For the quarterly period ended September 30, 2005

10-Q 1 d10q.htm FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 For the quarterly period ended September 30, 2005

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 September 30, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-26482

TRIKON TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


Delaware		95-4054321
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Ringland Way, Newport, South Wales NP18 2TA, United Kingdom
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code 44-1633-414-000

Not Applicable

Former name, former address and former fiscal year, if changed since last report

Indicate by check whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

As of November 9, 2005, the total number of outstanding shares of the Registrant’s common stock was 15,754,985.

Trikon Technologies, Inc.

INDEX


		PAGE NUMBER
Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at September 30, 2005 and December 31, 2004	3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and September 30, 2004	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and September 30, 2004	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25

Item 4.	Controls and Procedures	25

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3	Defaults Upon Senior Securities	26

Item 4.	Submission of Matters to a Vote of Security Holders	26

Item 5.	Other Information	26

Item 6.	Exhibits	26

SIGNATURES		27

PART 1 - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	September 30, 2005			December 31, 2004
	(Unaudited)			(Note A)
Assets
Current assets:
Cash and cash equivalents	$	6,772		$	21,202
Accounts receivable, net		7,905			6,654
Inventories, net		14,442			16,543
Prepaid and other current assets		1,764			2,203
Restricted cash		8,850			–

Total current assets		39,733			46,602
Property, equipment and leasehold improvements, net		9,079			13,597
Demonstration systems, net		2,890			551
Other assets		255			391

Total assets	$	51,957		$	61,141

Liabilities and shareholders’ equity
Current liabilities:
Short term borrowing	$	8,850		$	9,600
Accounts payable		5,697			5,709
Accrued expenses		1,665			1,453
Deferred revenue		391			541
Warranty & related expenses		1,377			1,171
Current portion of long-term debt and capital lease obligations		100			281
Other current liabilities		2,257			971

Total current liabilities		20,337			19,726
Long-term debt and capital lease obligations less current portion		32			91
Other noncurrent liabilities		620			782

	$	20,989		$	20,599

Shareholders’ equity:
Preferred stock:
Authorized shares — 20,000,000 Issued and outstanding — nil at September 30, 2005 and December 31, 2004		–			–
Common stock, $0.001 par value:
Authorized shares — 50,000,000 Issued and outstanding — 15,754,985 at September 30, 2005 and at December 31, 2004		261,416			261,416
Accumulated other comprehensive loss		2,315			2,886
Accumulated deficit		(232,763	)		(223,760	)

Total stockholders’ equity		30,968			40,542

Total liabilities and stockholders’ equity	$	51,957		$	61,141

See Notes to Unaudited Condensed Consolidated Financial Statements.

Trikon Technologies, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)


	Three Months Ended						Nine Months Ended
	September 30, 2005			September 30, 2004 (Restated)			September 30, 2005			September 30, 2004 (Restated)
Revenues:
Product revenues	$	10,812		$	9,858		$	25,422		$	26,702
License revenues		2,190			17			4,275			126

		13,002			9,875			29,697			26,828

Costs and expenses:
Cost of goods sold		8,107			6,528			18,828			20,617
Research and development		1,909			2,314			6,406			7,921
Selling, general and administrative		3,646			3,756			11,015			12,038
Restructuring cost		—			(1,200	)		—			(1,200	)

		13,662			11,398			36,249			39,376

Loss from operations		(660	)		(1,523	)		(6,552	)		(12,548	)
Foreign currency (losses) gains		(246	)		7			(2,069	)		366
Interest (expenditure) income, net		(83	)		(92	)		5			37

Loss before income tax charge		(989	)		(1,608	)		(8,616	)		(12,145	)
Income tax charge		286			45			387			165

Net loss	$	(1,275	)	$	(1,653	)	$	(9,003	)	$	(12,310	)

Loss per share data:
Basic	$	(0.08	)	$	(0.10	)	$	(0.57	)	$	(0.78	)
Diluted	$	(0.08	)	$	(0.10	)	$	(0.57	)	$	(0.78	)

Weighted average common shares used in the calculation:
Basic		15,755			15,752			15,755			15,733
Diluted		15,755			15,752			15,755			15,733

See Notes to Unaudited Condensed Consolidated Financial Statements.

Trikon Technologies, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Nine Months Ended
	September 30, 2005			September 30, 2004 (Restated)
Operating Activities
Net loss.	$	(9,003	)	$	(12,310	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property plant and equipment		3,188			4,050
Loss on disposal of property plant and equipment		(20	)		(13	)
Provision for losses on accounts receivable		(120	)		(22	)
Changes in operating assets and liabilities:
Accounts receivable		(1,131	)		(2,563	)
Inventories (including demonstration systems)		(238	)		1,336
Other current assets		439			1,896
Accounts payable and other liabilities		1,627			(1,113	)
Income tax payable		65			(162	)
Deferred revenue		(150	)		(186	)

Net cash used in operating activities		(5,343	)		(9,087	)
Investing Activities
Purchases of property, equipment and leasehold improvements		(1,329	)		(1,673	)
Proceeds from sale of property, plant and equipment		1,474			651
Other assets and liabilities		(26	)		(148	)
Increase in restricted cash		(8,850	)		–

Net cash used in investing activities		(8,731	)		(1,170	)
Financing Activities
Issuance of common stock		–			196
Borrowings under short term loan		8,850			9,050
Repayments under bank credit lines		(9,600	)		(11,188	)
Payments on capital lease obligations		(240	)		(500	)

Net cash used in financing activities		(990	)		(2,442	)

Effect of exchange rate changes in cash		634			62

Net decrease in cash and cash equivalents		(14,430	)		(12,637	)
Cash and cash equivalents at beginning of period		21,202			31,646

Cash and cash equivalents at end of period	$	6,772		$	19,009

See Notes to Unaudited Condensed Consolidated Financial Statements.

Trikon Technologies, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2005

NOTE A BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include the accounts of Trikon Technologies, Inc. (the “Company”) and its subsidiaries. All material intercompany balances and transactions have been eliminated.

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The operating results for the three months and nine months ended September 30, 2005 and September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

In May 2005, the Company decided to restate certain of its previously issued financial statements to reflect (i) the classification of accounts receivable and deferred revenues on contracts with a portion of the contract price that is withheld until final acceptance; (ii) the timing of recognition of costs on those contracts: and (iii) the allocation of facilities cost. (See notes 13 and 14 to the consolidated financial statements in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004).

The balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2004, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K, as amended by the Company’s amended report on Form 10-K/A for the year ended December 31, 2004.

On March 14, 2005, the Company entered into an agreement and Plan of Merger, subsequently amended on June 23, 2005 and October 27, 2005, with Aviza Technology, Inc. (“Aviza”), a privately held global supplier of thermal process and atomic layer deposition systems. The consummation of the merger transaction is subject to the approval of the Trikon stockholders and other customary closing conditions. The requisite approval of stockholders of Aviza has already been obtained. The merger is expected to close in the fourth quarter of 2005. On March 14, 2005, the Company also entered into an agreement with Aviza for the joint development of control software for an existing Aviza process module (the “JDA”). The total development fee payable by Aviza to the Company under the JDA is $1.2 million. The development fee includes $900,000 payable upon delivery and sale by the Company to the Aviza of one standard, unmodified Trikon transport module. The JDA acknowledges that such delivery and sale and related payment was completed in December 2004 prior to executing the JDA. The JDA includes a grant of license rights to Aviza with respect to the process module control software to be developed under the JDA. The total license fee payable by Aviza to the Company under the JDA was $4 million, half of which was paid on March 14, 2005, the other half of which was paid on September 28, 2005.

