSATION.
-----------------
<PAGE>
A. BASE SALARY. The Corporation shall pay Executive a base salary at
the annual rate of not less than Three Hundred Forty Thousand U.S. Dollars (U.S.
$340,000). Such rate shall be subject to annual review by the Board and may be
increased at the Board's discretion. Base salary shall be paid at periodic
intervals in accordance with the Corporation's payroll practices for salaried
employees.
B. BONUS. For each fiscal year of the Corporation during the
Employment Period, including the short fiscal period beginning on the Start Date
and ending December 31, 1998, Executive shall be entitled to incentive
compensation in an amount not to exceed to fifty percent (50%) of his base
salary which is to become payable only upon the Corporation's achievement of the
financial objectives and performance milestones mutually agreed upon by the
Board and Executive for each such year. For the fiscal year ending May 31,
1999, the target bonus shall be One Hundred Seventy Thousand U.S. Dollars (U.S.
$170,000) to become payable upon the Corporation's achievement of the financial
objectives and performance milestones mutually agreed upon by the Board and the
Executive within sixty (60) days after the Start Date.
C. DELEGATION. The Corporation's obligation to pay the cash
compensation to which Executive becomes entitled pursuant to this Paragraph 3
may, in the Board's discretion, be delegated in whole or in part to Trikon
Limited in connection with the assignment to him of any duties or functions to
be performed for Trikon Limited.
D. WITHHOLDING. The Corporation or Trikon Limited shall deduct and
withhold from the compensation payable to Executive hereunder any and all
applicable withholding taxes and any other amounts required to be deducted or
withheld by the Corporation under applicable statutes, regulations, ordinances
or orders governing the withholding or deduction of amounts otherwise payable as
compensation or wages to employees.
4. EQUITY COMPENSATION.
--------------------
A. On the Start Date, Executive shall be granted a stock option to
acquire shares of the Corporation's common stock (the "Common Stock") under the
Corporation's 1991 Stock Option Plan (the "Plan"). The option will cover
1,872,430 shares of Common Stock (representing two percent (2%) of the
Corporation's currently outstanding equity securities on a fully-diluted basis).
The exercise price per share will be the closing selling price per share of
Common Stock on the Start Date, as reported on the Nasdaq National Market.
B. The option will have a term of seven (7) years, subject to
earlier termination upon Executive's termination of employment with the
Corporation. The option will be immediately exercisable for ten percent (10%)
of the option shares and will become exercisable for the remaining shares in a
series of four (4) successive equal annual installments upon Executive's
completion of each year of employment over the four year period measured from
the Start Date. No additional shares will become exercisable after Executive's
termination of employment with the Corporation for any reason.
C. The remaining terms and provisions of the option will be governed
by the applicable provisions of the Plan.
<PAGE>
5. EXPENSE REIMBURSEMENT. Executive shall be entitled to reimbursement
---------------------
from the Corporation, in accordance with the Corporation's reimbursement
policies as in effect from time to time, for all reasonable business expenses
incurred by Executive in the performance of his duties hereunder, provided
--------
Executive furnishes the Corporation with the Required Documentation for those
expenses.
6. FRINGE BENEFITS
---------------
A. EMPLOYEE BENEFIT PROGRAMS. Executive shall, throughout the
Employment Period, be eligible to participate in all employee benefit programs
and other executive perquisites which are made available to the Corporation's
executives and for which Executive qualifies, including health care coverage.
B. VACATION. Executive shall accrue paid vacation benefits during
the Employment Period at the rate of five (5) full weeks per calendar year to be
pro-rated on the basis of six and one-quarter (6 1/4) days per calendar quarter.
Executive may take his accrued vacation at such times as are mutually convenient
to Executive and the Corporation.
C. AUTOMOBILE. The Corporation shall provide an automobile for
Executive's business and personal use and shall reimburse Executive for all
reasonable expenses incurred in the operation and maintenance of such vehicle,
including insurance, fuel, maintenance and repair costs, provided Executive
--------
furnishes the Corporation with the Required Documentation for those expenses.
D. HOUSING ACCOMMODATIONS. The Corporation shall reimburse
Executive for his housing costs in the United Kingdom in an amount not to exceed
One Thousand Pounds Sterling ((Pounds)1,000.00) per month during the Employment
Period, provided Executive furnishes the Corporation with the Required
--------
Documentation for those costs.
E. RELOCATION PAYMENT. Upon the commencement of his employment
under this Agreement, the Company shall pay Executive the cash sum of Twenty
Five Thousand U.S. Dollars (U.S. $25,000.00) to cover any and all costs or
expenses incurred by him in connection with his relocation to the United
Kingdom.
