<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
THERMA-WAVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3823 94-3000561
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
1250 RELIANCE WAY, FREMONT, CALIFORNIA 94539
(510) 490-3663
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
DR. ALLAN ROSENCWAIG
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
THERMA-WAVE, INC.
1250 RELIANCE WAY, FREMONT, CALIFORNIA 94539
(510) 490-3663
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications, including communications sent to agent for
service, should be sent to:
DENNIS M. MYERS, ESQ. DAVID B. WALEK, ESQ.
KIRKLAND & ELLIS ROPES & GRAY
200 EAST RANDOLPH DRIVE ONE INTERNATIONAL PLACE
CHICAGO, ILLINOIS 60601 BOSTON, MASSACHUSETTS 02110
(312) 861-2000 (617) 951-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS OF
SECURITIES PROPOSED MAXIMUM AGGREGATE
TO BE REGISTERED OFFERING PRICE(1)(2) AMOUNT OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01
per share $ 36,800,000 $ 11,152
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</TABLE>
(1) Includes shares of Common Stock that the Underwriters have the option to
purchase from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
OCTOBER 2, 1997
[LOGO OF THERMA-WAVE, INC.]
Shares
THERMA-WAVE, INC.
Common Stock
-----------
All of the shares of Common Stock, par value $.01 per share ("Common
Stock"), offered hereby (the "Offering"), are being sold by Therma-Wave, Inc.
("Therma-Wave" or the "Company"). Prior to this Offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $ and $ per
share. See "Underwriting" for the factors to be considered in determining the
initial public offering price. The Company has applied to have the Common Stock
eligible for trading on the Nasdaq National Market under the symbol "THWV."
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS
TO COMMISSIONS TO
PUBLIC (1) COMPANY (2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................................... $ $ $
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Total (3)....................................... $ $ $
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</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock solely to cover over-
allotments, if any. To the extent the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about
, 1997.
BT ALEX. BROWN
LEHMAN BROTHERS
MONTGOMERY SECURITIES
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[pictures of the Opti-Probe(R) system and Therma-Probe(R) system]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK IN
CONNECTION WITH THE OFFERING, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-
COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the Consolidated Financial Statements and notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise stated, the information contained in this
Prospectus: (i) assumes no exercise of the Underwriters' over-allotment option
and (ii) reflects the reclassification of all classes of common stock into a
single class of Common Stock. Unless the context requires otherwise, references
to the "Company" or "Therma-Wave" mean Therma-Wave, Inc. and its subsidiaries.
Therma-Wave(R), Therma-Probe(R), Opti-Probe(R) and Meta-Probe(R) are registered
trademarks of the Company. For an explanation of certain terms used in this
Prospectus, reference should be made to the Glossary beginning on page G-1.
References to the Company's fiscal year ("Fiscal Year") refer to the 52/53 week
period ending on the Sunday on or nearest preceding March 31 of each year for
periods prior to 1997 and the Sunday on or following March 31 of each year for
periods thereafter. For example, the fiscal year ended April 6, 1997 is
referred to herein as "Fiscal 1997."
THE COMPANY
The Company is a worldwide leader in the development, manufacture, marketing
and service of process control metrology systems for use in the manufacture of
semiconductors. Semiconductor manufacturers use process control metrology
systems in their fabrication facilities ("fabs") to detect process deviations
or problems in order to minimize the effects on manufacturing yield, device
performance and reliability. The Company's metrology systems are principally
used to measure two of the most important and pervasive semiconductor
fabrication process steps: ion implantation and thin film deposition and
removal. Ion implantation involves the implantation of ions into selective
areas of the silicon wafer, which alters the electrical properties of the
semiconductor. Thin film deposition and removal is a process by which layers of
conductive or insulating films are deposited on and removed from the wafer to
give the semiconductor the desired performance characteristics. The Company's
products are designed to offer a low cost of ownership due to the integration
of proprietary technology and advanced software in a highly reliable, easy-to-
use and productive system. Since the introduction of its first product in 1985,
the Company's revenues have increased at a compound annual growth rate ("CAGR")
of approximately 36.7%.
Demand for process control metrology systems is driven primarily by: (i) the
capital expenditures of semiconductor manufacturers, which, in turn, depend
upon the current and anticipated market demand for semiconductors and products
utilizing semiconductors and (ii) the increasing complexity of the
semiconductor manufacturing process as a result of the demand for smaller,
higher performance devices. The demand for semiconductors has significantly
increased over time. According to Dataquest, since 1991 the global
semiconductor market has expanded at a CAGR of 17.3% to approximately
$143.3 billion in 1996. To meet this increased demand for semiconductors,
manufacturers must continually construct and equip new fabs to increase
capacity and replace existing fabs and production equipment that are rendered
obsolete as a result of improvements in semiconductor manufacturing processes.
As a result of these factors, capital equipment expenditures by semiconductor
manufacturers have increased at a CAGR of 29.4% from 1991 to 1996 (as reported
by Dataquest) to approximately $21.7 billion in 1996. In addition, industries
that use semiconductors are demanding increasingly complex, higher performance
devices. Fabrication of these devices requires increasing the number of process
steps to more than 500 and reducing feature sizes to .25 microns or smaller,
necessitating narrower process tolerances which make it more difficult to
maintain acceptable yields. These factors, together with the industry migration
toward larger wafer sizes (e.g., 300 millimeters), have led to an increase in
the demand for process control metrology equipment. For example, from 1991 to
1996, the thin film measurement market has grown at a CAGR of 40.3% as compared
to a CAGR of 29.4% for the semiconductor capital equipment market as a whole
(based in each case on information reported in Dataquest). During the same
period, the Company estimates that the ion implant metrology market grew at a
CAGR of 25.9%.
3
<PAGE>
The Company's process control metrology systems use proprietary and patented
technology to measure key dimensions and other physical properties of
semiconductor wafers. The Company holds 69 U.S. and foreign patents primarily
covering the technology utilized in its two major product lines: (i) the
Therma-Probe system and (ii) the Opti-Probe system. The Therma-Probe system,
introduced in 1985, utilizes the Company's proprietary thermal wave technology
and is the predominant nondestructive process control metrology system used to
measure the critical ion implantation process in the fabrication of
semiconductors. Since the introduction of the Therma-Probe, the Company
believes it has captured over 50% of the market for ion implant measurement in
general and over 95% of the market for nondestructive ion implantation
measurement of product wafers. The Opti-Probe system, introduced in 1992,
significantly improves upon existing thin film metrology systems by
successfully integrating different measurement technologies into one system and
utilizing the Company's proprietary optical technologies. The Company believes
that the Opti-Probe has captured over 30% of the thin film measurement market
in less than five years.
The Company markets and sells its products worldwide to most major
semiconductor manufacturers, including Intel Corporation, Samsung Semiconductor
Inc., LG Semicon, Advanced Micro Devices, Inc., Siemens Microelectronics,
Lucent Technologies and NEC Semiconductor. The Company believes it is the
dominant supplier of ion implant metrology systems to virtually all major
semiconductor manufacturers and has become the primary supplier of thin film
metrology systems to many of its customers. In addition, the Company believes
that its largest customers, such as Intel Corporation and Samsung Semiconductor
Inc., are among the fastest growing manufacturers in the semiconductor
industry. In aggregate, the Company serves more than 60 customers worldwide,
which are located in over 14 different countries and manufacture many different
types of semiconductors for a broad range of applications.
Therma-Wave was established in 1982 by Dr. Allan Rosencwaig, the Company's
current Chairman, President and CEO and the principal developer of the field of
thermal wave physics. In Fiscal 1992, the Company was acquired by Toray
Industries, Inc. and Shimadzu Corporation. Through a recapitalization of the
Company (the "Recapitalization") effected in May 1997, Bain Capital, Inc.
("Bain Capital"), Sutter Hill Ventures ("Sutter Hill") and the Company's senior
management team collectively acquired securities representing approximately 88%
of the Company's outstanding voting power. As a result of the Recapitalization,
the Company's senior management team currently owns approximately 22% of the
outstanding Common Stock and holds options to acquire an additional 7% of the
Common Stock. Such equity ownership represents a significant economic
commitment to and participation in the continued success of the Company.
BUSINESS AND GROWTH STRATEGY
The Company's business strategy is to continue its leadership and growth in
the process control metrology market and thereby increase market share and
maximize revenues and profitability. The Company's business and growth strategy
includes the following key initiatives:
. Capitalize on Favorable Industry Trends. The Company believes that the
increasing demand for semiconductors should continue to drive significant
growth in the semiconductor capital equipment market. In addition, the
Company believes that the need for more comprehensive and sophisticated
process control of semiconductor device manufacturing will result in greater
demand for metrology systems. In particular, the transition from 200
millimeter to 300 millimeter wafers, in conjunction with the evolution
towards circuit sizes of .25 microns or less, is expected to increase the
need for process control metrology in fabs. Management believes that the
Company is well positioned to take advantage of these favorable trends,
given its market leadership position, strong customer base, superior
technology and research and development expertise.
4
<PAGE>
. Maintain and Leverage Strong Customer Relationships. The Company expects to
continue to strengthen its existing customer relationships and foster
working partnerships by providing technologically superior systems and high
levels of customer support. The Company believes it is the dominant supplier
of ion implant metrology systems to virtually all major semiconductor
manufacturers and has become the primary supplier of thin film metrology
systems to many of its customers. Furthermore, the Company intends to
continue to capitalize on its strong customer relationships, which have
enabled it to develop new products and applications through close
collaboration with customers. Such collaboration has often resulted in
products and applications which have a broader market appeal. For example,
the Company has sold its Opti-Probe 2600 system, developed in cooperation
with one of its major customers, to numerous other semiconductor
manufacturers.
. Increase Market Penetration. The Company believes that it can increase its
market penetration based on its competitive strengths and superior product
offerings. In particular, the Company expects that the market share of its
Opti-Probe system, which was introduced by the Company in 1992, will
continue to increase as a result of its technological advantages and
superior return on investment to its customers. During Fiscal 1997, the
Company has added seven major new customers for the Opti-Probe system and,
based on Dataquest information, has increased its market share in the thin
film measurement market by approximately 5 percentage points to capture over
30% of such market. The Company believes that the Opti-Probe system offers
significant opportunities for increased revenues due to the size of the thin
film measurement market, which had aggregate sales of $234 million in 1996
and has grown at CAGR of 40.3% from 1991 to 1996.
. Continue to Focus on Technological Innovation. The Company intends to
continue its emphasis on engineering and research and development in an
effort to anticipate and address technological advances in semiconductor
manufacturing. The Company's current product development efforts include:
(i) the Opti-Probe 5240, which will integrate two additional measurement
technologies into the Opti-Probe system, providing the Company with a
product entry in a new segment of the thin film measurement market; (ii)
expanding the capability of both the Therma-Probe and Opti-Probe systems to
accommodate 300 millimeter wafer sizes; and (iii) the Meta-Probe, a thin
film metrology system specifically designed to measure the thickness and
material properties of opaque and metallic thin films. The Company expects
these new products to begin beta-testing in 1998. Management believes that
continued product innovation and investment in research and development will
help the Company stengthen its leadership position.
. Leverage Existing Infrastructure. The Company believes that it has the
opportunity to improve its operating margins by leveraging its existing
infrastructure through increased sales. To support its worldwide growth, the
Company has expended considerable resources in establishing its
infrastructure, including a worldwide customer service and support
organization and a state-of-the-art manufacturing facility.
. Pursue Strategic Acquisitions. The Company expects to capitalize on the
recent consolidation trend in the process control metrology and wafer
inspection industries by targeting strategic acquisitions. The Company
expects to review selective opportunities to acquire businesses which would
add to its portfolio of technologies and products. The Company is not
currently engaged in any on-going discussions regarding potential
acquisitions.
The Company's executive offices are located at 1250 Reliance Way, Fremont,
California 94539. The Company's telephone number is (510) 490-3663. The Company
maintains a website on the Internet at http://www.thermawave.com. The Company's
website and the information contained therein shall not be deemed part of this
Prospectus.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. shares
Common Stock to be outstanding after the
Offering........................................ shares (1)
Use of proceeds................................. To redeem a portion of the
Company's 10 5/8% Senior Notes
issued in connection with the
Recapitalization. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.......... "THWV"
</TABLE>
- --------
(1) Based upon shares outstanding as of September 30, 1997. Excludes: (i)
1,343,750 shares of Common Stock issuable upon the exercise of outstanding
options granted under the Company's 1997 Stock Purchase and Option Plan
(the "1997 Stock Plan"), all of which were then exercisable, at exercise
prices ranging from $8.93 to $15.89 per share; or (ii) additional
shares of Common Stock expected to be reserved for future grants or awards
under the 1997 Equity Incentive Plan (the "New Incentive Plan") or the
Company's 1997 Stock Purchase Plan (the "Stock Purchase Plan"). See
"Management -- Stock Plans."
RISK FACTORS
Prospective investors should carefully consider the factors set forth under
"Risk Factors," as well as the other information set forth in this Prospectus
before making an investment in the Common Stock offered hereby. Such risks
include, among others, that: (i) the Company is dependent on the semiconductor
industry, which most recently experienced a downturn in 1996; (ii) the
Company's quarterly operating results have historically and may in the future
vary significantly due to a number of factors; (iii) the Company has a high
level of indebtedness and is restricted by the terms of its indebtedness; (iv)
the Company relies, in part, on patent, trade secret and trademark law to
protect the technology used in its principal products; (v) the semiconductor
capital equipment industry as a whole is characterized by rapidly changing
technology and industry standards; (vi) the semiconductor capital equipment
industry is highly competitive; (vii) the Company has been experiencing a
period of growth that could place a strain on its management team; (viii) two
customers accounted for approximately 13% and 10% of the Company's net revenues
in Fiscal 1997, and three customers accounted for 22%, 13% and 13% of the
Company's net revenues for the three-month period ended July 6, 1997; (ix) the
Company's operations are characterized by relatively high fixed costs; (x)
approximately 50% of the Company's sales are made through independent sales
representatives; (xi) international sales accounted for approximately 59.7% and
44.2% of the Company's total revenues for Fiscal 1997 and the first quarter of
Fiscal 1998, respectively; (xii) the Company's systems typically have lengthy
sales cycles; (xiii) certain of the components and subassemblies included in
the Company's systems are obtained from a single source or a limited group of
suppliers; (xiv) the Company produces all of its products in a single
manufacturing facility located in Fremont, California; and (xv) the Company is
dependent upon the continued contributions of key management, engineering,
sales and marketing, customer support, finance and manufacturing personnel.
6
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-MONTH
FISCAL YEAR (1) PERIOD ENDED (1)
--------------------------------------------- ------------------
JULY 7, JULY 6,
1993 1994 1995 1996 1997 1996 1997
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(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
(2):
Net revenues............ $ 14,250 $20,770 $55,675 $79,293 $109,493 $ 28,715 $ 28,205
Cost of revenues........ 10,561 11,262 25,024 35,027 49,795 12,893 13,263
Gross margin............ 3,689 9,508 30,651 44,266 59,698 15,822 14,942
Research and develop-
ment................... 5,372 3,586 5,942 10,072 13,050 3,025 4,488
Selling, general and ad-
ministrative........... 7,508 9,092 13,299 18,704 22,004 5,893 5,026
Amortization of goodwill
and purchased intangi-
bles................... 1,912 1,912 1,912 1,912 1,275 478 --
Non-recurring recapital-
ization and related ex-
penses (non-cash)...... -- -- -- -- -- -- 2,888
Operating income (loss). (11,103) (5,082) 9,498 13,578 23,369 6,426 2,540
Interest expense........ 1,320 1,543 1,998 1,722 1,621 432 2,193
Interest income......... (145) (331) (102) (247) (346) (45) (169)
Other (income) expense,
net.................... 345 125 115 138 (14) 26 5
Income (loss) before
provision for income
taxes.................. (12,623) (6,419) 7,487 11,965 22,108 6,013 511
Provision for income
taxes.................. -- -- -- 4,684 9,007 2,510 200
Net income (loss)....... $(12,623) $(6,419) $ 7,487 $ 7,281 $ 13,101 $ 3,503 $ 311
Net income (loss)
attributable to common
stockholders (3)....... $(12,623) $(6,419) $ 7,487 $ 7,281 $ 13,101 $ 3,503 $ 195
OTHER FINANCIAL DATA:
EBITDA calculation:
Operating income
(loss)............... $(11,103) $(5,082) $ 9,498 $13,578 $ 23,369 $ 6,426 $ 2,540
Depreciation and amor-
tization............. 3,167 2,965 2,998 3,607 3,744 1,049 1,036
EBITDA (4).............. (7,936) (2,117) 12,496 17,185 27,113 7,475 3,576(5)
Cash provided by (used
in) operating activi-
ties................... (9,797) (6,006) 1,876 5,867 11,860 1,990 (969)
Cash used in investing
activities............. (1,456) (299) (2,048) (4,965) (1,575) (964) (1,939)
Cash provided by (used
in) financing activi-
ties................... 9,003 6,304 6,205 (1,278) (851) (532) 184
Capital expenditures.... 1,031 60 1,616 4,361 1,091 554 780
BALANCE SHEET DATA:
Working capital......... $ (3,800) $(6,484) $17,240 $23,740 $ 38,720 $ 43,459
Total assets............ 22,368 23,039 45,081 53,056 68,620 82,340
Long-term debt.......... 23,692 24,171 24,838 25,273 25,556 117,320
Mandatorily redeemable
preferred stock........ -- -- -- -- -- 13,916
Stockholders' equity
(net capital deficien-
cy).................... (18,191) (22,845) (379) 6,903 20,145 (68,764)
</TABLE>
- --------
(1) The Company's Fiscal Year refers to the 52/53 week period ending on the
Sunday on or nearest preceding March 31 of each year for periods prior to
1997 and the Sunday on or following March 31 of each year for periods
thereafter. The three-month periods ended July 7, 1996 and July 6, 1997
include 14 weeks and 13 weeks of operating results, respectively.