As of September 30, 2005 the Company had cash and cash equivalents of $6.8 million, working capital of $19.4 million and an accumulated deficit of $232.8 million. The Company incurred a net loss of $1.3 million in the nine months ended September 30, 2005 and may incur additional losses through fiscal 2005. Management believes that cash and cash equivalents at September 30, 2005 will be sufficient to fund the Company’s cash requirements through at least September 30, 2006. However, if anticipated revenues and costs do not meet management’s expectations, then management would look to raise additional equity or debt financing or reduce planned expenditures and curtail operations to preserve cash. Currently the Company’s net worth at $31 million puts it in breach of the bank covenant, which could result in the bank exercising its right to cause the Company to repay the outstanding balance under the loan facility, designated as restricted cash, and not permit such amounts to be redrawn. The Company is currently in discussions with its bank regarding this matter.

NOTE B RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 151, “Inventory Costs an Amendment to ARB 43, Chapter 4” which becomes effective beginning January 1, 2006. This Statement requires that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) costs be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company does not expect this pronouncement to have a material impact on the financial statements.

In December 2004, the FASB issued SFAS 123(R) “Share-Based Payment” that will require compensation costs related to share-based payment transactions to be recognized in the consolidated financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant date fair value of the equity instruments issued. Compensation cost will be recognized over the period that an employee provides services in exchange for the award. SFAS 123(R) replaces SFAS 123, and supersedes Accounting Principals Board (“APB”) Opinion 25. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Fair value of share-based awards will be determined using option-pricing models and assumptions that appropriately reflect the specific circumstances of the awards.

The adoption of SFAS 123(R)’s fair market value method, which is effective for the Company from January 1, 2006, will have a significant impact on the Company’s results of operations, although it will have no impact on its overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note H to the consolidated financial statements. SFAS 123(R) also requires the benefit of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current guidance. This requirement is not expected to have a material effect on the Company’s financial condition or results of operations.

In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulleting (“SAB”) 107, “Share Based Payments” to provide public companies additional guidance in applying the provisions of SFAS 123(R). Among other things, SAB 107 describes the SEC staff’s expectations in determining the assumptions that underlie the fair value estimates and discussed the interaction of SFAS 123(R) with certain existing SEC guidance.

In May 2005, the FASB issued SFAS 154. “Accounting Changes and Error Corrections.” SFAS 154 is a replacement of APB 20 and SFAS 3. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. SFAS 154 also addresses the reporting of a correction of an error by restating previously issued financial statements. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt this pronouncement beginning in fiscal year 2006.

NOTE C INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or market value. The components of inventory consist of the following:


	September 30, 2005		December 31, 2004
	(In thousands)
Customer service spares	$	2,313	$	2,723
Finished goods		2,370		–
Components		6,533		7,648
Work in process		3,226		6,172

Total	$	14,442	$	16,543

NOTE D LIABILITIES

The components of other current liabilities are as follows:


	September 30, 2005		December 31, 2004
	(In thousands)
Customer deposits	$	1,520	$	26
Payroll taxes		637		693
Income taxes		96		80
Other		4		172

Total	$	2,257	$	971

Generally, the Company’s products are sold with a standard warranty, the period of which varies from 12 to 24 months, depending on a number of factors including the specific equipment purchased. The Company accounts for the estimated warranty cost as a charge to cost of sales at the time it recognizes revenue. The warranty cost is based upon historic product performance and is based on a rolling 12-month average of the historic cost per machine per warranty month outstanding.

Changes in the Company’s product warranty liability during the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 were as follows (in thousands):


Balance, January 1, 2005	$	1,171
Provisions for warranty		170
Consumption of reserves		(286	)
Translation adjustment		(17	)

Balance, March 31, 2005	$	1,038
Provisions for warranty		282
Consumption of reserves		(60	)
Translation adjustment		(56	)

Balance, June 30, 2005	$	1,204
Provisions for warranty		352
Consumption of reserves		(167	)
Translation adjustment		(12	)

Balance, September 30, 2005	$	1,377

NOTE E COMPREHENSIVE LOSS

Comprehensive loss is comprised of the following:


	Three Months Ended						Nine Months Ended
	September 30, 2005			September 30, 2004 (Restated)			September 30, 2005			September 30, 2004 (Restated)
	(In thousands)						(In thousands)
Net loss	$	(1,275	)	$	(1,653	)	$	(9,003	)	$	(12,310	)
Foreign currency translation adjustments		(14	)		55			(551	)		272

Total	$	(1,289	)	$	(1,598	)	$	(9,554	)	$	(12,038	)

NOTE F EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:


	Three Months Ended						Nine Months Ended
	September 30, 2005			September 30, 2004 (Restated)			September 30, 2005			September 30, 2004 (Restated)
	(In thousands)						(In thousands)
Numerator:
Net loss	$	(1,275	)	$	(1,653	)	$	(9,003	)	$	(12,310	)

Denominator:
Weighted average shares outstanding		15,755			15,752			15,755			15,733

Basic and diluted earnings per share are calculated in accordance with SFAS No. 128, “Earnings Per Share,” which specifies the computation, presentation and disclosure requirements for earnings per share.

The effect of the Company’s potential issuance of common shares from the Company’s stock option program and unvested restricted stock are excluded from the diluted shares calculation in accordance with SFAS 128, as they are anti-dilutive when a loss is incurred.

NOTE G PREFERRED STOCK

The Board of Directors has the authority to issue up to 20,000,000 shares of Preferred Stock in one or more series with rights, preferences, privileges and restrictions to be determined at the Board’s discretion.

NOTE H STOCK BASED COMPENSATION EXPENSE

The Company has estimated the fair value of the options at the date of grant using a Black-Scholes option pricing model which was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable.

No share based payment expense was recognized under APB 25 for the three and nine month periods ended September 30, 2005 and 2004. If compensation expense had been determined based on the grant date fair value as computed under the Black-Scholes option pricing model for awards in the three and nine month periods ending September 30, 2005 and 2004 in accordance with the provisions of SFAS 123 and SFAS 148, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated below:


	Three Months Ended						Nine Months Ended
	September 30, 2005			September 30, 2004 (Restated)			September 30, 2005			September 30, 2004 (Restated)
	(In thousands)						(In thousands)
Net loss as reported	$	(1,275	)	$	(1,653	)	$	(9,003	)	$	(12,310	)
Pro forma compensation expense calculated on the fair value method		(162	)		(239	)		(498	)		(771	)

Pro forma net loss	$	(1,437	)	$	(1,892	)	$	(9,501	)	$	(13,081	)

As reported loss per common share
Basic	$	(0.08	)	$	(0.10	)	$	(0.57	)	$	(0.78	)
Diluted	$	(0.08	)	$	(0.10	)	$	(0.57	)	$	(0.78	)

Pro forma loss per common share:
Basic	$	(0.09	)	$	(0.12	)	$	(0.60	)	$	(0.83	)
Diluted	$	(0.09	)	$	(0.12	)	$	(0.60	)	$	(0.83	)

On February 9, 2005, the Board of Directors resolved to amend the outstanding option agreements held by Christopher Dobson, Nigel Wheeler and John Macneil to provide for full acceleration of options with a per share exercise price below $6.00 upon the completion of the proposed merger transaction with Aviza Technology, Inc.