Should Executive's employment be terminated for Cause, Executive must
repay such cash sum to Corporation within five (5) business days after such
termination.
7. DEATH OR DISABILITY.
-------------------
A. Upon Executive's death or Disability during the Employment
Period, the employment relationship created pursuant to this Agreement shall
immediately terminate, and no further cash compensation shall become payable to
Executive pursuant to Paragraph 3. However, the Corporation shall pay Executive
or his estate (i) any unpaid base salary earned under Paragraph 3 for services
rendered through the date of his death or Disability, (ii) the value of all
accrued and unused vacation benefits based upon Executive's most recent level of
base salary and (iii) any other incentive compensation which becomes due and
payable for the fiscal year of the Executive's death or Disability, pro-rated in
amount for the portion of the year completed prior to Executive's death or
Disability.
<PAGE>
B. The stock option granted to Executive under Paragraph 4 shall not
become exercisable for any additional shares of Common Stock following the
termination of the employment relationship by reason of Executive's death or
disability. However, to the extent that the option is exercisable for any
shares of Common Stock at the time of Executive's death, the option may be
exercised for those shares, at any time before the expiration or sooner
termination of that option, by the executors or administrators of Executive's
estate or by persons to whom the option is transferred pursuant to Executive's
will or in accordance with the laws of inheritance.
8. RESTRICTIVE COVENANTS. During the Employment Period:
---------------------
(i) Executive shall devote Executive's full time and energy
solely and exclusively to the performance of Executive's duties described
herein, except during periods of illness or vacation.
(ii) Executive shall not directly or indirectly provide
services to any person, firm or other entity except the Corporation, unless
otherwise authorized by the Board in writing.
(iii) Executive shall not render any services of any kind or
character for his own account or for any other person, firm or entity
without first obtaining the Board's written consent.
However, Executive shall have the right to perform such incidental
services as are necessary in connection with (a) Executive's private passive
investments, but only if Executive is not obligated or required to (and shall
not in fact) devote any managerial efforts which interfere with the services
required to be performed by him hereunder, or (b) Executive's charitable or
community activities or participation in trade or professional organizations,
but only if such incidental services do not interfere with the performance of
Executive's services hereunder.
9. NON-COMPETITION.
---------------
A. During the Employment Period, Executive shall not directly or
indirectly own, manage, operate, join, control or participate in the ownership,
management, operation or control of, or be employed by or connected in any
manner with, any enterprise which is engaged in the semiconductor equipment
manufacturing industry; provided, however, that such restriction shall not apply
--------
to any passive investment representing an interest of less than two percent (2%)
of an outstanding class of publicly-traded securities of any corporation or
other enterprise.
B. During the Employment Period and for an additional two (2)-year
period thereafter, Executive shall not, directly or indirectly:
(i) encourage or solicit any of the employees of the Trikon
Entities to leave the employ of the Trikon Entities for any reason or interfere
in any other manner with employment relationships at the time existing between
the those employees and the Trikon Entities; or
<PAGE>
(ii) solicit the business of any licensor, licensee or
customer of the Trikon Entities, induce any licensor, licensee or customer of
the Trikon Entities to terminate their existing business relationships with the
Trikon Entities or interfere in any other manner with any existing business
relationship between any licensor, licensee, customer or other third party and
the Trikon Entities.
Executive hereby acknowledges that monetary damages may not be
sufficient to compensate the Trikon Entities for any economic loss which may be
incurred by reason of his breach of the foregoing restrictive covenants.
Accordingly, in the event of any such breach, the Trikon Entities shall, in
addition to the termination of this Agreement and any remedies available to the
Trikon Entities at law, be entitled to obtain equitable relief in the form of an
injunction precluding Executive from continuing such breach.
10. PROPRIETARY INFORMATION.
-----------------------
A. Executive hereby acknowledges that the Trikon Entities may, from
time to time during the Employment Period, disclose to Executive confidential
information pertaining to the business and affairs, technology, research and
development projects and customer base of the Trikon Entities, including
(without limitation) financial information concerning customers and prospective
business opportunities. All information and data, whether or not in writing, of
a private or confidential nature concerning the business, technology or
financial affairs of the Trikon Entities and their clients (collectively,
"Proprietary Information") is and shall remain the sole and exclusive property
of the Trikon Entities. By way of illustration, but not limitation, Proprietary
Information shall include all trade secrets, research and development projects,
financial records, business plans, personnel data, computer programs and
customer lists and accounts relating to the business operations, technology or
financial affairs of the Trikon Entities, other similar items indicating the
source of the revenue of the Trikon Entities, all information pertaining to the
salaries, duties and performance ratings of the employees of the Trikon Entities
and all financial information relating to the customers of the Trikon Entities
and their proposed or contemplated business transactions.