(2) No historical earnings per share data are presented as the Company does not
consider such data to be meaningful as a result of the Recapitalization.
See "The Recapitalization," "The Reclassification" and the "Unaudited Pro
Forma Financial Data."
(3) The Company issued shares of Series A Voting Convertible Preferred Stock
(the "Preferred Stock") with an aggregate liquidation value of $13,916
(including accrued and unpaid dividends thereon as of July 6, 1997) to its
then existing stockholders as part of the Recapitalization. Dividends on
the Preferred Stock accrue at a rate of 6.0% per annum.
(4) "EBITDA" is defined herein as income (loss) before income taxes, plus
depreciation, amortization, net interest expense and other non-operating
(income) expenses, net. EBITDA is presented because the Company believes it
is a widely accepted financial indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles. Additionally, EBITDA as defined herein may not be
comparable to similarly titled measures reported by other companies.
(5) EBITDA in the three-month period ended July 6, 1997 includes $2,888 in non-
recurring, non-cash expenses related to the Recapitalization. Excluding
such expenses, EBITDA for the period would have been $6,464.
7
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary unaudited pro forma statement of income data give pro
forma effect to: (i) the Recapitalization; (ii) the transactions described
under "The Reclassification;" (iii) the redemption of all of the Company's
outstanding Preferred Stock; (iv) the refinancing of the Company's bank credit
facility; and (v) the Offering and the application of the net proceeds
therefrom as described under "Use of Proceeds," as if each had occurred as of
the beginning of the period presented. The following summary unaudited pro
forma balance sheet data give effect to items (ii) through (v) listed above, as
if each occurred on July 6, 1997. The Company's actual balance sheet at July 6,
1997 already reflects the effect of the Recapitalization. The summary unaudited
pro forma statement of income data and other financial data do not purport to
represent what the Company's results of operations actually would have been if
such transactions had actually occurred as of the beginning of the periods
presented or what such results will be for any future periods. The information
contained in this table should be read in conjunction with "Unaudited Pro Forma
Financial Data," "Selected Historical Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and accompanying notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
THREE-MONTH PERIOD
ENDED (1)
PRO FORMA --------------------
FISCAL YEAR ENDED JULY 7, JULY 6,
APRIL 6, 1997 (1)1996 1997
----------------- ------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues............................ $109,493 $28,715 $28,205
Cost of revenues........................ 49,795 12,893 13,263
Gross margin............................ 59,698 15,822 14,942
Research and development................ 13,050 3,025 4,488
Selling, general and administrative..... 23,004 6,143 5,276
Amortization of goodwill and purchased
intangibles............................ 1,275 478 --
Non-recurring recapitalization and re-
lated expenses (non-cash).............. -- -- --
Operating income........................ 22,369 6,176 5,178
Interest expense........................ 10,789 2,697 2,697
Interest income......................... (346) (45) (169)
Other (income) expense, net............. (14) 26 5
Income before provision for income
taxes.................................. 11,940 3,498 2,645
Provision for income taxes (2).......... 5,143 1,554 1,005
Net income.............................. $ 6,797 $ 1,944 $ 1,640
Pro forma net income per share (3) (4).. $ $ $
Pro forma weighted average number of
shares outstanding (3) (4).............
OTHER FINANCIAL DATA:
EBITDA calculation:
Operating income...................... $ 22,369 $ 6,176 $ 5,178
Depreciation and amortization......... 3,744 1,049 1,036
-------- ------- -------
EBITDA (5).............................. 26,113 7,225 6,214
Capital expenditures.................... 1,091 554 780
<CAPTION>
JULY 6, 1997
--------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $43,459 $32,452
Total assets............................ 82,340 64,504
Long-term debt.......................... 117,320 91,932
Mandatorily redeemable preferred stock.. 13,916 --
Stockholders' equity (net capital
deficiency)............................ (68,764) (44,286)
</TABLE>
- --------
(footnotes appear on following page)
8
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(1) The Company's Fiscal Year refers to the 52/53 week period ending on the
Sunday on or nearest preceding March 31 of each year for periods prior to
1997 and the Sunday on or following March 31 of each year for periods
thereafter. The three-month periods ended July 7, 1996 and July 6, 1997
include 14 weeks and 13 weeks of operating results, respectively.
(2) The Company's effective tax rate on a pro forma basis was 43.1%, 44.4% and
38.0% for Fiscal 1997 and the three-month periods ended July 7, 1996 and
July 6, 1997, respectively. The higher rate in Fiscal 1997 and the period
ended July 7, 1996 was due primarily to the existence of non-deductible
goodwill which was fully amortized at the end of Fiscal 1997.
(3) Pro forma net income per share and the pro forma weighted average number of
common shares outstanding include all Common Stock equivalents and have
been adjusted to give effect to: (i) the Recapitalization; (ii) the
Reclassification; (iii) the Offering and use of proceeds therefrom to repay
indebtedness associated with the Notes; and (iv) the redemption of all of
the outstanding Preferred Stock, as if the events described in (i) through
(iv) had occurred on April 1, 1996.
(4) As discussed above, the pro forma net income per share and the pro forma
weighted average number of common shares outstanding assumes the redemption
of all of the outstanding Preferred Stock immediately following the
completion of the Offering. Each share of Preferred Stock has a liquidation
value of $18.40 and is convertible into one share of Common Stock at the
option of the holder thereof. If the shares of Preferred Stock had been
converted into Common Stock, pro forma net income per share would have been
, and , for Fiscal 1997, the three-month periods
ended July 7, 1996 and July 6, 1997, respectively, and the pro forma
weighted average number of common shares outstanding for all periods would
have been .
(5) "EBITDA" is defined herein as income before income taxes, plus
depreciation, amortization, net interest expense and other non-operating
(income) expenses, net. EBITDA is presented because the Company believes it
is a widely accepted financial indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles. Additionally, EBITDA as defined herein may not be
comparable to similarly titled measures as reported by other companies.
9
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to the other information set forth in this Prospectus in analyzing an
investment in the Common Stock offered hereby. This Prospectus contains
forward-looking statements that involve risks and uncertainties. Actual
results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those identified below as well as those discussed elsewhere in this
Prospectus.
Dependence on Semiconductor Industry; Current Industry Conditions. The
Company's business depends upon the capital expenditures of semiconductor
manufacturers, which, in turn, depend upon the current and anticipated market
demand for semiconductors and products utilizing semiconductors. The
semiconductor industry is cyclical and has historically experienced periodic
downturns, which have often resulted in a decrease in the semiconductor
industry's demand for capital equipment, including process control metrology
systems. There is typically a six to twelve month lag between changes in the
semiconductor industry and the related impact on the level of capital
expenditures. In most cases, the resulting decrease in capital expenditures
has been more pronounced than the precipitating downturn in semiconductor
industry revenues. The semiconductor industry experienced its most recent
downturn in 1996, during which industry revenues declined by an estimated 6.4%
(as reported by Dataquest). As a result, a decrease in the overall level of
capital expenditures began in 1996 and is expected to continue throughout the
remainder of 1997. Dataquest forecasts that sales of semiconductor capital
equipment will decrease by approximately 10% in 1997. As a result of increased
market penetration, the Company's revenues for the first quarter of Fiscal
1998 have remained relatively equal to those of the comparable quarter for the
prior year and the Company currently does not have any plans to reduce its
production levels during the remainder of Fiscal 1998. Although there are
indications that the semiconductor industry is beginning to recover, there can
be no assurance that the industry will continue to improve nor can there be
any assurance that the industry will not experience other, possibly more
severe and prolonged downturns in the future. The anticipated decrease in the
level of capital expenditures by the semiconductor industry could have a
material adverse effect on the Company's business, financial condition and
results of operation. In addition, the need for continued investment in
research and development and extensive on-going customer service and support
capability will limit the Company's ability to reduce its expenses during a
downturn in the semiconductor industry. See "-- Risks Associated with Fixed
Costs" and "Business -- Industry Background."
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have historically and may in the future vary significantly
due to a number of factors. Factors that may influence the Company's operating
results in a given quarter include: (i) customer demand, such as economic
conditions in the semiconductor industry and products that use semiconductors,
market acceptance of products of both the Company and its customers,
seasonality, changes in product mix, and the timing, cancellation or delay of
customer orders and shipments; (ii) competition, such as competitive pressures
on prices of the Company's products and the introduction or announcement of
new products by competitors; (iii) manufacturing and operations, such as
fluctuations in availability and cost of components and subassemblies and
production capacity; (iv) fluctuations in foreign currency exchange rates; (v)
new product development, such as increased research, development and
engineering, as well as marketing, expenses associated with new product
introductions, including the effect of transitioning to new or advanced
products, and the Company's ability to design, introduce and manufacture new
products and technologies on a timely basis; (vi) sales and marketing, such as
concentrations of customers, and discounts that may be granted to certain
customers; and (vii) other factors such as levels of expenses relative to
revenue levels, personnel changes and generally prevailing economic
conditions.
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<PAGE>
During a given quarter, a significant portion of the Company's revenue may
be derived from the sale of a relatively small number of systems. Accordingly,
a small change in the number of systems actually shipped may cause significant
changes in operating results. Moreover, customers may cancel or reschedule
shipments, and production difficulties could delay shipments. In addition,
because of the significantly different gross margins attributable to the
Company's two products, changes in product mix may cause fluctuations in
operating results. Further, the lengthy sales cycle for certain of the
Company's capital equipment may result in the Company incurring significant
expenses prior to the receipt of customer orders. In addition, the
introduction of new products has in the past contributed, and may continue to
contribute, to fluctuations in quarterly operating results. These same factors
also could materially and adversely affect annual results of operations. In
addition, the need for continued investment in research and development,
marketing and customer support, as well as increased operating expenses
associated with the Company's recent growth, limit the Company's ability to
reduce expenses in the near-term.
Risks Associated with a High Level of Indebtedness. The Company incurred
substantial indebtedness in connection with the Recapitalization. At July 6,
1997 on a pro forma basis giving effect to the Offering and the application of
the net proceeds therefrom, the Company's total indebtedness would have been
approximately $91.9 million and its net capital deficiency would have been
$44.3 million. In addition, as of July 6, 1997, the Company had unused
borrowing capacity of $22.2 million under the Bank Credit Facility (as defined
herein). Furthermore, subject to the restrictions in the Bank Credit Facility
and the Indenture (as defined herein), the Company may incur additional
indebtedness, including secured indebtedness, from time to time to finance
acquisitions, capital expenditures, working capital, make certain deferred
payments to the Company's executive officers or for other purposes.
The level of the Company's indebtedness could have important consequences,
including, but not limited to, the following: (i) a substantial portion of the
Company's cash flow from operations must be dedicated to the repayment of
indebtedness and will not be available for other purposes; (ii) the Company's
future ability to obtain additional debt financing for working capital,
capital expenditures, acquisitions or other purposes may be limited; and (iii)
the Company's level of indebtedness could limit its flexibility in reacting to
changes in the industry and general economic conditions and its ability to
withstand a prolonged downturn in the semiconductor industry. Certain of the
Company's competitors currently operate on a less leveraged basis and have
significantly greater operating and financing flexibility than the Company.
The Indenture and the Bank Credit Facility contain restrictive covenants
that limit the Company's operating flexibility. In addition, the Bank Credit
Facility requires the Company to maintain specified financial ratios and
satisfy certain financial condition tests. The Company's ability to meet those
financial ratios and tests can be affected by events beyond its control, and
there can be no assurance that the Company will meet those tests. A breach of
any of these covenants could result in a default under the Bank Credit
Facility and/or the Indenture. Substantially all the assets of the Company,
together with all of the capital stock of each of its domestic subsidiaries
and 65% of the capital stock of each of its first tier foreign subsidiaries,
are pledged as security under the Bank Credit Facility. See "Description of
Certain Indebtedness."
Reliance on Patents and Other Intellectual Property. The Company's future
success and competitive position depend in part upon its ability to obtain and
maintain certain proprietary technology used in its principal products, and
the Company relies, in part, on patent, trade secret and trademark law to
protect that technology. The Company has obtained a number of patents relating
to its two key products, the Opti-Probe and Therma-Probe systems. The Company
owns 24 U.S. patents with expiration dates ranging from 1999 to 2013 and has
filed applications for two additional U.S. patents. In addition, the Company
owns 45 foreign patents with expiration dates ranging from 1999 to 2013 and
has filed applications for nine additional foreign patents.
11
<PAGE>
There can be no assurance that any of the Company's pending patent
applications will be approved, that the Company will develop additional
proprietary technology that is patentable, that any patents owned by or issued
to the Company will provide the Company with competitive advantages or that
these patents will not be challenged by any third parties. Furthermore, there
can be no assurance that third parties will not design around the Company's
patents. Any of the foregoing results could have a material adverse effect on
the Company's business or the Company's financial condition.
In addition to patent protection, the Company relies upon trade secret
protection for its confidential and proprietary information and technology.
The Company routinely enters into confidentiality agreements with its
employees. However, there can be no assurance that these agreements will not
be breached, that the Company will have adequate remedies for any breach or
that the Company's confidential and proprietary information and technology
will not be independently developed by or become otherwise known by third
parties.
The commercial success of the Company will also depend, in part, on its
ability to avoid infringing or misappropriating any patents or other
proprietary rights owned by third parties. If the Company is found to infringe
or misappropriate a third party's patent or other proprietary rights, the
Company could be required to pay damages to the third party, alter its
products or processes, obtain a license from the third party or cease certain
activities, including making or selling certain products. If the Company is
required to do any of the foregoing, there can be no assurances that the
Company will be able to do so on commercially favorable terms, if at all. The
Company's inability to do any of the foregoing on commercially favorable terms
could have a material adverse impact on the Company's business or the
Company's financial condition.
Litigation may be necessary to enforce any patents issued to or licensed to
the Company or to determine the scope and/or validity of a third party's
patent or other proprietary rights. Any such litigation, regardless of
outcome, could be expensive and time consuming and, as discussed above, could
subject the Company to significant liabilities or require the Company to cease
using certain technology and, consequently, could have a material adverse
effect on the Company's business or the Company's financial condition.
The Company is currently the plaintiff in certain patent infringement suits
filed against Jenoptik GmbH ("Jenoptik"), a German company, in the United
States and Germany claiming infringement of certain of the Company's patents
relating to the ion implant measurement technology utilized by the Company's
Therma-Probe system. In both of these actions, Jenoptik denies infringement
and has alleged that such patents are invalid. Jenoptik has recently received
favorable decisions in the German proceeding, which the Company plans to
challenge. A material adverse effect on the Company's business or the
financial condition could occur if one or more of the Company's U.S. patents
and its German patent are found to be invalid. See "Business -- Legal
Proceedings."
New Product Development and Technological Change. The semiconductor capital
equipment industry as a whole is characterized by rapidly changing technology
and industry standards, along with frequent new product introductions. The
Company's success in these markets will depend upon its ability to design,
develop, manufacture, assemble, test, market and support new products and
enhancements on a timely and cost-effective basis. New product introductions
may contribute to fluctuations in quarterly operating results, as customers
may defer ordering products from the Company's existing product lines. If new
products have reliability or quality problems, then reduced orders, higher
manufacturing costs, delays in collecting accounts receivable and additional
service and warranty expense may result. Responding to rapid technological
change and the need to develop and introduce new products to meet customers'
expanding needs and evolving industry standards will require the Company to
make substantial investments in research and product development. Any failure
by the Company to anticipate or respond adequately to technological
developments and customer requirements or any significant delays in product
development or introduction could result in a loss of
12
<PAGE>
competitiveness and could materially adversely affect the Company's operating
results. There can be no assurance that the Company will successfully identify
new product opportunities and develop and bring new products to market in a
timely and cost-effective manner, that any product enhancement or new product
developed by the Company will gain market acceptance, or that products or
technologies developed by others will not render the Company's products or
technologies obsolete or noncompetitive. The semiconductor industry is
currently undergoing a gradual evolution from 200 millimeter to 300 millimeter
wafers. Semiconductor manufacturers are beginning to establish pilot
production lines and specifications for the manufacture of semiconductor
devices on 300 millimeter wafers. The Company is currently developing product
enhancements and new products designed to meet increasing demand for metrology
equipment for 300 millimeter wafers. Until the Company begins shipping its
next generation products, the Company's sales of its process control metrology
systems could be adversely affected. There can be no assurance that the
Company will be able to develop enhancements and new products successfully or
in time to meet emerging demand, or that enhancements and new products
developed by the Company will be accepted by the Company's customers. A
fundamental shift in technology in the Company's product markets could have a
material adverse effect on the Company, particularly in light of the fact that
the Company currently derives substantially all of its revenues from sales of
its two products, Opti-Probe and Therma-Probe systems.