Under FASB Interpretation 44, if an award is modified to accelerate vesting, a new measurement date results because the modification may allow the employee to vest in an option or award that would have otherwise been forfeited pursuant to the award’s original terms. While measurement of compensation is made at the date of the modification, the recognition of compensation expense, if any, depends on whether the employee ultimately retains an option or award that would otherwise have been forfeited under the option or award’s original vesting terms. Compensation is measured based on the award’s intrinsic value at the date of modification in excess of the award’s original intrinsic value.

At the date of modification the Company’s share price was below the exercise price of the options and therefore no compensation expense results from the acceleration.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Report. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward-looking statements included herein and any expectations based on such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Factors that could cause actual results to differ materially include, without limitation, global economic conditions and in particular the general uncertainty within the semiconductor capital equipment industry, the long sales cycle and implementation periods for Trikon’s systems, the acceptance of Trikon’s technologies and products, Trikon’s ability to respond to technological change, Trikon’s dependence on a limited number of customers and other factors such as those set forth below under the heading “Risk Factors” and the other risks and uncertainties described from time to time in our public announcements and SEC filings, including, without limitation, our Quarterly and Annual Reports on Form 10-Q and 10-K and 10-K/A respectively.

OVERVIEW

Our business is to design, manufacture, market and sell advanced production equipment, spares and related support services that are used to process semiconductor wafers for the manufacture of integrated circuits. Due to the large unit price associated with our systems, which typically vary between $0.8 million and $3.5 million, our backlog, shipments and revenues can be affected, positively or negatively, by a relatively small swing in orders.

Our products carry out processes to deposit and/or remove materials on the surface of a wafer. In particular, our products are used for chemical vapor deposition (CVD), physical vapor deposition (PVD) and plasma etch processes. We sell, install and service our systems to semiconductor manufacturers worldwide and our existing customers include a wide range of semiconductor companies, including large independent device makers. We use a direct sales model in all of our markets except in Asia, where we use a combination of direct sales and distributors.

Recent Developments

On March 14, 2005, we entered into an Agreement and Plan of Merger, as subsequently amended on June 23, 2005 and October 27, 2005, (the “Merger Agreement”) with Aviza, a privately held global supplier of thermal process and atomic layer deposition systems. Under the terms of the Merger Agreement, a wholly owned subsidiary of New Athletics, Inc., a newly formed Delaware corporation, will merge with and into us, and another wholly-owned subsidiary of New Athletics, will merge with and into Aviza. Upon consummation of the merger, we and Aviza will each continue as subsidiaries of New Athletics. The consummation of the merger is subject to the approval of the Company’s stockholders and other customary closing conditions. The requisite approval of the stockholders of Aviza has already been obtained. The merger is expected to close in the fourth quarter of 2005.

In addition, on March 14, 2005, the Company entered into an agreement for the joint development of control software for an existing Aviza process module (the “JDA”). The total development fee payable by Aviza to the Company under the JDA is $1.2 million. The development fee includes $900,000 payable upon delivery and sale by the Company to Aviza of one standard, unmodified Trikon transport module. The JDA acknowledges that such delivery and sale and related payment was completed in December 2004 prior to executing the JDA. The JDA also obligates Aviza to purchase, and Trikon to sell, eight additional Trikon transport modules incorporating the developed software, all on a cost-plus a specified percentage basis, and all within two years after the completion of the development work (for delivery no later than two and a half years after the date of the JDA).

The JDA includes a grant of license rights to Aviza with respect to the process-module control software to be developed under the JDA, and also with respect to certain manufacturing documentation and software source code for the existing Trikon transport module. The total license fee payable by Aviza to the Company under the JDA is $4 million, half of which was paid upon execution of the JDA, the other half of which was paid by Aviza in September, 2005. The JDA also specifies per-unit royalties that Aviza is to pay the Company for licensed products sold, subject to an overall cap of $2 million.

In May 2005, we decided to restate certain of our previously issued financial statements to reflect; (i) the classification of accounts receivable and deferred revenues on contracts where a portion of the contract price is withheld until final acceptance; (ii) the timing of recognition of costs on those contracts; and (iii) the allocation of facilities cost. (See notes 13 and 14 to the consolidated financial statements on Form 10-K/A for the fiscal year ended December 31, 2004).

Critical Accounting Policies

General

Our discussion and analysis of the financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles.

A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates generally require us to make assumptions about matters that are highly uncertain at the time of the estimate; and if different estimates or judgments were used, the use of these estimates or judgments would have a material effect on our financial condition or results of operations.

The estimates and judgments we make that affect the reported amount of assets, liabilities, revenues and expenses are based on our historical experience and on various other factors, which we believe to be reasonable in the circumstances under which they are made. Actual results may differ from these estimates under different assumptions or conditions. We consider our accounting policies related to revenue recognition, foreign currency translation, the valuation of inventories including demonstration inventory and accounting for the costs of installation and warranty obligations to be critical accounting policies.

Revenue Recognition

We derive our revenues from four sources – equipment sales, spare parts sales, the provision of services and license revenue. In accordance with Staff Accounting Bulletin 104 issued by the staff of the Securities and Exchange Commission, we recognize revenue when all the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services rendered, the sales price is fixed or determinable and collectivity is reasonably assured. For transactions that consist of multiple deliverables we allocate revenue to each of the deliverables based upon relative fair values and apply the revenue recognition criteria above to each element.

Generally, we recognize revenue on shipment, as the equipment is pre-tested in the factory prior to shipment and our terms of business are FOB factory. For new customers, or new products, revenue is recognized on shipment only if the customer attends and approves the pre-shipment testing procedures and we, and the customer, are satisfied that the performance of the equipment, once installed and operated, will meet the customer-defined specifications. Generally, even with new customers we recognize revenue on shipment because the customer attends and approves the pre-shipment testing. The amount of revenue recognized is reduced by the amount of any customer retention (typically between 10% and 20%), which is not payable by the customer until installation is completed and final customer acceptance is achieved.

The amount of revenue related to system shipments and customer retentions not recognized at September 30, 2005 was $5.7 million compared to $1.9 million at December 31, 2004. The total contract values for these specific shipments were $23.7 million and $16.4 million at September 30, 2005 and December 31, 2004, respectively.

Equipment shipped as demonstration or evaluation units are recognized as revenue on transfer of title and either final acceptance, or satisfactory completion of testing, which demonstrates that the equipment meets the entire customer, defined specifications.

Revenue related to spare parts is recognized on shipment. Revenue related to service contracts is recognized ratably over the duration of the contracts. Revenue deferred on service contracts was $0.3 million at September 30, 2005 compared to $0.5 million at December 31, 2004.

Where technology has been sold, revenue has been recognized on receipt of the royalty payments. Where technology has been licensed and delivered, the royalty is recognized as revenue when it becomes irrevocable.