B. Executive shall not, at any time during or after such Employment
Period, disclose to any third party or directly or indirectly make use of any
such Proprietary Information, other than in connection with the business and
affairs of the Trikon Entities.
C. All files, letters, memoranda, reports, records, data or other
written, reproduced or other tangible manifestations of the Proprietary
Information, whether created by Executive or others, to which the Executive has
access during the Employment Period shall be used by Executive only in the
performance of his duties hereunder. All such materials (whether written,
printed or otherwise reproduced or recorded) shall be returned by Executive to
the Corporation immediately upon the termination of the Employment Period or
upon any earlier request by any of the Trikon Entities, without Executive
retaining any copies, notes or excerpts thereof.
D. Executive's obligation not to disclose or use Proprietary
Information shall also extend to any and all information, records, trade
secrets, data and other tangible property of the customers of the Trikon
Entities or any other third parties who may have disclosed or
<PAGE>
entrusted the same to the Trikon Entities or Executive in connection with the
Corporation's business operations.
E. Executive's obligations under this Paragraph 10 shall continue in
effect after the termination of his employment with the Corporation, whatever
the reason or reasons for such termination, and the Corporation shall have the
right to communicate with any future or prospective employer of Executive
concerning Executive's continuing obligations under this Paragraph 10.
<PAGE>
F. Upon the request of one or more of the Trikon Entities at any time
during the Employment Period, Executive shall sign a Proprietary Information and
Inventions Agreement, in form and substance mutually acceptable to Executive and
the Trikon Entities.
11. TERMINATION OF EMPLOYMENT.
-------------------------
A. The Corporation, acting by majority vote of the Board, may
terminate Executive's employment under this Agreement at any time for any
reason, with or without cause, by giving at least thirty (30) days prior written
notice of such termination to the Executive. However, such thirty (30)-day
notice requirement shall not apply to the termination of Executive's employment
for Cause under Paragraph C below. The Corporation may, at the time such
termination notice is given to Executive, immediately relieve Executive of some
or all of his duties hereunder.
B. Executive may terminate his employment under this Agreement at
any time by giving the Corporation at least thirty (30) days prior written
notice of such termination.
C. The Corporation, acting by majority vote of the Board, may at any
time, upon written notice, terminate the Executive's employment with the
Corporation hereunder for Cause. Such termination shall be effective
immediately upon such notice.
D. Upon the termination of Executive's employment for any reason
during the Employment Period, Executive shall be paid (i) any unpaid base salary
earned under Paragraph 3 for services rendered through the date of his death or
Disability and (ii) the value of all accrued and unused vacation benefits based
upon Executive's most recent level of base salary. If Executive is
involuntarily terminated by the Corporation other than for Cause, Executive
shall also be entitled to the special severance benefits provided under
Paragraph 12.
12. BENEFIT ENTITLEMENT. Executive shall be entitled to receive the
-------------------
following severance benefits in the event his employment with the Corporation is
involuntarily terminated other than for Cause:
(a) Salary Continuation. Executive shall receive salary
-------------------
continuation payments, at the monthly rate of base salary in effect for him
under Paragraph 3 at the time of his involuntary termination, for a period
of twelve (12) months. Such salary continuation payments shall be made at
semi-monthly intervals on the 15th and last day of each calendar month and
shall be subject to all applicable withholding requirements as set forth in
Paragraph 3.D.
<PAGE>
(b) Incentive Compensation. Executive shall be entitled
----------------------
fifty percent (50%) of the dollar amount of any incentive compensation which
would have actually become payable to him on the basis of the Corporation's
financial performance for the fiscal year in which his employment is
involuntarily terminated, had he continued in employ through the end of that
fiscal year. Payment shall be made within ninety (90) days after the close of
such fiscal year.
(c) Health Care Coverage. Continued health care coverage
--------------------
under the Corporation's medical plan shall be provided, without charge, to
Executive and his eligible dependents until the earlier of (i) the expiration of
-------
the six (6)-month period measured from the effective date of his involuntary
termination or (ii) the first date on which Executive is covered under another
employer's health benefit program without exclusion for any pre-existing medical
condition.
PART THREE -- MISCELLANEOUS PROVISIONS
13. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
----------------------
inure to the benefit of, and shall be binding upon, (i) the Corporation, Trikon
Limited and their respective successors and assigns and (ii) the Executive, the
personal representative of his estate and his heirs and legatees.