Competition. The semiconductor capital equipment industry is highly
competitive. The Company faces substantial competition in each of the markets
it serves from established competitors, some of which have greater financial,
engineering, manufacturing and marketing resources than the Company. Many of
the Company's competitors are investing heavily in the development of new
products aimed at applications currently served by the Company. The Company's
competitors in each product area can be expected to continue to improve the
design and performance of their products and to introduce new products with
competitive prices and performance characteristics. Although the Company has
not historically been forced to reduce its prices, there can be no assurance
that competitive pressures will not necessitate price reductions, adversely
affecting operating results in the future. Maintaining technological
advantages to mitigate the adverse affect of pricing pressures will require a
continued high level of investment by the Company in research and development
and sales and marketing. There can be no assurance that the Company will have
sufficient resources to continue to make such investments or that the Company
will be able to make the technological advances necessary to maintain such
competitive advantages.
KLA Corporation recently acquired a competitor of the Company, Tencor
Corporation, to form KLA-Tencor Corporation. The Company expects that similar
acquisitions and business combinations by competitors and potential
competitors of the Company may continue in the future. Acquisitions by the
Company's competitors and potential competitors could allow them to expand
their product offerings, which could afford such competitors and potential
competitors an advantage in meeting customers' demands. The greater resources,
including financial and marketing and support resources, of competitors
engaged in these acquisitions could permit them to accelerate the development
and commercialization of new competitive products and the marketing of
existing competitive products to their larger installed bases. Accordingly,
such business combinations and acquisitions by competitors and potential
competitors could have an adverse impact on both the Company's market share
and the pricing of its products, which could have a material adverse effect on
the Company's business and results of operations.
The market for the Company's products is characterized by rapidly changing
technology and evolving industry standards. There can be no assurance that the
current technology base within the Company can be advanced to address all
customer needs. In addition, the Company believes that once a device
manufacturer has selected a particular vendor's capital equipment, that
manufacturer generally relies upon that vendor's equipment for that specific
production line application and, to the extent possible, subsequent
generations of that vendor's systems. Accordingly, it may be difficult to
achieve
13
<PAGE>
significant sales to a particular customer once another vendor's capital
equipment has been selected by that customer unless there are compelling
reasons to do so, such as significant performance or cost advantages.
Management of Growth. The Company has been experiencing a period of growth
that could place a strain on its management and other resources. To support
the Company's anticipated growth, the Company will need to hire more
engineering, manufacturing, sales and marketing, and support and
administrative personnel, expand customer service capabilities, and update or
expand management information and inventory systems, procedures and controls.
Competition for the necessary personnel in the Company's industry is high.
There can be no assurance that the Company will be able to attract and retain
the necessary personnel to accomplish its growth strategies or that it will be
able to satisfy customer demand in a timely fashion and satisfactorily support
its customers and operations or that its information systems, procedures and
controls will be adequate to support the Company's operations. If the
Company's management is unable to manage growth effectively, the Company's
business, operating results and financial condition could be materially
adversely affected.
Concentration of Customers. During Fiscal 1997, sales to Intel Corporation
("Intel") and Samsung Semiconductor Inc. ("Samsung") accounted for
approximately 13% and 10%, respectively, of the Company's net revenues, and
sales to the Company's top twenty customers in the aggregate accounted for
approximately 78% of the Company's net revenues. During the first quarter of
Fiscal 1998, sales to Intel, Taiwan Semiconductor Manufacturing Company and
Hyundai Corporation accounted for 22%, 13% and 13% of the Company's net
revenues, respectively, and sales to the Company's top twenty customers in the
aggregate accounted for substantially all of the Company's net revenues. As
customers seek to establish closer relationships with their suppliers, the
Company expects that its customer base will continue to become more
concentrated with a limited number of customers accounting for a significant
portion of revenues. If, for any reason, any of its key customers were to
purchase significantly less of the Company's products in the future, such
decreased level of purchases could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business --Customers."
Risks Associated with Fixed Costs. The Company's operations are
characterized by relatively high fixed costs due to the need for continued
investment in research and development and extensive ongoing customer service
and support capability. In addition, because of the Company's emphasis on
research and development and technological innovation, there can be no
assurance that the fixed costs associated with the Company's manufacturing
processes will not increase in the future. Therefore, the Company's operating
results could be materially adversely affected depending on the level of
revenues relative to fixed costs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
Reliance on Manufacturers' Sales Representatives. Approximately 50% of the
Company's sales are made through manufacturers' sales representatives,
including all of the Company's sales to customers located in Japan and Taiwan,
which collectively accounted for approximately 26% of the Company's net
revenues in Fiscal 1997. The activities of these representatives are not
within the control of the Company, and they may sell products manufactured by
other manufacturers. In addition, in some locations the Company's
manufacturing sales representatives also provide field service to the
Company's customers. A reduction in the sales efforts or financial viability
of such manufacturers' sales representatives, or a termination of the
Company's relationship with such representatives, could materially adversely
affect the Company's sales, financial results and ability to support its
customers. Although management believes that it maintains good relations with
its sales representatives, there can be no assurance that such relationships
will continue. See "Business -- Sales and Marketing."
Risks Associated with International Sales. International sales accounted for
approximately 59.7% and 44.2% of the Company's total revenues for Fiscal 1997
and the first quarter of Fiscal 1998, respectively. The Company anticipates
that international sales will continue to account for a significant portion of
its revenue in the foreseeable future. International sales are subject to
certain risks, including, among others, unexpected changes in regulatory
requirements, tariffs and other market barriers, political and
14
<PAGE>
economic instability, potentially adverse tax consequences, natural disasters,
outbreaks of hostilities, difficulties in accounts receivable collection,
extended payment terms, difficulties in managing foreign sales representatives
and difficulties in staffing and managing foreign branch operations. Since a
substantial majority of the Company's international sales are denominated in
U.S. dollars, sales to international customers may be affected by fluctuations
in the U.S. dollar, which could increase the sales price in local currencies
of the Company's products. The Company is also subject to the risks associated
with the imposition of legislation and import and export regulations. The
Company cannot predict whether tariffs, quotas, duties, taxes or other changes
or restrictions will be implemented by the United States or other countries
upon the import or export of the Company's products in the future. In
addition, the laws of certain countries in which the Company's products are or
may be sold may not provide the Company's products and intellectual property
rights with the same degree of protection as the laws of the United States.
There can be no assurance that these factors will not have a material adverse
effect on the Company's business, financial condition or results of
operations.
Lengthy Sales Cycle. Sales of the Company's systems depend, in significant
part, upon the decision of a prospective customer to increase its existing
capacity by either constructing new fabs or expanding its existing fabs,
either of which typically involves a significant capital commitment. In view
of the significant investment involved in a system purchase, the Company may
experience delays in obtaining purchase orders while the customer plans for
such expansion and evaluates and receives approvals for the purchase of the
Company's systems. Due to these and other factors, the Company's systems
typically have lengthy sales cycles during which the Company may expend
substantial funds and management effort. In addition, lengthy sales cycles
subject the Company to a number of significant risks, including inventory
obsolescence and fluctuations in operating results over which the Company has
little or no control.
Dependence on Suppliers. Some of the components and subassemblies included
in the Company's systems are obtained from a single source or a limited group
of suppliers. Although the Company seeks to reduce dependence on those sole
and limited source suppliers, the partial or complete loss of certain of these
sources could have at least a temporary adverse effect on the Company's
results of operations and damage customer relationships. Further, a
significant increase in the price of one or more of these components or
subassemblies could materially adversely affect the Company's results of
operations.
Risks Associated with a Single Manufacturing Facility. The Company produces
all of its products in its manufacturing facility located in Fremont,
California. The Company's manufacturing processes are highly complex and
require sophisticated and costly equipment. As a result, any prolonged
disruption in the operations of the Company's manufacturing facility, whether
due to technical or labor difficulties, destruction of or damage to this
facility as a result of an earthquake, fire or any other reason, could have a
material adverse effect on the Company's financial condition or results of
operations. See "Business -- Facilities."
Dependence on Key Personnel. The Company's success depends to a significant
degree upon the continued contributions of key management, engineering, sales
and marketing, customer support, finance and manufacturing personnel, certain
of whom would be difficult to replace. The loss of the services of certain
personnel could have a material adverse effect on the Company. There can be no
assurance that the services of such personnel will continue to be available to
the Company. The Company entered into employment agreements with certain
members of its senior management team in connection with the Recapitalization.
In addition, the Company believes that its success depends on its ability to
attract and retain additional qualified employees and that the failure to
recruit such other skilled personnel could have a material adverse effect on
the Company. The Company maintains and is the named beneficiary under key-man
life insurance policies for Messrs. Rosencwaig, Willenborg and Opsal in the
amounts of $500,000; $100,000; and $250,000, respectively. Mr. Rosencwaig's
spouse is also a named beneficiary under his key-man life insurance policy in
the additional amount of $1,000,000. See "Management -- Employment
Agreements."
15
<PAGE>
Risk of Developing and Marketing the Meta-Probe System. The Company has
expended and expects to continue to expend substantial research, development
and engineering resources to develop the Meta-Probe system. The Company has
not previously offered the Meta-Probe system and there can be no assurance
that the Company will not experience difficulties or delays in its development
efforts or that such efforts will be successful. Even if the Company's Meta-
Probe system is successfully developed, the Company may encounter problems or
delays as it commences manufacturing the Meta-Probe system, for which it has
no prior experience, or as customers begin using the Meta-Probe system. The
Company's Meta-Probe system, if developed, will compete against metrology
systems marketed by suppliers with installed bases as well as products that
are expected to be introduced by new competitors. There can be no assurance
that the Company will be successful in marketing and obtaining acceptance of
its Meta-Probe system. The failure to complete development of the Meta-Probe
system on a timely basis or to achieve market acceptance could have a material
adverse effect on the Company's growth prospects.
Future Liquidity Requirements. The Company expects to use all of the net
proceeds of the Offering to repay indebtedness incurred in the
Recapitalization. As a result, none of the net proceeds will be available to
fund future operations. The Company expects that its principal sources of
funds following the Offering will be cash generated from operating activities
and borrowings under the New Bank Credit Facility. The Company believes that
these funds will provide the Company with sufficient liquidity and capital
resources for the Company to meet its current and future financial
obligations, as well as to provide funds for the Company's working capital,
capital expenditures and other needs for at least the next twelve months. No
assurance can be given, however, that this will be the case. Depending upon
its rate of growth and profitability, the Company may require additional
equity or debt financing to meet its working capital requirements or to fund
its research and development efforts. There can be no assurance that
additional financing will be available when required or, if available, will be
on terms satisfactory to the Company. The Company's future operating
performance and ability to service or refinance the Notes and to repay, extend
or refinance the New Bank Credit Facility will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond the Company's control.
Environmental Liabilities; Other Governmental Regulations. The Company is
subject to various federal, state, local and foreign environmental laws and
regulations relating to the discharge, storage, treatment, handling, and
disposal of certain materials, substances and water used in or resulting from
its operations and the remediation of contamination associated with releases
of hazardous substances both at the Company's facilities and at offsite
disposal locations. The Company's operations are also governed by laws and
regulations relating to workplace safety and worker health which, among other
things, regulate employee exposure to hazardous substances in the workplace.
The nature of the Company's operations expose it to the risk of liabilities or
claims with respect to environmental and workplace health and safety matters,
and there can be no assurance that material costs will not be incurred in
connection with such liabilities or claims.
Based on information currently available to management, management believes
that the cost of compliance with existing environmental and health and safety
laws and regulations (and liability for known environmental conditions) will
not have a material adverse effect on the Company's business, financial
condition or results of operations. However, management cannot predict which
environmental or health and safety legislation or regulations will be enacted
in the future or how existing or future laws or regulations will be enforced,
administered or interpreted, nor can it predict the amount of future
expenditures which may be required in order to comply with such environmental
or health and safety laws or regulations or to respond to such environmental
claims.
Influence by Significant Stockholders. Upon completion of the Offering,
investment funds affiliated with Bain Capital (the "Bain Capital Funds") will
hold approximately % of the Company's outstanding Common Stock ( % if the
Underwriters' over-allotment is exercised in full). By virtue of such stock
16
<PAGE>
ownership, the Bain Capital Funds will continue to have a significant
influence over all matters submitted to stockholders of the Company, including
the election of the directors of the Company, and to exercise significant
control over the business, policies and affairs of the Company. Such
concentration of voting power could have the effect of delaying, deterring or
preventing a change of control of the Company or other business combination
that might otherwise be beneficial to stockholders. See "Certain Relationships
and Related Transactions" and "Principal Stockholders."
Risks Associated with Forward-Looking Statements. This Prospectus contains
certain forward-looking statements, including, without limitation, statements
concerning the Company's operations, economic performance and financial
condition, including in particular statements relating to the Company's
business and growth strategy and product development efforts. The words
"believe," "expect," "anticipate" and other similar expressions generally
identify forward-looking statements. Potential investors are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of their dates. These forward-looking statements are based largely on the
Company's current expectations and are subject to a number of risks and
uncertainties, including, without limitation, those identified under "Risk
Factors" and elsewhere in this Prospectus and other risks and uncertainties
indicated from time to time in the Company's filings with the Securities and
Exchange Commission. Actual results could differ materially from these
forward-looking statements. In addition, important factors to consider in
evaluating such forward-looking statements include changes in external market
factors, changes in the Company's business or growth strategy or an inability
to execute its strategy due to changes in its industry or the economy
generally, the emergence of new or growing competitors and various other
competitive factors. In light of these risks and uncertainties, there can be
no assurance that the matters referred to in the forward-looking statements
contained in this Prospectus will in fact occur.
Risks Associated with the Company's Obligations under Executive Stock
Agreements. In connection with the Recapitalization, the Company entered into
an Executive Stock Agreement with each of the Management Investors (as defined
herein) (collectively, the "Stock Agreements"). Pursuant to the Stock
Agreements, the Company, among other things, granted the Management Investors
options to purchase an aggregate of 1,128,749 shares of Common Stock, which
collectively have an aggregate exercise price of approximately $16.7 million.
Under the terms of the Stock Agreements, each of the Management Investors is
entitled to pay the exercise price of his options through the issuance of a
full recourse promissory note to the Company. There can be no assurance that
the Management Investors will repay such promissory notes in accordance with
their terms. In addition, under the terms of their respective employment
agreements, each of the Management Investors is entitled to receive a deferred
payment on the fifth anniversary of the Recapitalization in an amount that is
sufficient to repay the outstanding promissory note if the Company achieves
certain operating results. If made, these deferred payments will result in a
significant compensation charge to the Company. See "Management -- Stock
Plans."
Certain Anti-Takeover Effects. Certain provisions of the Company's Restated
Certificate of Incorporation (the "Restated Certificate") and Amended and
Restated By-laws (the "By-laws") may inhibit changes in control of the Company
not approved by the Company's Board of Directors and would limit the
circumstances in which a premium may be paid for the Common Stock in proposed
transactions or a proxy contest for control of the Board. These provisions
include: (i) a classified Board of Directors; (ii) a prohibition on
stockholder action through written consents; (iii) a requirement that special
meetings of stockholders be called only by the Board of Directors; (iv)
advance notice requirements for stockholder proposals and nominations; (v)
limitations on the ability of stockholders to amend, alter or repeal the By-
laws; and (vi) the authority of the Board to issue without stockholder
approval preferred stock with such terms as the Board may determine. The
Company will also be afforded the protections of Section 203 of the Delaware
General Corporation Law, which could have similar effects. See "Description of
Capital Stock."