Foreign Currency Translation

Most of our operations are located within the United Kingdom and most of our costs are incurred in British pounds. However, our system sales are generally in US dollars and, to a lesser extent, in euro, and we report in US dollars. As a result, fluctuations in the exchange rate between the US dollar and the British pound could have a significant effect on our reported earnings and net asset position. We have determined that the functional currency for all UK entities is the British pound and as a result our actual expenses expressed in US dollars will fluctuate with changes in foreign currency exchange rates and result in currency gains and losses, which are charged to net income. Changes in the value of non-US net assets as a result of these movements of foreign currency exchange rates are treated as changes to the cumulative translation adjustment on the balance sheet. We also have significant intercompany loans between the United Kingdom operating subsidiary and the parent, which are determined as being short-term in nature. This determination results in exchange gains and losses associated with these loans being accounted for in the statement of operations.

Inventory Valuation

Inventories are stated at the lower of cost or net realizable value, using standard costs which approximate to actual cost. We maintain a perpetual inventory system and continuously record the quantity on hand and standard cost of each product including purchased components, sub assemblies and finished goods. We maintain the integrity of the perpetual inventory through a cycle stock count program.

Our standard costs are re-assessed at least annually and generally reflect the most recent purchase cost and currently achievable assembly and test labor and overhead rates. We estimate our labor and overhead rates based upon average utilization rates and treat as a period cost abnormal absorption variances, which arise due to low or high production volumes. As a result of the recent low levels of production, significant negative volume variances are being experienced, which has resulted in a gross margin that is below levels that could be achieved at higher revenue levels.

We also make provision for slow moving and obsolete inventory and evaluate their adequacy on a quarterly basis. For our work in process and finished goods inventory, which generally consist of specific systems or modules, we compare the inventory on hand to current sales and market forecasts and other information that indicates the ability to identify a purchaser for such equipment. We apply a formula approach to reserves against raw materials and spares inventory based upon 12 months historic usage, applying different criteria to components that are required for current products, non current products and spares.

A major component of the estimate of inventory reserves is our forecast of future customer demand, technological and/or market obsolescence, and general semiconductor market conditions. If future customer demand or market conditions are less favorable than our projections, then additional inventory write-downs may be required, and these would be reflected in cost of sales in the period the reserves were adjusted.

Installation and Warranty

Generally we recognize the costs of installation when the machine is fully accepted by the customer. Our contracts cover on-site installation services and provide for a warranty of the machine. Our standard warranty period varies from 12 to 24 months, depending on a number of factors including the specific equipment purchased

We account for the estimated warranty cost as a charge to cost of sales at the time we recognize revenue. The warranty reserve is based upon historic product performance and is based on a rolling 12-month average of the historic cost per machine per warranty month outstanding. We also recalculate the estimated warranty cost for all remaining systems still under warranty using the most recent historic average and the difference is included as a component of cost of sales. We do not maintain any general reserves for warranty obligations. Actual warranty costs in the future may vary from historic costs, which could result in adjustments to our warranty reserves in future periods that are more volatile than in recent years.

RESULTS OF OPERATIONS

The following table sets forth certain operating data as a percentage of total revenue for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30, 2005		September 30, 2004 (Restated)		September 30, 2005		September 30, 2004 (Restated)
Product revenues	83.2	%	99.8	%	85.6	%	99.5	%
License revenue	16.8	%	0.2	%	14.4	%	0.5	%

Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	62.4	%	66.1	%	63.4	%	76.8	%

Gross margin	37.6	%	33.9	%	36.6	%	23.2	%

Operating expenses:
Research and development	14.7	%	23.4	%	21.6	%	29.5	%
Selling, general and administrative	28.0	%	38.0	%	37.1	%	44.9	%
Restructuring costs	–		(12.2	)%	–		(4.5	)%

Total operating expenses	42.7	%	49.2	%	58.7	%	69.9	%

Loss from operations	(5.1	)%	(15.3	)%	(22.1	)%	(46.7	)%
Foreign currency (losses) gains	(1.9	)%	0.1	%	(6.9	)%	1.4	%
Interest income, net	(0.6	)%	(0.9	)%	–		0.1	%

Loss before income tax charge	(7.6	)%	(16.1	)%	(29.0	)%	(45.2	)%
Income tax charge	(2.2	)%	(0.5	)%	(1.3	)%	(0.6	)%

Net loss	(9.8	)%	(16.6	)%	(30.3	)%	(45.8	)%

Product revenues

Product revenues for the three months ended September 30, 2005 increased 10% to $10.8 million compared to $9.9 million for the three months ended September 30, 2004 and product revenues for the nine months ended September 30, 2005 decreased 5% to
$25.4 million compared to $26.7 million for the nine months ended September 30, 2004. Shipments for the three months ended September 30, 2005 were $9.5 million compared to $10.0 million in the three months ended September 30, 2004.

Revenue from outside of the United States accounted for approximately 58% and 85% of total revenues in the three-month periods ended September 30, 2005 and September 30, 2004 respectively, and approximately 60% and 75% of total revenues in the nine-month periods ended September 30, 2005 and September 30, 2004, respectively. We expect that sales outside of the United States will continue to represent a significant percentage of our product sales.

Due to the large unit price associated with our systems, we anticipate that our product sales will continue to be made to a small number of customers in each quarter. The quantity of product shipped in any particular quarter can fluctuate significantly and therefore is not indicative of a trend in customer or geographical mix.

Our sales by type of product are as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2005		September 30, 2004		September 30, 2005		September 30, 2004
PVD	70	%	45	%	55	%	37	%
CVD	–		7	%	3	%	5	%
Etch	7	%	14	%	12	%	24	%
Spares and service	23	%	34	%	30	%	34	%

Total	100	%	100	%	100	%	100	%

License revenues

License revenues relate to an exclusive license of power supply technology, a non-exclusive license of M0RI technology to a systems integrator in Japan for a non-competing application and the non-exclusive license fee of $4 million entered into with Aviza on March 14, 2005. License revenues for the three and nine month periods ended September 30, 2005 were each 17% and 14% of total revenue, respectively.

Gross Margin

The gross profit on total revenue for the three-month period ended September 30, 2005 was $4.9 million, or 38%, as compared to $3.3 million, or 34%, for the three-month period ended September 30, 2004. The increase in gross margin of 4% can be attributed to a combination of factors including the impact from $2.2 million licence revenue without any associated cost of sales of approximately 12% and reduced adverse manufacturing variances related to fixed manufacturing overheads of 3% as compared to the three-month period ended September 30, 2004. These increases were offset by 6% lower margin resulting from differing product mixes during the quarters, 3% as a result of a reduction on the volume of higher margin spares sales and 2% from increased warranty costs against the three-month period ended September 30, 2004. Revenue associated with customer retentions deferred from prior periods and recognized during the three-month periods ended September 30, 2005 and 2004 was $0.1 million and $0.1 million, respectively. The impact on gross margin of these releases was 1% in both of the periods.

The gross profit on total revenues for the nine-months ended September 30, 2005 was $10.9 million, or 37%, compared with $6.2 million, or 23%, for the nine-month ended September 30, 2004. The improvement in gross margin of 14% can be attributed to a combination of factors including the impact of the $4.3 million license revenue without any associated cost of sales of approximately 11%, reduced customer support labour costs of approximately 3% and reduced adverse manufacturing variances related to fixed manufacturing overheads, as compared to the nine-months ended September 30, 2004, of approximately 9%. These increases in gross margin were offset by lower margin of 3% as a result of a reduction on the volume of higher margin spare sales, 3% resulting from different systems product mix, 1% from increased warranty costs against the nine-month period ended September 30, 2004 and a reduced benefit from customer retention releases in the period of 2%. Revenue associated with customer retentions deferred from prior years and recognized during the nine-months ended September 30, 2005 and 2004 was $1.0 million and $1.6 million respectively. The impact on gross margin of these releases was approximately 2% for the nine months ended September 30, 2005 and 5% for the nine months ended September 30, 2004.