14. NOTICES.
-------
A. Any and all notices, demands or other communications required or
desired to be given hereunder by any party shall be in writing and shall be
validly given or made to another party if served either personally or if
deposited in the local post, certified or registered mail, postage prepaid,
return receipt requested. If such notice, demand or other communication shall
be served personally, service shall be conclusively deemed made at the time of
such personal service. If such notice, demand or other communication is given
by local post, such notice shall be conclusively deemed given forty-eight (48)
hours after the deposit thereof in the mail, addressed to the party to whom such
notice, demand or other communication is to be given as hereinafter set forth:
To the Corporation: Trikon Technologies, Inc.
Ringland Way
Newport, Gwent NP6 2TA
UNITED KINGDOM
Attention: President
With a copy to: Michael J. Kennedy, Esq.
Brobeck, Phleger & Harrison LLP
Spear Street Tower
One Market
San Francisco, CA 94105
To Trikon Limited: Trikon Technologies Limited
<PAGE>
Ringland Way
Newport, Gwent NP6 2TA
UNITED KINGDOM
Attention: President
To Executive: Thomas McKee
_____________________
_____________________
_____________________
_____________________
With a copy to: _____________________
_____________________
_____________________
_____________________
_____________________
B. Any party hereto may change its address for the purpose of
receiving notices, demands and other communications as herein provided by a
written notice given in the manner aforesaid to the other party hereto.
14. GOVERNING DOCUMENT. This Agreement constitutes the entire
------------------
agreement and understanding of the Corporation, Trikon Limited and Executive
with respect to the terms and conditions of Executive's employment with the
Corporation and Trikon Limited, including the compensation payable to him, and
supersedes all prior and contemporaneous written or verbal agreements and
understandings among Executive, the Corporation and Trikon Limited relating to
such subject matter. This Agreement may only be amended by written instrument
signed by Executive and an authorized officer of the Corporation and Trikon
Limited. Any and all prior agreements, understandings or representations
relating to the Executive's employment with the Corporation or Trikon Limited
are hereby terminated and cancelled in their entirety and are of no further
force or effect.
15. GOVERNING LAW. This Agreement shall be construed and interpreted
-------------
under the laws of the State of California applicable to agreements executed and
to be wholly performed within the State of California, except to the extent any
law of the United Kingdom is mandatorily applicable. If any provision of this
Agreement as applied to any party or to any circumstance should be adjudged by a
court of competent jurisdiction to be void or unenforceable for any reason, the
invalidity of that provision shall in no way affect (to the maximum extent
permissible by law) the application of such provision under circumstances
different from those adjudicated by the court, the application of any other
provision of this Agreement, or the enforceability or invalidity of this
Agreement as a whole. Should any provision of this Agreement become or be
deemed invalid, illegal or unenforceable in any jurisdiction by reason of the
scope, extent or duration of its coverage, then such provision shall be deemed
amended to the extent necessary to conform to applicable law so as to be valid
and enforceable or, if such provision cannot be so amended without materially
altering the intention of the parties, then such provision will be stricken and
the remainder of this Agreement shall continue in full force and effect.
<PAGE>
16. REMEDIES. All rights and remedies provided pursuant to this
--------
Agreement or by law shall be cumulative, and no such right or remedy shall be
exclusive of any other. A party may pursue any one or more rights or remedies
hereunder or may seek damages or specific performance in the event of another
party's breach hereunder or may pursue any other remedy by law or equity,
whether or not stated in this Agreement.
17. COUNTERPARTS. This Agreement may be executed in more than one
------------
counterpart, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year written above.
TRIKON TECHNOLOGIES, INC.
By:
Title:
TRIKON TECHNOLOGIES LIMITED
By:
Title:
------------------------------------------------
THOMAS MCKEE, EXECUTIVE
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE FORM
10-Q FOR THE PERIOD ENDING JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,405
<SECURITIES> 0
<RECEIVABLES> 12,026
<ALLOWANCES> (2,566)
<INVENTORY> 18,961
<CURRENT-ASSETS> 44,476
<PP&E> 25,718
<DEPRECIATION> (4,757)
<TOTAL-ASSETS> 69,477
<CURRENT-LIABILITIES> 25,577
<BONDS> 4,147
0
57,426
<COMMON> 170,104
<OTHER-SE> 193,823
<TOTAL-LIABILITY-AND-EQUITY> 69,477
<SALES> 8,292
<TOTAL-REVENUES> 8,292
<CGS> 6,546
<TOTAL-COSTS> 16,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (948)
<INCOME-PRETAX> (8,837)
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<EXTRAORDINARY> 20,293
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