Absence of Prior Public Market; Substantial and Immediate Dilution. Prior to
the Offering, there has been no public market for the Common Stock. The
Offering price of the Common Stock will be determined by negotiations among
the Company and the Representatives (as defined herein) and may not
17
<PAGE>
be indicative of the market price for shares of the Common Stock after the
Offering. For a description of factors considered in determining the Offering
price, see "Underwriting." There can be no assurance that an active trading
market for the Common Stock will develop or if developed, that such market
will be sustained. In addition, numerous factors, many of which are beyond the
control of the Company, may cause the market price of the Common Stock to
fluctuate significantly, such as fluctuations in product revenues and net
income of the Company or its competitors, shortfalls in the Company's
operating results from levels forecast by securities analysts, announcements
concerning the Company, its competitors or its customers, announcements of
technological innovations by the Company, its competitors or its customers,
the introduction of new products or changes in product pricing policies by the
Company, its competitors or its customers, market conditions in the industry
and the general state of the securities market (particularly the technology
sector thereof). In addition, the stock prices of many technology companies
fluctuate significantly for reasons that may be unrelated or disproportionate
to operating results. These fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of the
Common Stock. Because the initial public offering price is substantially
higher than the book value per share of Common Stock, purchasers of the Common
Stock in the Offering will be subject to immediate and substantial dilution.
See "Dilution."
Risks Associated with Dividend Policy. The Company does not expect to pay
dividends on its Common Stock for the foreseeable future. Instead, the Company
currently intends to retain earnings for working capital purposes and to
reduce indebtedness. The payment of dividends or other distributions by the
Company for purposes of paying dividends to holders of Common Stock is
prohibited by the Bank Credit Agreement and restricted by the Indenture. Any
future determination to pay dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other factors, the
Company's results of operations, financial condition, capital requirements and
contractual restrictions. See "Dividend Policy" and "Description of Certain
Indebtedness."
Potential Adverse Impact from Shares Eligible for Future Sale. Upon
completion of the Offering, the Company expects to have shares of
Common Stock outstanding. Of these shares, the shares of Common
Stock ( shares if the Underwriters' over-allotment option is
exercised in full) sold in the Offering will be freely tradeable without
restriction under the Securities Act of 1933, as amended (the "Securities
Act"), except any such shares which may be acquired by an "affiliate" of the
Company. Subject to certain 180-day "lock-up" agreements described herein,
approximately and shares of Common Stock will be eligible for
sale in the public market, subject to compliance with the resale volume
limitations and other restrictions of Rule 144 under the Securities Act,
beginning 90 days after the date of this Prospectus, and on May 16, 1998,
respectively. Beginning 180 days after the completion of the Offering, the
holders of an aggregate of approximately shares of Common Stock will
have certain rights to require the Company to register their shares of Common
Stock under the Securities Act at the Company's expense. Future sales of the
shares of Common Stock held by existing stockholders could have a material
adverse effect on the price of the Common Stock. See "Shares Eligible for
Future Sale."
18
<PAGE>
THE RECAPITALIZATION
On December 18, 1996, the Bain Capital Funds and Toray Industries, Inc.,
Toray Industries (America), Inc. (collectively, "Toray") and Shimadzu
Corporation ("Shimadzu" and, collectively with Toray, the "Existing
Stockholders") and the Company entered into a Recapitalization Agreement (the
"Recapitalization Agreement"). The Recapitalization was effected on May 16,
1997. Pursuant to the Recapitalization Agreement: (i) the Company redeemed from
the Existing Stockholders approximately 86.6% of their existing shares of the
common stock of the Company ("Old Common Stock"); (ii) the Bain Capital Funds
and Sutter Hill purchased from the Company shares of Old Common Stock; (iii)
the Existing Stockholders converted all of their shares of Old Common Stock not
otherwise redeemed for newly authorized and issued shares of Series A Voting
Convertible Preferred Stock, Class L Common Stock, par value $0.01 per share
("Class L Common") and Class A Common Stock, par value $0.01 per share ("Class
A Common") of the Company; and (iv) the Bain Capital Funds and Sutter Hill
converted all of their shares of Old Common Stock for newly authorized and
issued shares of Class L Common and Class A Common. As part of the
Recapitalization, the Company also: (i) repaid substantially all of its
outstanding borrowings under existing loan agreements and (ii) paid fees and
expenses related to the financing of the Recapitalization.
The Company used approximately $150.0 million to complete the
Recapitalization, including the payment of related fees and expenses. In order
to finance the Recapitalization, the Company: (i) issued $115.0 million in
aggregate principal amount of 10 5/8% Senior Notes due 2004 (the "Notes"); (ii)
received an equity contribution of $20.0 million in cash from the Bain Capital
Funds, Sutter Hill and members of the Company's senior management team,
including Dr. Allan Rosencwaig, Anthony W. Lin, W. Lee Smith, David Willenborg
and Jon L. Opsal (collectively, the "Management Investors"); and (iii)
converted equity securities received from its Existing Stockholders having a
value of $15.0 million into shares of Preferred Stock and Common Stock
(collectively, with the equity investments made by the investors described in
(ii) above, the "Equity Contribution").
In connection with the Recapitalization, the Management Investors: (i)
purchased an aggregate of 1,226,331 shares of Class A Common and 136,258 shares
of Class L Common; (ii) purchased an aggregate of 1,128,749 shares of non-
voting Class B Common Stock, par value $0.01 per share (the "Class B Common"),
which are subject to quarterly vesting over a five-year period; and (iii)
received options to purchase an aggregate of 1,128,749 shares of Class B
Common. See "Management -- Stock Plans."
The foregoing transactions are collectively referred to herein as the
"Recapitalization."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common
Stock in the Offering are estimated to be approximately $28.8 million ($33.3
million if the Underwriters' over-allotment option is exercised in full),
assuming an Offering price of $ per share, the midpoint of the range set
forth on the cover page of this Prospectus. The Company intends to use such net
proceeds to redeem $26.0 million aggregate principal amount of the Notes and to
pay the redemption premium and accrued and unpaid interest thereon (estimated
to be approximately $2.8 million on November 15, 1997).
The Notes mature on May 15, 2004, and bear interest at the rate of 10 5/8%
per annum. The Company used proceeds from the issuance of the Notes to finance
a portion of the Recapitalization. The Notes will be redeemed by the Company as
soon as practical following the completion of the Offering. Pending such use,
the Company will invest such proceeds in short-term, interest-bearing,
investment-grade securities. See "Description of Certain Indebtedness -- Senior
Notes."
Immediately after the Offering, the Company expects to: (i) enter into an
amended and restated Bank Credit Facility (the "New Bank Credit Facility") and
(ii) use cash on hand and borrowings under the New Bank Credit Facility to
redeem all of the outstanding Preferred Stock (the "Preferred Stock
Redemption"). The Preferred Stock is entitled to a preferred yield of 6.0% per
annum, compounded quarterly, and had an aggregate liquidation preference of
$13.9 million on any liquidation or other distribution by the Company (as of
July 6, 1997). See "The Reclassification."
20
<PAGE>
THE RECLASSIFICATION
The Company currently has one class of Preferred Stock and three classes of
common stock, designated as Class A Common, Class B Common and Class L Common.
Each share of Preferred Stock has a liquidation preference of $18.40 and is
convertible at any time into one share of Common Stock at the option of the
holder thereof. The Company has the right to redeem the Preferred Stock at a
price per share equal to its liquidation value plus all accrued and unpaid
dividends thereon at any time after an initial public offering. The Company
intends to redeem all of the issued and outstanding Preferred Stock immediately
following the completion of the Offering. See "Use of Proceeds." The Class A
Common and Class B Common are identical, except that the Class B Common is non-
voting and is convertible on a share-for-share basis into Class A Common at any
time following an initial public offering by the Company. The Class L Common is
identical to the Class A Common, except that each share of Class L Common is
entitled to a preferential payment (the "Preference Amount") upon any
distribution by the Company to holders of its capital stock (whether by
dividend, liquidating distribution or otherwise) equal to the original cost of
such share ($19.085) plus an amount which accrues on a daily basis at a rate of
12.0% per annum on such cost and on the amount so accrued in prior quarters. As
of September 30, 1997, the Preference Amount was $19.946 per share of Class L
Common issued at the time of the Recapitalization.
Prior to the completion of the Offering: (i) all of the outstanding shares of
Class A Common and Class B Common will be reclassified into a single class of
Common Stock on a share-for-share basis and (ii) all of the outstanding shares
of Class L Common will be reclassified into shares of Common Stock
(collectively, the "Reclassification"). In connection with the
Reclassification, each outstanding share of Class L Common will be reclassified
into one share of Common Stock plus an additional number of shares of Common
Stock determined by dividing the Preference Amount by the value of a share of
Common Stock (based on the Offering price). Assuming an Offering price of
$ per share (the mid-point of the range set forth on the cover page of
this Prospectus), and a closing date of November 15, 1997 for this Offering, an
aggregate of shares of Common Stock will be issued in exchange for the
outstanding shares of Class L Common in connection with the Reclassification.
The actual number of shares of Common Stock that will be issued as a result of
the Reclassification is subject to change based on the actual Offering price
and the closing date of this Offering. Fractional shares otherwise issuable as
a result of the Reclassification will be rounded to the nearest whole number.
See "Description of Capital Stock."
21
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of the Company as of July 6, 1997 on an actual basis and on a
pro forma as adjusted basis to reflect: (i) the Reclassification; (ii) the
Preferred Stock Redemption; (iii) the refinancing of the Bank Credit Facility;
and (iv) the sale by the Company of shares of Common Stock pursuant to the
Offering, assuming an Offering price of $ per share (the midpoint of the
range set forth on the cover page of this Prospectus), and the application of
the net proceeds therefrom as described under "Use of Proceeds." This table
should be read in conjunction with the "Selected Historical Financial Data" and
"Unaudited Pro Forma Financial Data" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JULY 6, 1997
---------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................. $ 14,017 $ --
======== =======
Long-term debt:
Bank Credit Facility................................. $ -- $ --
New Bank Credit Facility (1)......................... -- 612
Senior Notes......................................... 115,000 89,000
Other long-term obligations.......................... 2,320 2,320
-------- -------
Total long-term debt............................... 117,320 91,932
Mandatorily redeemable preferred stock................ 13,916 --
Stockholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized; no shares issued on an actual and pro
forma as adjusted basis............................. -- --
Common Stock, $0.01 par value, 25,000,000 shares
authorized; no shares issued on an actual basis;
shares issued on a pro forma as adjusted basis
(2)................................................. --
Class A Common Stock, $0.01 par value, 20,000,000
shares authorized; 9,073,534 shares issued on an
actual basis and no shares issued on a pro forma as
adjusted basis...................................... 91 --
Class B Common Stock, $0.01 par value, 4,000,000
shares authorized; 1,343,750 shares issued on an
actual basis and no shares issued on a pro forma as
adjusted basis...................................... 11 --
Class L Common Stock, $0.01 par value, 2,000,000
shares authorized; 1,008,170 shares issued on an
actual basis and no shares issued on a pro forma as
adjusted basis...................................... 10 --
Additional paid-in capital........................... 21,303 50,175
Accumulated deficit.................................. (88,456) (92,738)
Other................................................ (1,723) (1,723)
-------- -------
Net capital deficiency............................. (68,764) (44,286)
-------- -------
Total capitalization.............................. $ 62,472 $47,646
======== =======
</TABLE>
- --------
(1) The New Bank Credit Facility is expected to have a total of $30.0 million
available on a revolving basis, of which $7.8 million will initially be
used to issue letters of credit.
(2) Par value of Common Stock on a pro forma as adjusted basis has not been
presented as the number of shares to be sold in the Offering has not yet
been determined. Consequently, the value which would have otherwise been
ascribed to the Common Stock on a pro forma as adjusted basis has been
included in additional paid-in capital.
22
<PAGE>
DIVIDEND POLICY
The Company does not expect to pay dividends on its Common Stock for the
foreseeable future. Instead, the Company anticipates that all of its earnings
in the foreseeable future will be used for working capital purposes and to
reduce indebtedness. The payment of dividends by the Company to holders of
Common Stock is expected to be prohibited by the New Bank Credit Facility and
is restricted by the Indenture. Any future determination to pay dividends will
be at the discretion of the Board of Directors and will depend upon, among
other factors, the Company's results of operations, financial condition,
capital requirements and contractual restrictions. See "Risk Factors -- Risks
Associated with Dividend Policy."
23
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of July 6, 1997 was
$ million, or $ per share of Common Stock. Pro forma net tangible
book value per share is determined by dividing the tangible net worth of the
Company (total assets less intangible assets and total liabilities) by the
aggregate number of shares of Common Stock outstanding, assuming the
Reclassification had taken place on July 6, 1997. After giving effect to the
sale of the shares of Common Stock offered hereby (at an assumed Offering price
of $ per share, the midpoint of the range set forth on the cover page of
this Prospectus) and the receipt and application of the net proceeds therefrom,
pro forma net tangible book value of the Company as of July 6, 1997 would have
been approximately $ million, or $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
the current stockholders of the Company and an immediate dilution in pro forma
net tangible book value of $ per share to purchasers of Common Stock in the
Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.............................. $
Net tangible book value per share at July 6, 1997................... $
Increase per share attributable to new investors....................
-----
Pro forma net tangible book value per share after the Offering.......
-----
Net tangible book value dilution per share to new investors(1)....... $
=====
</TABLE>
- --------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the Offering from the Offering price per share.
The following table summarizes, on a pro forma basis, as of July 6, 1997, the
number of shares purchased, the total consideration paid (or to be paid) and
the average price per share paid (or to be paid) by the existing stockholders
and the purchasers of Common Stock in the Offering, at an assumed Offering
price of $ per share (the midpoint of the range set forth on the cover
page of this Prospectus), before deducting the estimated Offering expenses and
underwriting discounts and commissions:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... % $ % $
New investors........... $
------- -------- --------- ----------
Total................ 100.0% $ 100.0%
======= ======== ========= ==========
</TABLE>
The foregoing calculations exclude an aggregate of: (i) 1,343,750 shares of
Common Stock issuable upon the exercise of outstanding options granted under
the 1997 Stock Plan, all of which are exercisable, at exercise prices ranging
from $8.93 to $15.89 per share; and (ii) additional shares of Common Stock
expected to be reserved for grants or awards under the New Incentive Plan or
sale under the Stock Purchase Plan. See "Management -- Stock Plans."
24
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS)
The Unaudited Pro Forma Consolidated Statements of Income for the Fiscal Year
ended April 6, 1997 and the three-month periods ended July 7, 1996 and July 6,
1997 give pro forma effect to: (i) the Recapitalization; (ii) the
Reclassification; (iii) the Preferred Stock Redemption; (iv) the refinancing of
the Bank Credit Facility; and (v) the Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds," as if each had
occurred on April 1, 1996. The Unaudited Pro Forma Condensed Consolidated
Balance Sheet at July 6, 1997 gives pro forma effect to (ii) through (v) listed
above as if each had occurred on July 6, 1997. The Company's Condensed
Consolidated Balance Sheet at July 6, 1997 already reflects the effect of the
Recapitalization and is included elsewhere in this Prospectus. The Unaudited
Pro Forma Financial Data do not purport to represent what the Company's results
of operations would have been if the Recapitalization had occurred as of the
beginning of each period presented or what such results will be for any future
periods. The Unaudited Pro Forma Financial Data are based upon assumptions that
the Company believes are reasonable and should be read in conjunction with the
Consolidated Financial Statements and accompanying notes thereto included in
this Prospectus.
The Unaudited Pro Forma Consolidated Statements of Income do not reflect: (i)
extraordinary debt extinguishment costs estimated at $4,282 (net of tax benefit
of $2,624) relating to: (a) the write-off of deferred financing costs in
connection with the application of the net proceeds from the Offering as
described under "Use of Proceeds" and the refinancing of the Bank Credit
Facility and (b) the payment of the redemption premium and (ii) compensation
paid directly by the Existing Stockholders to the Management Investors in
connection with the Recapitalization totalling $2,888. The Unaudited Pro Forma
Condensed Consolidated Balance Sheet, however, reflect these charges.
The Recapitalization has been accounted for as a recapitalization, under
which the purchase and redemption of the shares of Old Common Stock was
accounted for as an equity transaction. The historical financial reporting
basis of the assets and liabilities has been retained since purchase accounting
is not prescribed under Generally Accepted Accounting Principles.
25
<PAGE>
THERMA-WAVE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FISCAL YEAR ENDED APRIL 6, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.............................. $109,493 $109,493
Cost of revenues.......................... 49,795 49,795
-------- -------- --------
Gross margin.............................. 59,698 59,698
Operating expenses:
Research and development................. 13,050 13,050
Selling, general and administrative...... 22,004 $ 1,000 (1) 23,004
Amortization of goodwill and purchased
intangibles............................. 1,275 1,275
-------- -------- --------
Operating income.......................... 23,369 (1,000) 22,369
Interest expense.......................... 1,621 9,168 (2) 10,789
Interest income........................... (346) (346)
Other income, net......................... (14) (14)
-------- -------- --------
Income before provision for income taxes.. 22,108 (10,168) 11,940
Provision for income taxes................ 9,007 (3,864)(3) 5,143(4)
-------- -------- --------
Net income................................ $ 13,101 $ (6,304) $ 6,797
-------- -------- --------
Accretion of Preferred Stock dividend (8). -- -- --
-------- -------- --------
Net income attributable to common
stockholders............................. $ 13,101 $ (6,304) $ 6,797
======== ======== ========
Pro forma net income per share (5)........ $
========
Pro forma weighted average number of
shares outstanding (5)...................