Research and development expenses

Research and development expenses for the three months ended September 30, 2005 were $1.9 million, or 15% of total revenues, compared with $2.3 million, or 23% of total revenues, for the three months ended September 30, 2004. For the nine months ended September 30, 2005 research and development expenses were $6.4 million, or 22% of total revenues, compared with $7.9 million, or 30% of total revenues, for the nine months ended September 30, 2004.

Research and development expenses for the nine-month period ended September 30, 2004 include $322,000 relating to a reduction in work-force, no similar charges have been incurred in the three and nine-month periods ended September 30, 2005. The major focus of our research and development efforts will be the development of new processes in further advancing our proprietary PVD, CVD and etch technologies, especially the development of novel process solutions for emerging applications in addition to our Flowfill and Orion product lines at technology nodes of 90nm and below.

We have accepted the offer of a grant from the UK government to develop broad ion beam deposition technology in collaboration with other parties for magnetic random access memory (MRAM) applications. The grant will reimburse 50% of the total project costs to a maximum of $3.1 million. As at September 30, 2005 no costs had been incurred and no funding had been received. The expenditure and funding are expected to commence in the fourth quarter of fiscal 2005 and would be expended/received over the 18-month period of the project.

We have also accepted an offer of a grant from the Welsh Development Agency to develop a process to fabricate microfluidic substrates for the production of a single stage emulsion for R&D use by pharmaceutical and biotechnology companies. This grant will reimburse 50% of the total project costs to a maximum of $300,000. The project start date was March 8, 2005 and to date we have expensed in aggregate $175,000. The project is expected to complete by May 2006. Costs have been recovered during the quarter in line with the payment schedule.

Trikon gains full ownership rights to all intellectual property generated from the development projects that are the subject of the UK government and Welsh Development Agency grant funding.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended September 30, 2005 were $3.6 million, or 28% of total revenues, compared to $3.8 million, or 38% of total revenues, in the three months ended September 30, 2004. Selling, general and administrative expenses for the third quarter of 2005 include legal, accounting and due diligence costs of $0.7 million expended in respect of the planned merger transaction with Aviza. For the nine months ended September 30, 2005 selling, general and administrative expenses were $11.0 million, or 37% of total revenues, compared to $12.0 million, or 45% of total revenues, in the nine months ended September 30, 2004. Total non-recurring costs, net of a credit for property taxes, were $1.3 million in the nine month period ended September 30, 2004. Selling, general and administrative expenses for the nine months ended September 30, 2005 include $1.7 million in respect of legal, accounting and due diligence costs associated with the planned merger transaction with Aviza.

Results from operations

We incurred a loss from operations of $0.7 million in the three months ended September 30, 2005 compared to $1.5 million in the three months ended September 30, 2004 and $6.6 million in the nine months ended September 30, 2005 compared to a loss from operations of $12.5 million in the nine months ended September 30, 2004.

Interest income (expense) net

Net interest expenditure was $83,000 for the three months ended September 30, 2005 compared with net interest expenditure of $92,000 for the three months ended September 30, 2004. During the nine months ended September 30, 2005 net interest income was $5,000 compared to net interest income of $37,000 in the same period of the prior year. Lower cash balances are the primary reason for the lower interest income in the three and nine-month period ended September 30, 2005.

Income taxes

For the three months ended September 30, 2005, we recorded a tax charge of $286,000 compared with a tax charge of $45,000 for the three months ended September 30, 2004. For the nine months ended September 30, 2005 we recorded a tax charge of $387,000 compared with a tax charge of $165,000 for the nine months ended September 30, 2004. We expect to report a small tax charge for the fiscal year ending December 31, 2005 which will consist primarily of United States state taxes including Delaware and a small amount of Non-US or UK taxes where we have cost plus arrangements in place. In estimating the tax rate for the three and nine months ended September 30, 2005, we have not provided any benefit for the deferred tax asset arising from operating losses generated that can only be offset against future profits.

NEW ACCOUNTING PRONOUNCEMENTS

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2005, we had $6.8 million in cash and cash equivalents, compared to $21.2 million at December 31, 2004. Cash and cash equivalents excluding bank borrowings was $6.8 million at September 30, 2005 compared to $11.6 million at December 31, 2004. We utilized cash from operations of $5.3 million in the nine months ended September 30, 2005 compared to a use of cash by operations of $9.1 million in the nine-month period of the prior year.

As of December 31, 2003, we had a term loan from a British bank with a balance outstanding of 6.25 million British pounds (approximately $11.2 million at the exchange rate at such date). The term loan was repaid in full during the three months ended March 31, 2004.

In July 2003, we entered into a two-year revolving credit facility for 5 million British pounds ($8.9 million at the September 30, 2005 exchange rate) (the “2003 facility”). Interest on the 2003 facility, was incurred at the London Interbank Offer Rate (LIBOR) plus 1.75% for borrowings in British pounds and at the Bank’s short-term offered rate plus 1% for foreign currency.

The 2003 facility has subsequently been amended, and on June 30, 2005 an agreement was entered into to extend the term of the facility to December 31, 2005. In addition, the amendment lowered the minimum consolidated net worth that we were required to maintain under the financial covenants contained in the facility agreement from $40 million to $32 million. The net interest covenant remained at £70,000 per quarter and LIBOR plus 1.75%. As at September 30, 2005 we have drawn down £5 million (approximately $8.9 million at September 30, 2005 exchange rates) on the facility, which has been placed in a Lloyds TSB Bank deposit account, access to which is on a business case basis at the discretion of the bank. Our current net worth at $31 million puts us in breach of the net worth covenant, and our bank could exercise its right to cause us to repay amounts outstanding under the 2003 facility and not permit such amounts to be redrawn. We are currently in discussions with our bank regarding this matter.

Our cash and cash equivalents net of amounts borrowed under the 2003 facility (as amended) was $6.8 million at September 30, 2005 and represents our primary source of liquidity. Our cash provided from operating activities during the quarter ended September 30, 2005 was $2.6 million. We may use all, or a substantial part of our cash balance to fund our current obligations and our operations. The amount of cash reserves that we will use to fund our operations will depend on our ability to reduce our operating losses through revenue growth or cost reduction.

The amount of funding required by operations in the next twelve months will depend on numerous factors including, market conditions within the semi conductor industry, general economic conditions, our ability to increase our revenue, or reduce our expenditures or our ability to reduce our working capital requirements in areas such as inventory and accounts receivable. However, management believes, based upon our current forecast for revenues operating expenses, cash flows and other financial metrics that the resources available at September 30, 2005 are sufficient to fund operations for the next 12 months.

If anticipated revenues do not meet our expectations we would continue to seek to scale back our operations to lower the use of cash. We also anticipate that we would seek to raise additional debt or equity funding during the next 12 months and to seek an extension or replacement to the current line of credit.

RISK FACTORS

There are numerous risks associated with the pending merger with Aviza Technology, Inc.