========
OTHER DATA:
EBITDA (6)................................ $ 27,113 $ (1,000)(1) $ 26,113
======== ======== ========
</TABLE>
See accompanying notes
26
<PAGE>
THERMA-WAVE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
THREE-MONTH PERIOD ENDED JULY 7, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.............................. $28,715 $28,715
Cost of revenues.......................... 12,893 12,893
------- ------- -------
Gross margin.............................. 15,822 15,822
Operating expenses:
Research and development................. 3,025 3,025
Selling, general and administrative...... 5,893 $ 250 (1) 6,143
Amortization of goodwill and purchased
intangibles............................. 478 478
------- ------- -------
Operating income.......................... 6,426 (250) 6,176
Interest expense.......................... 432 2,265 (2) 2,697
Interest income........................... (45) (45)
Other expense, net........................ 26 26
------- ------- -------
Income before provision for income taxes.. 6,013 (2,515) 3,498
Provision for income taxes................ 2,510 (956)(3) 1,554(4)
------- ------- -------
Net income................................ $ 3,503 $(1,559) $ 1,944
------- ------- -------
Accretion of Preferred Stock dividend (8). -- -- --
------- ------- -------
Net income attributable to common
stockholders............................. $ 3,503 $(1,559) $ 1,944
======= ======= =======
Pro forma net income per share (5)........ $
=======
Pro forma weighted average number of
shares outstanding (5)...................
=======
OTHER DATA:
EBITDA (6)................................ $ 7,475 $ (250)(1) $ 7,225
======= ======= =======
</TABLE>
See accompanying notes
27
<PAGE>
THERMA-WAVE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
THREE-MONTH PERIOD ENDED JULY 6, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.............................. $28,205 $28,205
Cost of revenues.......................... 13,263 13,263
------- ------- -------
Gross margin.............................. 14,942 14,942
Operating expenses:
Research and development................. 4,488 4,488
Selling, general and administrative...... 5,026 $ 250 (1) 5,276
Amortization of goodwill and purchased
intangibles............................. -- --
Non-recurring recapitalization and
related expenses (non-cash)............. 2,888 (2,888)(7) --
------- ------- -------
Operating income.......................... 2,540 2,638 5,178
Interest expense.......................... 2,193 504 (2) 2,697
Interest income........................... (169) (169)
Other expense, net........................ 5 5
------- ------- -------
Income before provision for income taxes.. 511 2,134 2,645
Provision for income taxes................ 200 805 (3) 1,005(4)
------- ------- -------
Net income................................ $ 311 $ 1,329 $ 1,640
------- ------- -------
Accretion of Preferred Stock dividend..... (116) 116 (8) --
------- ------- -------
Net income attributable to common
stockholders............................. $ 195 $ 1,445 $ 1,640
======= ======= =======
Pro forma net income per share (5)........ $
=======
Pro forma weighted average number of
shares outstanding (5)...................
=======
OTHER DATA:
EBITDA (6)................................ $ 3,576 $ 2,638 (1) $ 6,214
======= ======= =======
</TABLE>
See accompanying notes
28
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED APRIL 6, 1997 AND THE THREE-MONTH PERIODS ENDED JULY 6, 1997
AND JULY 7, 1996
(DOLLARS IN THOUSANDS)
(1) Represents the annual management fee to be paid to Bain Capital for
consulting and financial services to be provided to the Company. See
"Certain Relationships and Related Transactions -- Advisory Agreement."
(2) Represents the net increase in interest expense as a result of: (i) the
Recapitalization; (ii) the application of the net proceeds from the
Offering as discussed under "Use of Proceeds"; (iii) the refinancing of
the Bank Credit Facility; and (iv) borrowings of approximately $612 under
the New Bank Credit Facility to finance a portion of the Preferred Stock
Redemption and other expenses.
<TABLE>
<CAPTION>
THREE-MONTH
FISCAL PERIOD ENDED
YEAR ENDED -------------------------
APRIL 6, 1997 JULY 7, 1996 JULY 6, 1997
------------- ------------ ------------
<S> <C> <C> <C>
Historical interest expense........... $ 1,621 $ 432 $2,193
------- ------ ------
Cash interest related to the Notes--
(at 10 5/8%)......................... 12,219 3,055 3,055
Cash commitment fee on unused portion
of Bank Credit Facility at 0.75%..... 162 40 40
Cash letter of credit fee of 3.25% on
outstanding letters of credit
($7,800 assumed outstanding balance). 254 63 63
Amortization of debt issuance costs
($11,130 over a seven-year
amortization period)................. 1,590 398 398
------- ------ ------
Interest expense related to the
Recapitalization..................... 14,224 3,556 3,556
------- ------ ------
Reduction of cash interest expense
related to application of the
Offering proceeds.................... (2,761) (691) (691)
Reduction of amortization of debt
issuance costs related to application
of the Offering proceeds............. (606) (151) (151)
Reduction of letter of credit fees to
1.0%................................. (176) (44) (44)
Interest on borrowings under the New
Bank Credit Facility at LIBOR plus
1.25% (7.03% on $612 assumed average
balance)............................. 43 11 11
Amortization of deferred refinancing
costs ($325 over a five-year
amortization period)................. 65 16 16
------- ------ ------
Net reduction of interest expense
relating to the Offering............. (3,435) (859) (859)
------- ------ ------
Net increase in interest expense...... $ 9,168 $2,265 $ 504
======= ====== ======
</TABLE>
(3) Reflects the income tax adjustment required to result in a pro forma
income tax provision based on: (i) the Company's historical tax provision
using historical amounts and (ii) the direct tax effects of the pro forma
adjustments described herein.
(4) The Company's effective tax rate on a pro forma basis was 43.1%, 44.4% and
38.0% for Fiscal 1997 and the three-month periods ended July 7, 1996 and
July 6, 1997, respectively. The higher rate in Fiscal 1997 and the period
ended July 7, 1996 was due primarily to the existence of non-deductible
goodwill which was fully amortized at the end of Fiscal 1997.
(5) Pro forma net income per share and the pro forma weighted average number
of common shares outstanding include all Common Stock equivalents and have
been adjusted to give effect to the: (i) Recapitalization;
(ii) Reclassification; (iii) the application of the net proceeds from the
Offering as described under "Use of Proceeds"; (iv) the Preferred Stock
Redemption; and (v) the refinancing of the Bank Credit Facility, as if
these events had occurred on April 1, 1996. The pro forma net income per
share and common shares outstanding assumes the redemption of all of the
Preferred Stock upon completion of the Offering. Holders of the Preferred
Stock have the option to convert each share held into one share of Common
Stock at any time prior to redemption date. If all of such shares of
Preferred Stock were converted rather than redeemed, pro forma net income
per share would have been , and , for Fiscal 1997 and the
three-month periods ended July 7, 1997 and July 6, 1997, respectively, and
the weighted average number of shares outstanding would have been .
(6) "EBITDA" is defined herein as income before income taxes, plus
depreciation, amortization, net interest expense and other non-operating
(income) expense, net. EBITDA is presented because the Company believes it
is a widely accepted financial indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles. Additionally, EBITDA as defined herein may not be
comparable to similarly titled measures reported by other companies.
(7) Represents the elimination of a non-recurring charge relating to
compensation paid directly by the Existing Stockholders to the Management
Investors in connection with the Recapitalization.
(8) Reflects the elimination of the Preferred Stock dividend after giving pro
forma effect to the Recapitalization and the Preferred Stock Redemption.
29
<PAGE>
THERMA-WAVE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JULY 6, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 14,017 $ 28,760 (2)
(29,148)(3)
(13,916)(4)
287 (5) --
Accounts receivable, net of allowance for
doubtful accounts....................... 23,996 $ 23,996
Inventories.............................. 19,019 19,019
Other current assets..................... 6,295 6,295
-------- -------- --------
Total current assets.................... 63,327 (14,017) 49,310
Property and equipment, net................ 6,157 6,157
Deferred financing costs, net.............. 10,880 (4,144)(3)
325 (5) 7,061
Other assets, net.......................... 1,976 1,976
-------- -------- --------
Total assets............................. $ 82,340 $(17,836) $ 64,504
======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Short-term debt.......................... $ -- $ $ --
Other current liabilities................ 19,868 (3,010)(3) 16,858
-------- -------- --------
Total current liabilities............... 19,868 (3,010) 16,858
New Bank Credit Facility................... -- 612 (5) 612
Senior notes............................... 115,000 (26,000)(3) 89,000
Other long-term liabilities................ 2,320 2,320
-------- -------- --------
Total liabilities........................ 137,188 (28,398) 108,790
Mandatorily redeemable preferred stock..... 13,916 (13,916)(4) --
Stockholders' equity (net capital
deficiency):
Common stock -- Class A.................. 91 (91)(1) --
Common stock -- Class B.................. 11 (11)(1) --
Common stock -- Class L.................. 10 (10)(1) --
Common stock and additional paid-in
capital................................. 21,303 112 (1)
28,760 (2) 50,175
Accumulated deficit........................ (88,456) (4,282)(3) (92,738)
Other...................................... (1,723) (1,723)
-------- -------- --------
Total stockholders' equity (net capital
deficiency)............................ (68,764) 24,478 (44,286)
-------- -------- --------
Total liabilities and stockholders'
equity
(net capital deficiency).............. $ 82,340 $(17,836) $ 64,504
======== ======== ========
</TABLE>
See accompanying notes
30
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to
the following unaudited pro forma adjustments:
(1) Reflects the Reclassification.
(2) Reflects the estimated net proceeds from the Offering to the Company of
$28,760, net of the estimated underwriting discount and other Offering
expenses totaling $3,240.
(3) Reflects: (i) the use of the net Offering proceeds to repay a portion of
the outstanding principal of the Notes of $26,000 ; (ii) payment of
redemption premium of $2,762; (iii) payment of accrued interest of $386 and
(iv) write-off of deferred financing fees relating to a portion of the
Notes and the refinanced Bank Credit Facility of $4,144. The transaction
results in an extraordinary loss of $4,282 (net of tax benefit of $2,624).
(4) Reflects the Preferred Stock Redemption.
(5) Reflects the incurrence of indebtedness under the New Bank Credit Facility
to finance: (i) a portion of the Preferred Stock Redemption and (ii) fees
associated with the refinancing.
31
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
The following selected historical financial data as of March 31, 1996 and
April 6, 1997 and for the Fiscal Years ended April 2, 1995, March 31, 1996 and
April 6, 1997 have been derived from the Company's consolidated financial
statements, which were audited by Ernst & Young LLP, and are included
elsewhere in this Prospectus. The selected historical financial data as of
March 28, 1993, March 27, 1994 and April 2, 1995 and for the Fiscal Years
ended March 27, 1994 and March 28, 1993 were derived from the consolidated
financial statements of the Company, which were audited by Ernst & Young LLP
and which do not appear elsewhere in this Prospectus. The summary historical
financial data as of July 6, 1997 and for the three-month periods ended July
7, 1996 and July 6, 1997 were derived from the Company's unaudited
consolidated financial statements which, in the opinion of management, reflect
all adjustments (consisting of normal recurring adjustments) necessary for the
fair presentation of the financial condition and results of operations for
such periods. The selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and
accompanying notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE-MONTH
FISCAL YEAR (1) PERIOD ENDED (1)
---------------------------------------------- ------------------
JULY 7, JULY 6,
1993 1994 1995 1996 1997 1996 1997
-------- -------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
(2):
Net revenues............ $ 14,250 $ 20,770 $55,675 $79,293 $109,493 $ 28,715 $ 28,205
Cost of revenues........ 10,561 11,262 25,024 35,027 49,795 12,893 13,263
-------- -------- ------- ------- -------- -------- --------
Gross margin............ 3,689 9,508 30,651 44,266 59,698 15,822 14,942
Research and
development............ 5,372 3,586 5,942 10,072 13,050 3,025 4,488
Selling, general and
administrative......... 7,508 9,092 13,299 18,704 22,004 5,893 5,026
Amortization of goodwill
and purchased
intangibles............ 1,912 1,912 1,912 1,912 1,275 478 --
Non-recurring
recapitalization and
related expenses
(non-cash)............. -- -- -- -- -- -- 2,888
-------- -------- ------- ------- -------- -------- --------
Operating income (loss). (11,103) (5,082) 9,498 13,578 23,369 6,426 2,540
Interest expense........ 1,320 1,543 1,998 1,722 1,621 432 2,193
Interest income......... (145) (331) (102) (247) (346) (45) (169)
Other (income) expense,
net.................... 345 125 115 138 (14) 26 5
-------- -------- ------- ------- -------- -------- --------
Income (loss) before
provision for income
taxes.................. (12,623) (6,419) 7,487 11,965 22,108 6,013 511
Provision for income
taxes.................. -- -- -- 4,684 9,007 2,510 200
-------- -------- ------- ------- -------- -------- --------
Net income (loss)....... $(12,623) $ (6,419) $ 7,487 $ 7,281 $ 13,101 $ 3,503 $ 311
======== ======== ======= ======= ======== ======== ========
Net income (loss)
applicable to common
stockholders (3)....... $(12,623) $ (6,419) $ 7,487 $ 7,281 $ 13,101 $ 3,503 $ 195
======== ======== ======= ======= ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA calculation:
Operating income
(loss)................ $(11,103) $ (5,082) $ 9,498 $13,578 $ 23,369 $ 6,426 $ 2,540
Depreciation and
amortization.......... 3,167 2,965 2,998 3,607 3,744 1,049 1,036
-------- -------- ------- ------- -------- -------- --------
EBITDA (4).............. (7,936) (2,117) 12,496 17,185 27,113 7,475 3,576(5)
Cash provided by (used
in) operating
activities............. (9,797) (6,006) 1,876 5,867 11,860 1,990 (969)
Cash used in investing
activities............. (1,456) (299) (2,048) (4,965) (1,575) (964) (1,939)
Cash provided by (used
in) financing
activities............. 9,003 6,304 6,205 (1,278) (851) (532) 184
Capital expenditures.... 1,031 60 1,616 4,361 1,091 554 780
BALANCE SHEET DATA:
Working capital......... $ (3,800) $ (6,484) $17,240 $23,740 $ 38,720 $ 43,459
Total assets............ 22,368 23,039 45,081 53,056 68,620 82,340
Long-term debt.......... 23,692 24,171 24,838 25,273 25,556 117,320
Mandatorily redeemable
preferred stock........ -- -- -- -- -- 13,916
Stockholders' equity
(net capital
deficiency)............ (18,191) (22,845) (379) 6,903 20,145 (68,764)
</TABLE>
- --------
(1) The Company's Fiscal Year refers to the 52/53 week period ending on the
Sunday on or nearest preceding March 31 of each year for periods prior to
1997 and the Sunday on or following March 31 of each year for periods
thereafter. The three-month periods ended July 7, 1996 and July 6, 1997
include 14 and 13 weeks of operating results, respectively.
(2) No historical earnings per share data has been presented as the Company
does not consider such data to be meaningful as a result of the
Recapitalization. See "The Recapitalization," "The Reclassification" and
"Unaudited Pro Forma Financial Data."
(3) The Company issued shares of Preferred Stock with an aggregate liquidation
value of $13,916 (including accrued and unpaid dividends thereon as of
July 6, 1997) to its then existing stockholders as part of the
Recapitalization. Dividends on the Preferred Stock accrue at a rate of
6.0% per annum.
(4) "EBITDA" is defined herein as income before income taxes, plus
depreciation, amortization, net interest expense and other non-operating
(income) expense, net. EBITDA is presented because the Company believes it
is a widely accepted financial indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles. Additionally, EBITDA as defined herein may not be
comparable to similarly titled measures reported by other companies.
(5) EBITDA in the three-month period ended July 6, 1997 includes $2,888 in
non-recurring, non-cash expenses related to the Recapitalization.
Excluding such expenses, EBITDA for the period would have been $6,464.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a worldwide leader in the development, manufacture, marketing
and service of process control metrology systems for use in the manufacture of
semiconductors. The Company's process control metrology systems are principally
used to measure ion implantation and thin film deposition and removal. The
Company has developed two major lines of process control metrology systems: (i)
the Therma-Probe system and (ii) the Opti-Probe system. The Therma-Probe
system, introduced in 1985, utilizes the Company's proprietary thermal wave
technology and is the predominant nondestructive process control metrology
system used to measure the critical ion implantation process on product wafers
in the fabrication of semiconductors. The Opti-Probe system, introduced in
1992, significantly improves upon existing thin film metrology systems by
successfully integrating different measurement technologies into one system and
utilizing the Company's proprietary optical technologies.