On March 14, 2005, we announced that we had entered into a definitive agreement to combine with Aviza Technology, Inc. to form a new company. The transaction is subject to a number of risks including risks related to the following:

•

unanticipated expenses related to the merger transaction;

•

the potential disruption of our ongoing business and distraction of our management;

•

potential loss of key employees and employee productivity;

•

adverse effects on existing business relationships with customers and customer prospects;

•

potential revenue decline as a result of customer and potential customer uncertainty;

•

the impairment of relationships with employees, customers, distributors, strategic partners and suppliers as a result of integration of management and other key personnel; and

•

the failure to realize the expected benefits of combining with Aviza Technology, Inc.

In addition, if the merger is not consummated for any reason, we may be subject to a number of risks, including:

•

the market price of our common stock could decline following an announcement that the merger has been abandoned to the extent that the current market price reflects a market assumption that the merger will be completed;

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the effect of incurring substantial costs related to the merger, such as legal, accounting and financial advisor fees, which will be required to be paid even if the merger is not consummated;

•

our ability to retain key employees may be adversely affected;

•

our relationships with customers may be adversely affected; and

•

depending upon the reason for termination of the merger, the possible requirement that we pay a substantial termination fee to Aviza Technology, Inc.

In connection with the proposed merger, New Athletics, Inc. has filed a registration statement on Form S-4 that contains a proxy statement/prospectus with the Securities and Exchange Commission (File No. 333-126098). The proxy statement/prospectus contains important information about the proposed merger, risks relating to the merger, and related matters, we urge all of our stockholders to read the proxy statement/prospectus carefully.

We have experienced losses over the last few years and we may not be able to achieve profitability and may need to raise additional capital to support our operations.

We have experienced losses of $9 million during the nine months ended September 30, 2005 and $13.7 million and $25.0 million for the years ended December 31, 2004 and 2003, respectively. We will need to increase sales and/or reduce costs to return to profitability. However, we may never generate sufficient revenues to achieve profitability. Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future.

As at September 30, 2005, we had cash, restricted cash and cash equivalents of $15.6 million. This amount includes the equivalent of 5 million British pounds (approximately $8.9 million at the September 30, 2005 exchange rate) outstanding under our revolving credit facility that we may be required to repay if we breach the consolidated net worth covenant in the facility. A breach of this covenant has occurred as at September 30, 2005, and the bank has the option to require payment if it chooses. Discussions with the bank are ongoing on this issue.

We may need to raise additional capital in the next twelve months from the sale of equity. In addition, regardless of whether such financing is absolutely necessary, we may seek additional debt or equity financing in the next twelve months in order to strengthen our cash position. We may not be able to obtain additional financing on acceptable terms, or at all. If we issue additional equity or convertible debt securities to raise funds, the ownership percentage of our existing stockholders would be reduced and they may experience significant dilution. New investors may demand rights, preferences or privileges that differ from, or are senior to, those of existing holders of our common stock, including warrants in addition to the securities purchased and protection against future dilutive transactions. If we are unable to achieve positive cash flows or raise additional capital, we may be forced to implement further expense reduction measures, including, but not limited to, the sale of assets, the consolidation of operations, workforce reductions, and/or the delay, cancellation or reduction of certain product development, marketing or other operational programs.

We may not achieve profitability in fiscal 2005 and may not achieve the sales necessary to avoid further expense reduction measures in the future. Such expense reduction measures could materially adversely affect our results of operations and prospects and may not be successful in preserving sufficient cash to continue operations

The semiconductor industry is highly cyclical and unpredictable.

Our business depends upon the capital expenditures of semiconductor manufacturers, which in turn depend on the current anticipated market demand for integrated circuits. The semiconductor industry has historically been cyclical due to sudden changes in demand for semiconductors and manufacturing capacity using the latest technology. These changes in demand have affected the timing and amounts of customers’ capital equipment purchases and investments in technology, and continue to affect our orders, net sales, gross margin and results of operations.

During periods of decreasing demand for integrated circuit manufacturing equipment, we must be able to appropriately align our cost structure with prevailing market conditions and effectively motivate and retain key employees. Conversely, during periods of increasing demand, we must have sufficient manufacturing capacity and inventory to meet customer demand, and must be able to attract, retain and motivate a sufficient number of qualified individuals. If we are not able to timely adjust our cost structure with business conditions and/or to effectively manage our resources and production capacity during changes in demand, our business, financial condition or results of operations may be materially and adversely affected.

We are exposed to risks associated with a highly concentrated customer base.

Our orders and revenue are from a relatively small number of customers, which we expect to continue. In the nine months ended September 30, 2005, two customers exceeded 10% of product revenues. This may lead customers to demand from us less favourable pricing and other terms. In addition, sales to any single customer may vary significantly from quarter to quarter. If current customers delay, cancel or do not place orders, we may not be able to replace these orders with new orders in the corresponding period, and our results of operations will suffer. As our products are configured to customer specifications, changing, rescheduling or cancelling orders may result in significant and often non-recoverable costs. The resulting fluctuations in the amount of and terms of orders could have a material adverse effect on our business, financial condition and results of operations.

We will not be able to compete effectively if we fail to address the technology needs of our customers.

We operate in a highly competitive environment, and our future success is heavily dependent on effective development, commercialization and customer acceptance of new products compared to our competitors. In addition, our success is dependent upon our ability to timely and cost-effectively:

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develop and market new products and technologies;

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improve existing products and technologies;

•

expand into or develop equipment solutions for new markets for integrated circuit products;

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achieve market acceptance and accurately forecast demand for our products and technologies;

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achieve cost efficiencies across our product offerings;

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qualify new or improved products for volume manufacturing with our customers; and

•

lower our customers’ cost of ownership.

The development, introduction and support of new or improved products and technologies, including those which enable smaller feature sizes, new materials and the utilization of 300mm wafers becomes increasingly expensive and unpredictable. For example, the adoption of our ORION ^® technology for ultra low k deposition has been delayed as a result of integration issues at the potential customers. Until such integration issues are resolved, our ability to obtain commercial sales of our ORION ^® technology is limited and there can be no assurance that these integration issues will be resolved. We also need to continue to develop technology for such customer needs as power semiconductors, SiP/Mems, BAW, Flowfill, and other applications and there can be no assurance that such developments will be consistent with the needs of these customers.

We may not be able to accurately forecast or respond to the technological trends in the semiconductor industry or respond to specific product announcements by our competitors. Our competitors may be developing technologies and products that are more effective or that achieve more widespread acceptance. In addition, we may incur substantial costs to ensure the functionality and reliability of our current and future products. If our new developed products are unreliable or do not meet our customers’ expectations, then reduced orders, higher manufacturing costs, delays in collecting accounts receivable or additional service and warranty expense could result. Our customers may purchase equipment for their new products but experience delays and technical and manufacturing difficulties in their introductions or transition to volume production using our systems causing significant delays between the sale of an initial tool into our customers development facility and limit the potential for follow on sales for manufacturing. Any of these events could negatively affect our ability to generate the return we expect to achieve on our investments in these new products.

Integrated circuit manufacturers have been slow to adopt the use of new materials and if we fail to continue to develop these solutions to achieve all the specifications required by device manufacturers and/or the device manufacturers fail to successfully integrate these technologies with their other processes, or our competitors develop competing solutions, then our ability to grow our revenues from these products would be negatively affected.