The Company's business depends upon the capital expenditures of semiconductor
manufacturers, which, in turn, depend upon the current and anticipated market
demand for semiconductors and products utilizing semiconductors. The
semiconductor industry is cyclical and has historically experienced periodic
downturns, which have often resulted in a decrease in the semiconductor
industry's demand for capital equipment, including process control metrology
systems. The semiconductor industry experienced its most recent downturn in
1996, during which industry revenues declined by an estimated 6.4% (as reported
by Dataquest). As a result, a decrease in the overall level of capital
expenditures began in 1996 and is expected to continue throughout the remainder
of 1997. The Company's revenues during the first quarter of Fiscal 1998 have
remained relatively equal to those of the comparable quarter for the prior year
due primarily to increased market penetration.
The Company derives its revenues from product sales, sales of replacement and
spare parts and service contracts. In Fiscal 1997, the Company derived 92% of
its revenues from product sales, 4% from sales of replacement and spare parts
(and associated labor) and 4% from service contracts. Revenue from product
sales and replacement and spare parts is generally recognized at the time of
shipment. Revenue from service contracts is deferred and recognized on a
straight-line basis over the period of the contract.
The Company's operations are characterized by relatively high fixed costs due
to the need for continued investment in research and development and extensive
ongoing customer service and support capability. As a result, changes in net
revenues tend to have a larger corresponding impact on EBITDA and operating
income levels. Other factors that may have an influence on the Company's
operating results include the timing of the receipt of orders from major
customers, product mix, competitive pricing pressures, the relative proportions
of domestic and international sales, the Company's ability to design,
manufacture and introduce new products on a cost-effective and timely basis,
the delay between incurrence of expenses to further develop marketing and
service capabilities and realization of any benefits from such improved
capabilities, and the introduction of new products by the Company's
competitors.
International sales accounted for approximately 59.7% and 44.2% of the
Company's total revenues for Fiscal 1997 and the first quarter of Fiscal 1998,
respectively. The Company anticipates that international sales will continue to
account for a significant portion of its revenue in the foreseeable future.
Since a substantial majority of the Company's international sales are
denominated in U.S. dollars, sales to international customers may be affected
by fluctuations in the U.S. dollar, which could increase the sales price in
local currencies of the Company's products.
The Company was acquired by Toray and Shimadzu in Fiscal 1992. As a result,
the Company has subsequently incurred substantial interest expense and
amortization expense from goodwill and
33
<PAGE>
purchased intangibles. In May 1997, the Company effected the Recapitalization.
The Recapitalization did not result in a change in the historical financial
reporting basis of the assets and liabilities of the Company. The Company
incurred substantial indebtedness in connection with the Recapitalization.
In connection with the Offering, the Company expects to incur in the third
quarter of Fiscal 1998 a non-cash, non-recurring charge for extraordinary debt
extinguishment costs of $4.3 million (net of tax) relating to writing off
capitalized financing fees and the redemption premium on the Notes.
RESULTS OF OPERATIONS
The following table summarizes Therma-Wave's historical results of operations
as a percentage of net revenues for the periods indicated. The historical
financial data for the Fiscal Years ended April 2, 1995, March 31, 1996 and
April 6, 1997 were derived from the audited consolidated financial statements
of the Company included elsewhere in this Prospectus. The historical financial
data for the three-month periods ended July 7, 1996 and July 6, 1997 were
derived from the Company's unaudited consolidated financial statements which,
in the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary for the fair presentation of the financial
condition and results of operations for such periods. The information contained
in this table should be read in conjunction with "Selected Historical Financial
Data," and the Consolidated Financial Statements and accompanying notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE-MONTH
FISCAL YEAR ENDED (1) PERIOD ENDED (1)
--------------------------- -------------------
APRIL 2, MARCH 31, APRIL 6, JULY 7, JULY 6,
1995 1996 1997 1996 1997
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.............. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......... 44.9 44.2 45.5 44.9 47.0
----- ----- ----- -------- --------
Gross margin.............. 55.1 55.8 54.5 55.1 53.0
Research and development
expenses.................. 10.7 12.7 11.9 10.5 15.9
Selling, general and
administrative expenses... 23.9 23.6 20.1 20.5 17.8
Amortization of goodwill
and purchased intangibles. 3.4 2.4 1.2 1.7 --
Non-recurring
recapitalization and
related expenses (non-
cash).................... -- -- -- -- 10.3
----- ----- ----- -------- --------
Operating income ......... 17.1 17.1 21.3 22.4 9.0
Interest expense.......... 3.6 2.1 1.5 1.6 7.8
Interest income........... (0.2) (0.3) (0.4) (0.1) (0.6)
Other expense, net........ 0.3 0.2 0.0 -- --
----- ----- ----- -------- --------
Income before provision
for income taxes.......... 13.4 15.1 20.2 20.9 1.8
Provision for income
taxes..................... -- 5.9 8.2 8.7 0.7
----- ----- ----- -------- --------
Net income................ 13.4% 9.2% 12.0% 12.2% 1.1%
===== ===== ===== ======== ========
OTHER DATA:
EBITDA.................... 22.4% 21.7% 24.8% 26.0% 12.7%(2)
===== ===== ===== ======== ========
</TABLE>
- --------
(1) The Company's Fiscal Year refers to the 52/53 week period ending on the
Sunday on or nearest preceding March 31 of each year for periods prior to
1997 and the Sunday on or following March 31 of each year for periods
thereafter. The three-month periods ended July 7, 1996 and July 6, 1997
include 14 weeks and 13 weeks of operating results, respectively.
(2) EBITDA as a percent of sales for the three-month period ended July 6, 1997
includes non-recurring, non-cash expenses related to the Recapitalization.
Excluding such expenses, EBITDA as a percent of sales for the period would
have been 19.3%.
34
<PAGE>
THREE-MONTH PERIOD ENDED JULY 6, 1997 COMPARED TO THREE-MONTH PERIOD ENDED
JULY 7, 1996
Net Revenues. Net revenues for the three months ended July 6, 1997 decreased
by $0.5 million, or 1.8%, to $28.2 million from $28.7 million for the three
months ended July 7, 1996. This decrease in the Company's net revenues is
primarily attributed to lower Therma-Probe sales due to an overall decrease in
capital equipment spending by semiconductor manufacturers, offset by higher
sales of Opti-Probe systems due to increased market penetration, higher
average sales prices and increased service revenues. International sales,
including export sales to customers in foreign countries, for the three months
ended July 6, 1997 decreased to $12.5 million, or 44.2% of net revenues, from
$17.7 million, or 61.5% of net revenues for the comparable period ended July
7, 1996. The decrease is attributed to the specific geographical customer mix
for this quarter. The Company expects international sales to continue to
represent a substantial portion of net revenues.
Gross Margin. Gross margin for the three months ended July 6, 1997 decreased
by $0.9 million, or 5.6%, to $14.9 million from $15.8 million for the three
months ended July 7, 1996. This decrease is attributed to increased investment
in the service organization which was partially offset by increased system
sales gross margin as a result of higher average sales prices. As a percentage
of net revenues, gross margin for the three months ended July 6, 1997
decreased to 53.0% from 55.1% for the comparable period ended July 7, 1996.
Research and Development Expenses ("R&D"). R&D for the three months ended
July 6, 1997 increased by $1.5 million, or 48.4%, to $4.5 million from $3.0
million for the three months ended July 7, 1996. R&D as a percentage of net
revenues for the three months ended July 6, 1997 increased to 15.9% from 10.5%
for the comparable period ended July 7, 1996. The increase in R&D in both
absolute dollars and as a percentage of revenue is due to headcount and
project expense increases related to new product development, including the
OP-5240, Meta-Probe and 300 millimeter products. The Company believes that
technical leadership is essential to its success and expects to continue to
commit significant resources to research and development projects.
Selling, General and Administrative Expenses ("SG&A"). SG&A for the three
months ended July 6, 1997 decreased by $0.9 million, or 14.7%, to $5.0 million
from $5.9 million for the three months ended July 7, 1996. The decrease is
attributed to lower commissions paid on sales due to reduced dependence on
third party agents and lower incentives as revenue leveled out. SG&A as a
percentage of net revenues for the three months ended July 6, 1997 decreased
to 17.8% from 20.5% for the comparable period ended July 7, 1996.
Non-recurring recapitalization and Related Expenses. Recapitalization and
related expenses for the three months ended July 6, 1997 were $2.9 million or
10.3% of net revenues. These were non-cash, non-recurring expenses which were
paid to the Company's executive officers as a result of the completion of the
Recapitalization, which occurred on May 16, 1997.
Operating Income. Operating income for the three months ended July 6, 1997
decreased by $3.9 million, or 60.5%, to $2.5 million from $6.4 million for the
three months ended July 7, 1996. As a percentage of net revenues, operating
income for the three months ended July 6, 1997 decreased to 9.0% from 22.4%
for the comparable period ended July 7, 1996. The decrease in operating income
is due to the factors noted above.
Interest Expense. Interest expense for the three months ended July 6, 1997
increased by $1.8 million, or 407.6%, to $2.2 million from $0.4 million for
the three months ended July 7, 1996. As a percentage of net revenues, interest
expense for the three months ended July 6, 1997 increased to 7.8% from 1.6%
for the comparable period ended July 7, 1996. The increased interest expense
is attributed to the additional debt incurred as part of the Recapitalization.
35
<PAGE>
Provision for Income Taxes. Provision for income taxes for the three months
ended July 6, 1997 decreased by $2.3 million, or 92.0%, to $0.2 million from
$2.5 million for the three months ended July 7, 1996. In addition to lower
earnings, this decrease was also caused by a decrease in the effective tax
rate to 39.1% from 41.7% for the comparable period ended July 7, 1996.
Net Income. For the reasons stated above, net income for the three months
ended July 6, 1997 decreased by $3.2 million, or 91.1%, to $0.3 million from
$3.5 million.
FISCAL YEAR ENDED APRIL 6, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
Net Revenues. Net revenues for the Fiscal Year ended April 6, 1997 increased
by $30.2 million, or 38.1%, to $109.5 million from $79.3 million for the
Fiscal Year ended March 31, 1996. This increase in the Company's net revenues
is primarily attributable to the increased market penetration of the Opti-
Probe and the overall expansion of the semiconductor industry. Of the increase
in net revenues, 85.4% was attributable to increases in Opti-Probe sales and
11.1% was attributable to increases in Therma-Probe sales. International sales
for the Fiscal Year ended April 6, 1997, increased to $65.4 million, or 59.7%
of net revenues, from $45.8 million, or 57.8% of net revenues, for the
comparable period ended March 31, 1996. The Company expects international
sales to continue to represent a substantial portion of net revenues.
Gross Margin. Gross margin for the Fiscal Year ended April 6, 1997 increased
by $15.4 million, or 34.9% to $59.7 million from $44.3 million for the Fiscal
Year ended March 31, 1996. This increase is primarily attributable to
increased shipments of both the Therma-Probe and Opti-Probe systems. As a
percentage of net revenues, gross margin for the Fiscal Year ended April 6,
1997 decreased to 54.5% from 55.8% for the comparable period ended March 31,
1996. This decrease in gross margin as a percentage of net revenues is due to
a change in product mix, which was partially offset by operating leverage
associated with increased sales volumes and improved average selling prices.
Research and Development Expenses. R&D for the Fiscal Year ended April 6,
1997 increased by $3.0 million, or 29.6%, to $13.1 million from $10.1 million
for the Fiscal Year ended March 31, 1996 due to an increase in the number of
employees in the R&D department. R&D as a percentage of net revenues for the
Fiscal Year ended April 6, 1997 decreased to 11.9% from 12.7% for the
comparable period ended March 31, 1996. The decrease in R&D as a percentage of
net revenues is primarily attributable to net revenues increasing at a higher
rate than R&D. The Company expects that the level of spending on R&D will
continue to increase because it believes that technical leadership is
essential to its success and is committed to a high level of research and
development.
Selling, General and Administrative Expenses. SG&A for the Fiscal Year ended
April 6, 1997 increased by $3.3 million, or 17.6%, to $22.0 million from $18.7
million for the Fiscal Year ended March 31, 1996 due to an increase in
headcount in relevant departments and increased commission expense on a larger
net revenue base. SG&A as a percentage of net revenues for the Fiscal Year
ended April 6, 1997 decreased to 20.1% from 23.6% for the comparable period
ended March 31, 1996. The decrease in SG&A as a percentage of net revenues is
primarily due to the relatively fixed nature of SG&A, with the exception of
sales representative commission expenses.
Operating Income. Operating income for the Fiscal Year ended April 6, 1997
increased by $9.8 million, or 72%, to $23.4 million from $13.6 million for the
Fiscal Year ended March 31, 1996. As a percentage of net revenues, operating
income for the Fiscal Year ended April 6, 1997 increased to 21.3% from 17.1%
for the comparable period ended March 31, 1996.
Interest Expense. Interest expense for the Fiscal Year ended April 6, 1997
decreased by $0.1 million, or 5.9%, to $1.6 million from $1.7 million for the
comparable period ended March 31, 1996. As a percentage of net revenues,
interest expense for the Fiscal Year ended April 6, 1997 was 1.5% as compared
to 2.1% for the comparable period ended March 31, 1996.
36
<PAGE>
Provision for Income Taxes. Income taxes for the Fiscal Year ended April 6,
1997 increased by $4.3 million, or 92.3%, to $9.0 million from $4.7 million
for the comparable period ended March 31, 1996. In addition to higher
earnings, this increase was also caused by an increase in the effective tax
rate to 40.7% from 39.1% for the comparable period ended March 31, 1996. The
lower effective rate for the Fiscal Year ended March 31, 1996 reflects
utilization of net operating loss carry-forwards.
Net Income. For the reasons stated above, net income for the Fiscal Year
ended April 6, 1997 increased $5.8 million, or 79.9%, to $13.1 million from
$7.3 million.
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED APRIL 2, 1995
Net Revenues. Net revenues for the Fiscal Year ended March 31, 1996
increased by $23.6 million, or 42.4%, to $79.3 million from $55.7 million for
the Fiscal Year ended April 2, 1995. This increase in the Company's net
revenues is primarily attributable to the increased market penetration of the
Opti-Probe system and an overall increase in the number of units sold as a
result of the overall expansion of the semiconductor industry. Of the increase
in net revenues, 83.2% was attributable to increases in Opti-Probe sales and
7.6% was attributable to increases in Therma-Probe sales. International sales
for the Fiscal Year ended March 31, 1996 increased to $45.8 million, or 57.8%
of net revenues, from $32.5 million, or 58.5% of net revenues for the
comparable period ended April 2, 1995.
Gross Margin. Gross margin for the Fiscal Year ended March 31, 1996
increased by $13.6 million, or 44.4%, to $44.3 million from $30.7 million for
the Fiscal Year ended April 2, 1995. This increase in primarily attributable
to increased shipments of Opti-Probe systems. As a percentage of net revenues,
gross margin for the Fiscal Year ended March 31, 1996 increased to 55.8% from
55.1% for the comparable period ended April 2, 1995. This improvement in gross
margin as a percentage of net revenues is due to operating leverage associated
with increased sales volumes and improved average sales prices, partially
offset by a change in product mix.
Research and Development Expenses. R&D for the Fiscal Year ended March 31,
1996 increased by $4.2 million, or 69.5%, to $10.1 million from $5.9 million
for the Fiscal Year ended April 2, 1995. R&D as a percentage of net revenues
for the Fiscal Year ended March 31, 1996 increased to 12.7% from 10.7% for the
comparable period ended April 2, 1995. The increase in R&D resulted from
continued investments by the Company in both new product development and
product enhancements.
Selling, General and Administrative Expenses. SG&A for the Fiscal Year ended
March 31, 1996 increased by $5.4 million, or 40.6%, to $18.7 million from
$13.3 million for the Fiscal Year ended April 2, 1995. The increase in SG&A is
primarily attributable to increased costs associated with additional sales
support personnel. As percentage of net revenues for the Fiscal Year ended
March 31, 1996, SG&A decreased to 23.6% from 23.9% for the comparable period
ended April 2, 1995.
Operating Income. Operating income for the Fiscal Year ended March 31, 1996
increased $4.1 million, or 43.0%, to $13.6 million from $9.5 million for the
Fiscal Year ended April 2, 1995. As a percentage of net revenues, operating
income for the Fiscal Year ended March 31, 1996 remained constant at 17.1%.
Interest Expense. Interest expense for the Fiscal Year ended March 31, 1996
decreased by $0.3 million, or 13.8%, to $1.7 million from $2.0 million for the
Fiscal Year ended April 2, 1995. As a percentage of net revenues, interest
expense for the Fiscal Year ended March 31, 1996 was 2.1% as compared to 3.6%
for the Fiscal Year ended April 2, 1995. This decrease is a result of lower
average borrowing levels.
Provision for Income Taxes. Income taxes for the Fiscal Year ended March 31,
1996 were $4.7 million while no provision for income taxes was necessary for
the comparable period ended April 2, 1995. The Company utilized net operating
loss carry-forwards for Federal, state and foreign income tax purposes and was
not required to provide for income taxes for the Fiscal Year ended April 2,
1995.
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Net Income. For the reasons stated above, net income for the Fiscal Year
ended March 31, 1996 decreased by $0.2 million, or 2.8%, to $7.3 million from
$7.5 million for the Fiscal Year ended April 2, 1995.
QUARTERLY RESULTS OF OPERATIONS
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. The Company's expense
levels are based, in part, on expectations of future revenues. If revenue
levels in a particular quarter do not meet expectations, operating results are
adversely affected. A variety of factors could have an influence on the level
of the Company's revenues in a particular quarter. These factors include
general economic conditions, specific economic conditions in the semiconductor
industry, the timing of the receipt of orders from major customers, customer
cancellations or delay of shipments, specific feature requests by customers,
production delays or manufacturing inefficiencies, exchange rate fluctuations,
management decisions to commence or discontinue product lines, the Company's
ability to design, introduce and manufacture new products on a cost effective
and timely basis, the introduction of new products by the Company or its
competition, the timing of research and development expenditures, and expenses
attendant to acquisitions, strategic alliances and the future development of
marketing and service capabilities.
The following table sets forth the Company's unaudited operating results for
its last eight quarters. The information for each of the quarters is unaudited
but includes all adjustments, consisting only of normal recurring adjustments,
which management considers necessary for presentation thereof.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING
FISCAL YEAR ENDED MARCH 31, 1996 FISCAL YEAR ENDED APRIL 6, 1997 APRIL 5, 1998
-------------------------------------- ---------------------------------- --------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
-------- -------- -------- -------- ------- ------- ------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues............ $ 17,845 $ 18,299 $ 16,197 $ 26,952 $28,715 $31,034 $24,206 $25,538 $28,205
Gross margin............ 10,747 9,989 7,718 15,812 15,822 18,158 12,383 13,335 14,942
Operating income........ 3,847 2,982 465 6,284 6,426 8,803 4,462 3,678 2,540
Net income (loss)....... 2,166 1,468 (88) 3,735 3,503 4,923 2,400 2,275 311
OTHER DATA:
EBITDA.................. $ 4,622 $ 3,773 $ 1,277 $ 7,513 $ 7,475 $ 9,892 $ 5,492 $ 4,254 $ 3,576(1)
Cash provided by (used
in) operating
activities............. 4,291 (329) (2,344) 4,249 1,990 1,007 4,604 4,259 (969)
Cash used in investing
activities............. (168) (513) (1,636) (2,648) (964) (188) (208) (215) (1,939)
Cash provided by (used)
in financing
activities............. (1,395) (65) 52 130 (532) 121 (193) (247) 184
</TABLE>
- --------
(1) EBITDA in the three-month period ended July 6, 1997 includes $2,888 in
non-recurring, non-cash expenses related to the Recapitalization.
Excluding such expenses, EBITDA for the period would have been $6,464.
During the third quarter of Fiscal 1996, the Company experienced a decline
in revenue as a result of the high number of Opti-Probe and Therma-Probe
systems that were sent to the Company's wholly owned subsidiary in Japan
rather than to customers. The shipments were made to the Japanese subsidiary
to fulfill their order backlog and, due to the length of time these systems
were in transit, they could not be repackaged and shipped to end-users in the
third quarter. Such systems were ultimately shipped in the fourth quarter of
Fiscal 1996. The decline in operating income and the net loss incurred in the
third quarter of Fiscal 1996 was primarily the result of the decline in
revenues as operating expenses increased only slightly.
The decline in revenue in the third and fourth quarters of Fiscal 1997 as
compared to the previous three consecutive quarters was the result of the
external economic conditions in the semiconductor industry. The Company
experienced a decline in orders that resulted in a decline in backlog and
revenues in these quarters. The Company's gross margin as a percentage of net
revenues has fluctuated between approximately 50% and 60% during the quarters
of Fiscal 1996 and 1997 and the first quarter
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<PAGE>
of Fiscal 1998. Fluctuations in quarterly gross margins percentages during
these quarters resulted primarily from changes in average selling prices, unit
volumes and product mix and to a lesser extent from the mix of foreign and
domestic sales.
BACKLOG
At July 6, 1997, the Company's backlog was $42.1 million compared to $41.8
million at April 6, 1997, $56.9 million at March 31, 1996 and $27.0 million at
April 2, 1995. The Company's backlog consists of product orders for which a
customer purchase order has been received and accepted and which is scheduled
for shipment within six months. Orders that are scheduled for shipment beyond
the six-month window are not included in backlog until they fall within the
six-month window. Orders are subject to rescheduling or cancellation by the
customer, usually without penalty. Backlog also consists of recurring fees
payable under support contracts with the Company's customers and orders for
spare parts and billable service. Because of possible changes in product
delivery schedules and cancellation of product orders and because the Company's
sales will sometimes reflect orders shipped in the same quarter that they are
received, the Company's backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements are for working capital,
consisting primarily of accounts receivable and inventories, capital
expenditures and debt service. Historically, the Company has funded its
activities principally from working capital, capital infusions from Toray and
Shimadzu and working capital lines of credit. In the Fiscal Years ended April
2, 1995 and March 27, 1994, Toray and Shimadzu invested $15.0 million and $2.0
million, respectively, for additional shares of the Company's common stock.
Cash flow used by operating activities was $1.0 million for the three months
ended July 6, 1997 compared to cash flow provided from operating activities of
$2.0 million for the three months ended July 7, 1996. The decrease in cash flow
provided by operating activities in the first quarter of Fiscal 1998 compared
to Fiscal 1997 is due to lower net income combined with the timing between when
an obligation is incurred and when it was paid. Cash flow provided by operating
activities was $11.9 million, $5.9 million and $1.9 million for the Fiscal
Years ended April 6, 1997, March 31, 1996 and April 2, 1995, respectively. The
improvement in cash flow provided by operating activities in Fiscal 1997
compared to Fiscal 1996 is due to higher net income. The improvement in cash
flow provided by operating activities in Fiscal 1996 compared with Fiscal 1995
is primarily due to a lower investment in working capital, principally accounts
receivable.
Capital expenditures were $0.8 million for the three months ended July 6,
1997 compared to $0.6 million for the three months ended July 7, 1996. Capital
expenditures were $1.1 million for the Fiscal Year ended April 6, 1997, $4.4
million for the Fiscal Year ended March 31, 1996 and $1.6 million for the
Fiscal Year ended April 2, 1995. During Fiscal 1996, the Company spent
approximately $4.4 million in capital expenditures the majority of which was
associated with the Company's move into its new facilities. The Company expects
to make additional capital expenditures of $2.2 million during the next nine
months to acquire additional capital equipment and expand within current
facilities.
To finance the Recapitalization, the Company issued $115.0 million in
aggregate principal amount of the Notes and received the Equity Contribution of
$35.0 million. See "The Recapitalization." The Company expects to use the net
proceeds from the Offering to redeem $26.0 million in aggregate principal
amount of the Notes and to pay the redemption premium and accrued and unpaid
interest thereon.
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<PAGE>
In connection with the Recapitalization, the Company entered into the Bank
Credit Facility. The Bank Credit Facility provides for borrowings of up to
$30.0 million for working capital and other general corporate purposes, and
bears interest, at the Company's option, at: (i) the Base Rate (as defined in
the Bank Credit Facility) plus 1.75% or (ii) the Eurodollar Rate (as defined in
the Bank Credit Facility) plus 3.00%. The Company's borrowings under the Bank
Credit Facility are secured by substantially all of the Company's assets and a
pledge of substantially all of the capital stock of the Company's domestic
subsidiaries and 65% of the capital stock of the Company's first-tier foreign
subsidiaries. The Bank Credit Facility matures on May 16, 2002. Subsequent to
the Recapitalization, the Company used $7.8 million of the available borrowing
capacity under the Bank Credit Facility to issue letters of credit. At July 6,
1997, the Company had unused borrowing capacity under the Bank Credit Facility
of $22.2 million. See "Description of Certain Indebtedness -- Bank Credit
Facility."
In connection with the Offering, the Company expects to: (i) enter into the
New Bank Credit Facility and (ii) use cash on hand and borrowings under the New
Bank Credit Facility to finance the Preferred Stock Redemption and pay fees
associated with the refinancing. The terms of the New Bank Credit Facility are
still being negotiated between the Company and its principal lender. The
Company expects that the New Bank Credit Facility will contain better terms
than the Bank Credit Facility and will provide for working capital borrowings
of up to $30.0 million. The New Bank Credit Facility will permit the Preferred
Stock Redemption. Until such time as a definitive agreement relating to the New
Bank Credit Facility is executed, however, no assurance can be given that such
agreement will be executed or, if executed, will be on the terms set forth
herein.
The Company's principal sources of funds following the Offering are
anticipated to be cash flows from operating activities and borrowings under the
New Bank Credit Facility. The Company believes that these funds will provide
the Company with sufficient liquidity and capital resources for the Company to
meet its current and future financial obligations, as well as to provide funds
for the Company's working capital, capital expenditures and other needs for at
least the next twelve months. No assurance can be given, however, that this
will be the case. Depending upon its rate of growth and profitability, the
Company may require additional equity or debt financing to meet its working
capital requirements or to fund its research and development activities. There
can be no assurance that additional financing will be available when required
or, if available, will be on terms satisfactory to the Company. The Company's
future operating performance and ability to service or refinance the Notes and
to repay, extend or refinance the Bank Credit Facility will be subject to
future economic conditions and to financial, business and other factors, many
of which are beyond the Company's control. See "Risk Factors."
Foreign exchange rate fluctuations have historically not had a significant
impact on the Company's results of operations. Generally, system sales to
foreign markets outside of Japan have been invoiced and paid in U. S. Dollars
and system sales to Japanese customers have been invoiced and paid in Japanese
Yen. See "Risk Factors -- Risks Associated with International Sales."
INFLATION
The impact of inflation on the Company's business has not been material for
the Fiscal Years ended April 6, 1997, March 31, 1996 and April 2, 1995 or for
the three-month periods ended July 7, 1996 and July 6, 1997.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." The statement established standards for the reporting
and display of comprehensive income and its components. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It
includes all changes in equity during a
40
<PAGE>
period except those resulting from investments by owners and distributions to
owners. This standard will require that an enterprise display an amount
representing total comprehensive income for the period. SFAS No. 130 will be
effective for Fiscal 1998. The Company does not expect the adoption of SFAS No.
130 to have a significant impact on the Company's reported results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which supersedes SFAS No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
operating segments, in annual financial statements and would require that those
enterprises report selected segment information in interim financial reports to
stockholders. Operating segments are defined as revenue-producing components of
the enterprise which are generally used internally for evaluating segment
performance. SFAS No. 131 will be effective for the Company beginning with
Fiscal 1999. Adoption of SFAS No. 131 will not impact the Company's financial
position or results of operations, however, the Company has not yet determined
the effect of this statement on disclosures in the notes to its consolidated
financial statements.
41
<PAGE>
BUSINESS
Market data used throughout this Prospectus were obtained from internal
surveys and from industry publications, including a report generated by
Dataquest, an independent semiconductor industry research firm. This industry
publication generally indicates that the information contained therein has
been obtained from sources believed to be reliable, but that the accuracy and
completeness of such information is not guaranteed. The Company has not
independently verified such market data. This publication was not commissioned
by, or prepared at the request of, the Company or any of its affiliates.
Similarly, internal surveys, while believed to be reliable, have not been
verified by any independent source. The Company's belief as to its market
share of both the ion implantation market generally and the nondestructive
implantation market specifically derives from the Company's internal estimates
of the size of such market and the Company's internal records as to its sales
in such market. The Company's belief as to its market share of the thin film
measurement market derives from industry data as to the size of such market
and the Company's internal records as to its sales in such market. For an
explanation of certain terms used in this Prospectus, reference should be made
to the Glossary beginning on page G-1.
OVERVIEW
The Company is a worldwide leader in the development, manufacture, marketing
and service of process control metrology systems for use in the manufacture of
semiconductors. Semiconductor manufacturers use process control metrology
systems in their fabs to detect process deviations or problems in order to
minimize the effects on manufacturing yield, device performance and
reliability. The Company's metrology systems are principally used to measure
two of the most important and pervasive semiconductor fabrication process
steps: ion implantation and thin film deposition and removal. Ion implantation
involves the implantation of ions into selective areas of the silicon wafer,
which alters the electrical properties of the semiconductor. Thin film
deposition and removal is a process by which layers of conductive or
insulating films are deposited on and removed from the wafer to give the
semiconductor the desired performance characteristics. The Company's products
are designed to offer a low cost of ownership due to the integration of
proprietary technology and advanced software in a highly reliable, easy-to-use
and productive system. Since the introduction of its first product in 1985,
the Company's revenues have increased at a CAGR of approximately 36.7%.
The Company's process control metrology systems use proprietary and patented
technology to measure key dimensions and other physical properties of
semiconductor wafers. The Company holds 69 U.S. and foreign patents primarily
covering the technology utilized in its two major product lines: (i) the
Therma-Probe system and (ii) the Opti-Probe system. The Therma-Probe system,
introduced in 1985, utilizes the Company's proprietary thermal wave technology
and is the predominant nondestructive process control metrology system used to
measure the critical ion implantation process in the fabrication of
semiconductors. Since the introduction of the Therma-Probe, the Company
believes it has captured over 50% of the market for ion implant measurement in
general and over 95% of the market for nondestructive ion implantation
measurement of product wafers. The Opti-Probe system, introduced in 1992,
significantly improves upon existing thin film metrology systems by
successfully integrating different measurement technologies into one system
and utilizing the Company's proprietary optical technologies. The Company
believes that the Opti-Probe has captured over 30% of the thin film
measurement market in less than five years.
INDUSTRY BACKGROUND
Process Control Metrology Market
Semiconductor manufacturers use process control metrology systems in their
fabs to detect any process deviations or problems as quickly as possible so as
to minimize their effects on manufacturing yield, device performance and
reliability. Process control metrology systems are critical for yield
42
<PAGE>
enhancement and cost reduction because they allow error/defect detection in
real-time before there can be a significant impact on yield. Higher yields
increase the revenue a manufacturer can obtain for each semiconductor wafer
processed. Furthermore, equipment that helps a manufacturer to increase yield
quickly when new semiconductor products are introduced enables the
manufacturer to offer products in volume at the time when they are likely to
generate the greatest profits.
From 1991 to 1996, Dataquest reports that sales of process control metrology
systems and instruments have increased at a CAGR of 23.6% to approximately
$1.6 billion in 1996. Within the process control metrology market, the Company
operates specifically in the ion implant and the thin film measurement
metrology segments. Sales of ion implant metrology and thin film measurement
systems for the semiconductor industry in 1996 were approximately $60 million
(based upon the Company's estimate) and $234 million (based upon the estimate
of Dataquest), respectively. Demand for process control metrology systems is
driven primarily by: (i) capital expenditures of semiconductor manufacturers,
which, in turn, depend on the current and anticipated market demand for
semiconductors and products utilizing semiconductors and (ii) the increasing
complexity of the semiconductor manufacturing process as a result of the
demand for smaller, higher performance devices.
Increasing Demand for Semiconductors. The demand for semiconductors has
significantly increased over time. According to Dataquest, since 1991 the
global semiconductor market has expanded at a CAGR of approximately 17.3%. In
addition, Dataquest estimates that sales of semiconductors generated aggregate
revenues of approximately $143.3 billion in 1996. This market expansion is due
primarily to: (i) the increased demand for faster, smaller and more efficient
devices utilizing semiconductors (including personal computers and
telecommunications equipment) with a greater range of functionality; (ii) the
increased level of semiconductor content in electronic products; and (iii) the
increased use of products utilizing semiconductors in broader geographical
markets. For example, over 20% of the worldwide semiconductor capacity is
currently consumed in the Asia/Pacific market, compared to a negligible
quantity only a decade ago. Existing and new markets with significant growth
potential include Southeast Asia, China, Latin America and Eastern Europe. New
applications for semiconductors, both in traditional semiconductor markets,
such as data-processing computers, consumer electronics, automotive
electronics and office equipment, and in new and growing semiconductor
markets, such as personal computers, telecommunications, portable computers
and the Internet, have increased the level of semiconductor content in
electronic products and systems.
Growing Importance of Process Control Metrology. Industries that use
semiconductors are demanding increasingly complex, higher performance devices.