Our operating results could be negatively affected by currency fluctuations.

We are based in the United Kingdom, and most of our operating expenses are incurred in British pounds. Our revenues, however, are generally denominated in US dollars, and to a lesser extent in euro, and we report our financial results in US dollars. Accordingly, if the British pound increases in value against the US dollar, our expenses as a percentage of revenues will increase and gross margins and net income will be negatively affected.

The semiconductor industry is global and is expanding within the Asian region. If we are unable to penetrate this market our ability to grow our revenues will be restricted.

The percentage of worldwide semiconductor production that is based in the Asian region is growing, particularly within China. Our business has traditionally been strongest with the European semiconductor manufacturers and we have only small installed base and limited brand recognition in Asia. It will be necessary for us to penetrate the region by attracting new customers and expanding relationships in Asia to grow our business. While we have appointed a new sales representative in this region and hired a small number of employees, there is no assurance that we will be able to penetrate these geographic markets, which are subject to growth rates that are higher than worldwide growth rates. Failure to penetrate these markets may harm our competitive position and adversely affect our future business.

Our competitors have greater financial resources and greater name recognition than we do and therefore may compete more successfully.

We face competition or potential competition from many companies with greater resources than ours. If we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.

Virtually all of our primary competitors are substantially larger companies and some of them have broader product lines than ours. They have well-established reputations in the markets in which we compete, greater experience with high volume manufacturing, broader name recognition, substantially larger customer bases, and substantially greater financial, technical, manufacturing and marketing resources than we do. We also face potential competition from new entrants, including established manufacturers in other segments of the semiconductor capital equipment market who may decide to diversify and develop and market products that compete with our current offerings.

Semiconductor manufacturers are loyal to their current semiconductor equipment supplier, which may make it difficult for us to obtain new customers.

Because semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor fabrication facility, these manufacturers will tend to choose semiconductor equipment manufacturers based on established relationships, product compatibility and proven system performance.

Once a semiconductor manufacturer selects a particular vendor’s capital equipment, the manufacturer generally relies for a significant period of time upon equipment from this vendor of choice for the specific production line application. To do otherwise creates risk for the manufacturer because the manufacture of a semiconductor requires many process steps and a fabrication facility will contain many different types of machines that must work cohesively to produce products that meet the customers’ specifications. If any piece of equipment fails to perform as expected, the customer could incur significant costs related to defective products, production line downtime, or low production yields.

Since most new fabrication facilities are similar to existing ones, semiconductor manufacturers tend to continue using equipment that has a proven track record. Based on our experience with major customers such as Infineon, we have observed that once a particular piece of equipment is selected from a vendor, the customer is likely to continue purchasing that same piece of equipment from the vendor for similar applications in the future. Our customer list, though limited, has increased during the nine months ended September 30, 2005. Yet our broadening market share remains at risk due to choices made by customers that continue to be influenced by pre-existing installed bases by competing vendors. Consequently, our penetration of new customers and our ability to get additional orders may be limited.

A semiconductor manufacturer frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, we may face narrow windows of opportunity to be selected as the “vendor of choice” by potential new customers. It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitor’s product, and we may not be successful in obtaining broader acceptance of our systems and technology. If we are not able to achieve broader market acceptance of our systems and technology, we may be unable to grow our business and our operating results and financial condition will be harmed.

Our products generally have long sales cycles and implementation periods, which increase our costs of obtaining orders and reduce the predictability of our earnings.

Our products are technologically complex. Prospective customers generally must commit significant resources to test and evaluate our products and to install and integrate them into larger systems. In addition, customers often require a significant number of product presentations and demonstrations, in some instances evaluating equipment on site, before reaching a sufficient level of confidence in the product’s performance and compatibility with their requirements to place an order. As a result, our sales process is often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new products. The sales cycles of our products often last for many months or even years. Longer sales cycles require us to invest significant resources in attempting to make sales and delay the generation of revenue. In addition, we may incur significant costs in supporting evaluation equipment at our customers’ facilities.

Long sales cycles also subject us to other risks, including customers’ budgetary constraints, internal acceptance reviews and cancellations. In addition, orders expected in one quarter could shift to another because of the timing of customers’ purchase decisions. The time required for our customers to incorporate our products into their manufacturing processes can vary significantly with the needs of our customers and generally exceeds several months, which further complicates our planning processes and reduces the predictability of our operating results.

Customers are also demanding shorter delivery times from the time of placing a purchase order. We therefore are required to negotiate with our suppliers shorter lead times for the materials required and we may need to purchase inventory and to commence building for a customer prior to receipt of a confirmed purchase order. It is not possible to fully mitigate this risk within the supply chain. In the event a purchase order is not received from a customer where we had commenced manufacturing, then higher inventory levels would be incurred and potential inventory write-offs would also be incurred if an alternative customer is not identified to purchase that system

We depend upon sole suppliers for certain key components.

We depend on a number of sole suppliers for key components used in the manufacture of our products. If we are unable to obtain timely delivery of sufficient quantities of these components, we would be unable to manufacture our products to meet customer demand, unless we are able to locate replacement components. Most significantly, our cluster tools are designed around an automation module supplied by Brooks Automation. Due to the high cost of these modules we keep very few in inventory.

If Brooks Automation fails to deliver the component on a timely basis, delivery of our cluster tools will be delayed and sales could be lost. Typically revenue from cluster tools containing Brooks Automation’s module accounts for approximately 45% to 50% of our quarterly revenue. If Brooks Automation is unable to deliver any such modules for a prolonged period of time, we will have to redesign our cluster tools so that we may utilize other wafer transport systems. There can be no assurance that we will be able to do so, or that customers will adopt the redesigned systems.

Our final assembly and testing is concentrated in one facility.

Our final assembly and testing activity is concentrated in our facility in Newport, United Kingdom. We have no alternative facilities to allow for continued production if we are required to cease production in our facility, as a result of a fire, natural disaster or otherwise. In such event, we will be unable to produce any products until the facility is replaced. Any such interruption in our manufacturing schedule could cause us to lose sales and customers, which could significantly harm our business

If we are unable to hire and retain a sufficient number of qualified personnel, our ability to manage growth will be negatively affected.

Our business and future operating results depend in part upon our ability to attract and retain qualified management, technical, sales and support personnel for our operations on a worldwide basis. Competition for qualified personnel is intense, and we cannot guarantee that we will be able to continue to attract and retain qualified personnel. Our operations could be negatively affected if we lose key executives or employees or are unable to attract and retain skilled executives and employees as needed.

Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights from challenges by third parties.

Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, non-disclosure and other contractual agreements and technical measures to protect our proprietary rights.

There can be no assurance that patents will be issued on our pending patent applications or that competitors will not be able to ascertain legitimately proprietary information embedded in our products that is not covered by patent or copyright. In such case, we may be precluded from preventing the competitor from making use of such information.

In addition, should we wish to assert our patent rights against a particular competitor’s product, there can be no assurance that any claim in any of our patents will be sufficiently broad nor, if sufficiently broad, any assurance that our patent will not be challenged, invalidated or circumvented, or that we will have sufficient resources to prosecute our rights. Failure to protect our intellectual property could have an adverse effect on our business.

Claims or litigation regarding intellectual property rights could seriously harm our business or require us to incur significant costs.

In recent years, there has been significant litigation in the United States in the semiconductor equipment industry involving patents and other intellectual property rights. Infringement claims may be asserted against us in the future and, if such claims are made, we may not be able to defend against such claims successfully or, if necessary, obtain licenses on reasonable terms. Any claim that our products infringe proprietary rights of others would force us to defend ourselves and possibly our customers against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. These lawsuits, regardless of their outcome, would likely be time-consuming and expensive to resolve and would divert management’s time and attention. Any potential intellectual property litigation could force us to do one or more of the following:

•

lose or forfeit our proprietary rights;

•

stop manufacturing or selling our products that incorporate the challenged intellectual property;

•

obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms or at all and may involve significant royalty payments;

•

pay damages, including treble damages and attorney’s fees in some circumstances; or

•

re-design those products that use the challenged intellectual property.

If we are forced to take any of the foregoing actions, our business could be severely harmed.

Our operations are subject to health and safety and environmental laws that may expose us to liabilities for non-compliance.

We are subject to a variety of governmental regulations relating to the use, storage, discharge, handling, manufacture and disposal of all materials present at, or our output from, our facilities, including the toxic or other hazardous chemical by-products of our manufacturing processes. Environmental claims against us, or our failure to comply with any present or future regulations could result in, significant costs to remediate, the assessment of damages or imposition of fines against us; the suspension of production of our products; or the cessation of our operations.

New regulations could require us to purchase costly equipment or to incur other significant expenses. Our failure to control the use or adequately restrict the discharge of hazardous substances could subject us to future liabilities, which could negatively affect our operating results and financial condition.

Any acquisitions we may make could disrupt our business and severely harm our financial condition.

We may consider it necessary to invest in complementary products, companies or technologies, such investments involve numerous risks, including but not limited to: (1) diversion of management’s attention from other operational matters; (2) inability to complete acquisitions as anticipated or at all; (3) inability to realize synergies expected to result from an acquisition; (4) failure to commercialise purchased technologies; (5) ineffectiveness of an acquired company’s internal controls; (6) impairment of acquired intangible assets as a result of technological advancements or worse-than-expected performance of the acquired company or its product offerings; (7) unknown and/or undisclosed commitments or liabilities; (8) failure to integrate and retain key employees; and (9) ineffective integration of operations. Mergers and acquisitions are inherently subject to significant risks, and the ability to effectively manage these risks could materially and adversely affect our business, financial condition and results of operations.

Changes in accounting rules may adversely affect our financial results.

We prepare our financial statements in conformity with Generally Accepted Accounting Principles (GAAP) of the United States of America. These principles are subject to interpretation by the Securities and Exchange Commission (the “SEC”) and the Financial Accounting Standards Board (FASB). A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. In particular, changes to FASB guidelines relating to accounting for stock-based compensation will likely increase our compensation expense, could make our net result less predictable in any given reporting period and could change the way we compensate our employees or cause other changes in the way we conduct our business.

You may have difficulty protecting your rights as a stockholder and in enforcing civil liabilities because many of our executive officers and the majority of the members of our board of directors and the majority of our assets are located outside the United States.

Our principal assets and manufacturing plants are located in the United Kingdom. In addition, most of the members of our board of directors and our executive officers are residents of jurisdictions other than the United States. As a result, it may be difficult for stockholders to serve process within the United States upon members of our board of directors and our executive officers, or to enforce against us or members of our board of directors or our executive officers judgments of the U.S. courts, to enforce outside the United States judgments obtained against members of our board of directors or our executive officers in U.S. courts, or to enforce in U.S. courts judgments obtained against members of our board of directors or our executive officers in courts in jurisdictions outside the United States, in any action, including actions that derive from the civil liability provisions of the U.S. securities laws. In addition, it may be difficult for our stockholders to enforce, in original actions brought in courts in jurisdictions located outside the United States, liabilities that derive from U.S. securities laws.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The following discussion and analysis about market risk disclosures may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such statements include declarations regarding our intent, belief or current expectations and involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements.

Our earnings and cash flow are subject to fluctuations in foreign currency exchange rates. Significant factors affecting this risk include our manufacturing and administrative cost base, which is predominately in British pounds, and product sales outside the United States, which may be expressed in currencies other than the United States dollar. We constantly monitor currency exchange rates and match currency availability and requirements whenever possible. We may from time to time enter into forward foreign exchange transactions in order to minimize risk from firm future positions arising from trading. As of September 30, 2005 and December 31, 2004, we did not have any open forward currency transactions.

Based upon second quarter income and expenditures, a hypothetical increase of 10% in the value of the British pound against all other currencies would have no material effect on revenues, which are primarily expressed in United States dollars but would increase operating costs and reduce cash flow by approximately $1 million. The same increase in the value of the British pound would increase the value of our net assets expressed in United States dollars by approximately $3 million. The effect of the hypothetical change in exchange rates ignores the effect this movement may have on other variables including competitive risk. If it were possible to quantify this impact, the results could be significantly different from the sensitivity effects shown above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken relative to the British pound. In reality, some currencies may weaken while others may strengthen.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements.

In May 2005, we re-evaluated controls over the selection, application and monitoring of our accounting policies with respect to (i) the classification of accounts receivable and deferred revenues on contracts with a portion of the contract price that is withheld until final acceptance, (ii) the timing of recognition of costs on those contracts and (iii) the allocation of facilities cost, and deemed they were not effective. Accordingly, we decided to restate certain of our previously issued financial statements to reflect the corrections (see our Form 10-K/A for the fiscal year ended December 31, 2004, including notes 13 and 14 to our consolidated financial statements contained therein, for more regarding our restatement).

An evaluation was performed under the supervision and with the participation of our management team, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2005.

Changes in Internal Controls

In order to remediate our internal controls over financial reporting, subsequent to March 31, 2005, we sought additional advice and implemented additional review procedures over the selection application and monitoring of appropriate accounting policies to ensure overall compliance with GAAP. In order to reinforce our existing control procedures and to ensure that our policies continue to conform to GAAP and SEC pronouncements, among other things, we have subscribed to certain relevant informational databases designed expressly for the purpose of monitoring changes in GAAP and reinforced our existing procedures to discuss these changes with our audit committee, independent registered public accounting firm and other advisors as deemed necessary.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) that occurred during the quarter ended September 30, 2005 that has materially affected or is reasonably likely to materially affect our financial reporting.

Trikon Technologies, Inc.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On March 10, 2004 Dr. Jihad Kiwan departed the Company as Director and Chief Executive Officer. On March 29, 2004 and April 2, 2004 we received letters from a United Kingdom law firm and from a French law firm, respectively, on behalf of Dr. Kiwan, detailing certain monetary claims with respect to severance amounts due to Dr. Kiwan with respect to his employment with Trikon. On April 28, 2004 Dr. Kiwan filed a lawsuit in France. We are in the process of vigorously defending against this claim.

From time to time we become involved in ordinary, routine or regulatory legal proceedings incidental to our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) The following exhibits are included herein:



31.1		Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act

31.2		Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act

32.1		Certificate of Chief Executive Officer furnished pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)

32.2		Certificate of Chief Financial Officer furnished pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)

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: November 9, 2005		/s/ John Macneil
		John Macneil
		Chief Executive Officer, President and Director

		/s/ Martyn J Tuffery
		Martyn Tuffery
		Senior Vice President and Acting Chief Financial Officer

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