As a result, semiconductors continue to become more complex, with smaller
feature sizes and larger circuit device sizes. Fabrication of these devices
requires increasing the number of process steps to more than 500 and reducing
feature sizes to .25 microns or smaller, necessitating narrower process
tolerances which make it more difficult to maintain acceptable yields. These
factors, together with the industry migration toward larger wafer sizes (e.g.,
300 millimeters), have led to a substantial increase in the manufacturers' per
wafer investment, which in turn has caused these manufacturers to intensify
their efforts to maintain acceptable yields. As a result, manufacturers demand
equipment that provides superior process results and yields and which can also
accommodate larger wafers. With the increase in wafer process complexity, the
increase in wafer value as wafers become larger, and the requirements for
greater yield and productivity, process control metrology systems are becoming
more critical to the manufacture of semiconductors. For example, from 1991 to
1996, the thin film measurement market has grown at a CAGR of 40.3% as
compared to a CAGR of 29.4% for the semiconductor capital equipment market as
a whole (based in each case on information reported in Dataquest). During the
same period, the Company estimates that the ion implant metrology market grew
at a CAGR of 25.9%. In addition, the total costs for constructing and
equipping an advanced fabrication facility can be in excess of $1.5 billion, a
substantial portion of which represents the cost of capital equipment used to
process the wafers. Process control metrology
43
<PAGE>
systems, which typically represent a small percentage of the total investment,
enable manufacturers to leverage these expensive facilities and improve their
return on investment.
Two areas of process control metrology that have grown as a result of the
increasing demand for semiconductors and the growing importance of process
controls are ion implant metrology and thin film measurement.
Ion Implant Metrology
A key process step in the fabrication of semiconductor devices is the
implantation of ions, usually boron, phosphorous or arsenic, into selective
areas of the silicon wafer, which alters the electrical properties of the
silicon semiconductor. Control of the accuracy and uniformity of the ion
implant dose is critical to device performance and yield. Ion implantation is
generally performed several times during the early phases of the fabrication
cycle. As a result, there is typically a three to eight week time lag between
the implant steps and the first electrical measurements that indicate whether
the ion implantation process was properly executed. Failure to identify
improper ion implantation can be extremely costly to a semiconductor
manufacturer if the fabrication cycle is permitted to continue. To test whether
the ion implantation was properly executed on a timely basis, semiconductor
manufacturers historically used a four-point probe to perform test wafer
monitoring (i.e., testing a non-production blank wafer that has no devices on
it), which measured electrical resistance and required physical contact between
the probe and the silicon wafer surface. As a result of the high probability of
contamination of the silicon wafer from contact with the probe, this procedure
was only used on a limited number of test wafers. As compared to product wafer
monitoring (i.e., testing a production wafer that has devices on it), test
wafer monitoring adds considerable cost to the manufacturing process and will
often fail to identify processing problems inherent with product wafers.
Thin Film Measurement
The majority of the 100 to 500 process steps required to fabricate
semiconductors on the silicon wafer involve the deposition and removal of a
variety of insulating and conducting thin films. Thin film metrology measures
the thickness and material properties of these thin films and, because it is
used to measure a large number of process steps, is one of the most important
metrology systems utilized at semiconductor fabs. The most widely used
technologies to measure the thickness and properties of thin films have
historically been reflection spectrometry and ellipsometry. Reflection
spectrometers obtain an optical spectrum as a function of wavelength for light
reflected from the surface of a sample. This spectrum is then analyzed with
appropriate algorithms to obtain film thickness and, in some cases, other
properties of the film as well. In ellipsometry, the change of polarization of
the reflected light is measured. The polarization change is analyzed with
appropriate algorithms to obtain film thickness, and in some cases other
properties of the film.
Increasingly, these systems have been unable to meet the process control
metrology demands of the semiconductor industry. For example, the industry is
rapidly moving toward measuring product wafers rather than test wafers, both
because of the inability to control the manufacturing processes adequately
using test wafers alone, and the costs associated with the processing of
nonproductive test wafers. Measurements on product wafers, however, must be
performed in small areas and spectrometers and ellipsometers both require
fairly large measurement areas. Additionally, increasing demands for improved
precision and repeatability require the ability to measure thicknesses that
range from extremely thin films (i.e., below 20 Angstroms) to films that are
hundreds of thousands times thicker. Reflection spectrometers are most suitable
for measuring thicker films, whereas ellipsometers are most suitable for
measuring very thin films. Thus, neither system is individually capable of
accurate and reliable measurements over the full
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<PAGE>
range of film thicknesses. Further, the industry is now using many films whose
optical properties are functions of the actual deposition conditions.
Obtaining an accurate measurement of the thickness of these thin films
requires the ability to make simultaneous measurements of both thickness and
optical properties. Reflection spectrometers and most ellipsometers have very
limited capabilities for simultaneous measurements of both thickness and
optical parameters.
THERMA-WAVE SOLUTION
Therma-Wave has successfully developed two major lines of process control
metrology systems to address the limitations of conventional ion implant and
thin film metrology systems:
Therma-Probe System, introduced in 1985, is the predominant nondestructive
process control metrology system used to measure the critical ion implantation
process in the fabrication of semiconductors. The Therma-Probe System employs
highly focused but low power laser beams to generate and detect thermal wave
signals in the silicon wafer. Proprietary software correlates the signals to
the ion implant dose. Unlike previous ion implant metrology systems, the
Therma-Probe system utilizes a totally noncontact, nondamaging technology and
thus can be used for product wafer monitoring immediately after the ion
implantation process. These features have been packaged into an easy-to-use
and reliable package with automated wafer handling and statistical data
processing. Since its introduction, the Company believes that Therma-Probe has
captured over 50% of the market for ion implant measurement in general and
over 95% of the market for nondestructive ion implantation measurement of
product wafers.
Opti-Probe System, introduced in 1992, significantly improves upon existing
thin film metrology systems by successfully integrating three distinct film
measurement technologies, two of which are patented by the Company. This
combination of technologies, coupled with proprietary software that correlates
and interprets the data in a seamless manner, provides increased measurement
capability, speed and productivity on both test and product wafers. Based on
market estimates provided by Dataquest, the Company believes that the Opti-
Probe system has captured over 30% of the thin film measurement market in less
than five years.
THERMA-WAVE'S COMPETITIVE STRENGTHS
The Company attributes its success in the process control metrology market
and its significant opportunities for continued growth and profitability to
its ability to provide products and services that are superior in meeting the
requirements of semiconductor manufacturers. Management believes that the
Company has several competitive advantages, including:
. Technologically Advanced Capabilities and Products. The Company believes
that its expertise in engineering, research and development enables it to
offer process control metrology systems with more advanced technical
capabilities and features than those offered by its competitors. These
features include superior measurement capabilities, resolution, accuracy,
repeatability and reliability. The Therma-Probe system employs a patented
optical technology to provide noncontact, noncontaminating ion implant
measurement capability, unlike many of the Company's competitors who use
destructive four-point probes to accomplish similar measurements. The
Company's Opti-Probe system is the only tool that combines three distinct
measurement technologies, two of which are patented by the Company. The
Company believes that its technologically superior products are critical to
its success because technical capability is a key criterion that most major
semiconductor manufacturers use in selecting capital equipment for their
fabs.
. Continuous Product Improvement. During its last four fiscal years, the
Company has spent on average approximately 14% of its net revenues on
research and development activities. Since its
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founding, the Company has been a leader in the introduction of technological
advances, including: (i) the development of the most widely accepted
metrology system for measuring ion implant dose on product wafers; (ii) the
introduction of the first product to successfully combine different thin
film measurement technologies in one system; (iii) the development of
proprietary technologies significantly improving on existing thin film
measurement capability; and (iv) the development of advanced metrology
software dealing with signal processing, data analysis and pattern
recognition.
. Leading Market Share. The Company is one of the world's leading
manufacturers of process control metrology equipment and systems. Therma-
Wave is the largest provider of nondestructive ion implant process control
metrology systems worldwide with over 95% of the market. The Therma-Probe
system has become the industry standard for ion implant process control
metrology and is installed in virtually every major semiconductor
fabrication facility. The Company is also a leading supplier of thin film
measurement metrology systems worldwide. The Company believes that its Opti-
Probe system has captured over 30% of the market in less than five years
since its introduction as a result of its technological superiority and the
enhanced return on investment to its customers. In Fiscal 1997, sales of the
Opti-Probe system increased by over 55% from the previous Fiscal Year due to
continued market share gains as well as market growth.
. Strong and Diverse Customer Base. The Company markets and sells its products
worldwide to virtually all of the major semiconductor manufacturers,
including: (i) Intel, the largest microprocessor manufacturer worldwide;
(ii) Samsung, the largest dynamic random access memory ("DRAM")
manufacturer; and (iii) Lucent Technologies, one of the largest application
specific semiconductor ("ASIC") manufacturers. The Company believes that its
top customers are among the fastest growing manufacturers in the
semiconductor industry. For example, the Company's top nine customers for
Fiscal 1997 have increased their capital equipment expenditures at a CAGR of
approximately 36% over the last five years, as compared to a CAGR of
approximately 27% for the semiconductor capital equipment industry as a
whole. In addition, the Company has a diverse customer base in terms of both
geographic location and the types of semiconductors manufactured by its
customers. In aggregate, the Company serves more than 60 customers
worldwide, which are located in over 14 different countries.
. Strong Customer Relationships. The Company believes that it has developed
and consistently maintained excellent customer relationships. In addition,
the Company believes it is the dominant supplier of ion implant metrology
systems to virtually all major semiconductor manufacturers and has become
the primary supplier of thin film metrology equipment to many of its
customers. Engineering, sales and management personnel collaborate with
customer counterparts to determine customers' needs and specifications. For
example, the Opti-Probe 2600 was developed in cooperation with one of the
Company's major customers to address the need for a more capable thin film
measurement system.
. Worldwide Distribution and Strong Customer Support Capabilities. The Company
has expended considerable resources in creating a high-quality worldwide
distribution network with highly trained customer service and support
organizations. For Fiscal 1997 and the first quarter of Fiscal 1998, the
Company generated international revenues of approximately $65.4 million and
$12.5 million, representing 59.7% and 44.2% of net revenues, respectively.
The Company provides its customers with comprehensive support and service
before, during and after delivery of its systems. The Company's engineers
have extensive experience and provide valuable assistance to the Company's
customers, thereby strengthening Therma-Wave's strong position with its
customers. The Company anticipates that it will continue to strengthen and
expand its distribution and customer service and support organizations
worldwide, particularly in Asia.
46
<PAGE>
. Experienced and Successful Management Team. The Company is led by an
experienced senior management team whose members average more than 14 years
in the semiconductor capital equipment manufacturing industry. Dr. Allan
Rosencwaig has over 15 years of experience in the industry. In addition,
the Company's top nine executives average over nine years with the Company.
Under the leadership of its existing management team, the Company's net
revenues have grown from $2.7 million in Fiscal 1985 to $109.5 million in
Fiscal 1997, representing a CAGR of 36.7%. As a result of the
Recapitalization, the Company's senior management team currently owns
approximately 22% of the outstanding Common Stock and holds options to
acquire an additional 7% of such Common Stock. Such equity ownership
represents a significant economic commitment to and participation in the
continued success of the Company.
BUSINESS AND GROWTH STRATEGY
The Company's business strategy is to continue its leadership and growth in
the process control metrology market and thereby increase market share and
maximize revenues and profitability. The Company's business and growth
strategy includes the following key initiatives:
. Capitalize on Favorable Industry Trends. The Company believes that the
increasing demand for semiconductors should continue to drive significant
growth in the semiconductor capital equipment market. In addition, the
Company believes that the need for more comprehensive and sophisticated
process control of semiconductor device manufacturing will result in
greater demand for metrology systems. In particular, the transition from
200 millimeter to 300 millimeter wafers, in conjunction with the evolution
towards circuit sizes of .25 microns or less, is expected to increase the
need for process control metrology in fabs. Management believes that the
Company is well positioned to take advantage of these favorable trends,
given its market leadership position, strong customer base, superior
technology and research and development expertise.
. Maintain and Leverage Strong Customer Relationships. The Company expects to
continue to strengthen its existing customer relationships and foster
working partnerships by providing technologically superior systems and high
levels of customer support. The Company believes it is the dominant
supplier of ion implant metrology systems to virtually all major
semiconductor manufacturers and has become the primary supplier of thin
film metrology systems to many of its customers. Furthermore, the Company
intends to continue to capitalize on its strong customer relationships,
which have enabled it to develop new products and applications through
close collaboration with customers. Such collaboration has often resulted
in products and applications which have a broader market appeal. For
example, the Company has sold its Opti-Probe 2600 system, developed in
cooperation with one of its major customers, to numerous other
semiconductor manufacturers.
. Increase Market Penetration. The Company expects to increase its market
penetration based on its competitive strengths and superior product
offerings. In particular, the Company expects that the market share of its
Opti-Probe system, which was introduced by the Company in 1992, will
continue to increase as a result of its technological advantages and
superior return on investment to its customers. During Fiscal 1997, the
Company has added seven major new customers for the Opti-Probe system and,
based on Dataquest information, has increased its market share in the thin
film measurement market by approximately 5 percentage points to capture
over 30% of such market. The Company believes that the Opti-Probe system
offers significant opportunities for increased revenues due to the size of
the thin film measurement market, which had aggregate sales of $234 million
in 1996 and has grown at CAGR of 40.3% from 1991 to 1996.
. Continue to Focus on Technological Innovation. The Company intends to
continue its emphasis on engineering and research and development in an
effort to anticipate and address technological advances in semiconductor
manufacturing. The Company's current product development
47
<PAGE>
efforts include: (i) the Opti-Probe 5240, which will integrate two
additional measurement technologies into the Opti-Probe system, providing
the Company with a product entry in a new segment of the thin film
measurement market; (ii) expanding the capability of both the Therma-Probe
and Opti-Probe systems to accommodate 300 millimeter wafer sizes; and (iii)
the Meta-Probe, a thin film metrology system specifically designed to
measure the thickness and material properties of opaque and metallic thin
films. The Company expects that these new products will begin beta-testing
in 1998. Management believes that continued product innovation and
investment in research and development will help the Company strengthen its
leadership position.
. Leverage Existing Infrastructure. The Company believes that it has the
opportunity to improve its operating margins by leveraging its existing
infrastructure through increased sales. To support its worldwide growth, the
Company has expended considerable resources in establishing its
infrastructure, including a worldwide customer service and support
organization and a state-of-the-art manufacturing facility.
. Pursue Strategic Acquisitions. The Company expects to capitalize on the
recent consolidation trend in the process control metrology and wafer
inspection industries by targeting strategic acquisitions. The Company
expects to review selective opportunities to acquire businesses which would
add to its portfolio of technologies and products. The Company is not
currently engaged in any on-going discussions regarding any potential
acquisitions.
PRODUCTS AND TECHNOLOGY
Therma-Wave currently offers two major lines of process control metrology
systems to address a wide range of customer process control needs. The
Company's Therma-Probe system was introduced in 1985 as the Company's initial
product line, and its Opti-Probe system was introduced in 1992. Both product
lines feature the Company's proprietary and patented measurement technologies
and offer robotic wafer handling, advanced vision processing, sophisticated but
user-friendly software and high throughput and reliability. The modular design
of the hardware and software enable continuous product enhancement as new
advances are made.
Therma-Probe System
The Therma-Probe system is the predominant ion implant metrology system
capable of measuring in a noncontact, non-contaminating manner directly on
product wafers and immediately after the ion implantation process, both the
implant dose and its uniformity across the wafer with a high degree of
precision. In addition, the Therma-Probe system has unparalleled sensitivity
for the most critical implants. By the end of June 1997, more than 355 Therma-
Probe systems had been installed in virtually every major semiconductor fab
worldwide. A typical semiconductor fab uses Therma-Probe systems to monitor and
control critical implant steps. In addition, all major manufacturers of ion
implant equipment utilize Therma-Probe systems to help develop and qualify
their ion implanters. The Company believes that the Therma-Probe has captured
over 50% of the market for ion implant measurement in general and over 95% of
the market for nondestructive ion implantation measurement of product wafers.
The Company estimates that sales of ion implant metrology systems for the
semiconductor industry were approximately $60 million in 1996. From Fiscal 1992
through Fiscal 1997, net revenues from the sale of Therma-Probe systems have
grown at a CAGR of 15.2%. The selling price for a current model of the Therma-
Probe system ranges from $650,000 to $900,000.
The Company believes that its Therma-Probe system offers particular
technological advantages and features that distinguish it from the ion implant
metrology systems offered by its competitors:
Proprietary Technology. To provide noncontact, non-contaminating ion
implant measurements on product wafers, the Company's Therma-Probe system
employs highly focused but low power
48
<PAGE>
laser beams to generate and detect thermal wave signals in the silicon
wafer that can be correlated to the implant dose. The thermal wave
technology used to measure the ion implant dose in the silicon wafer is a
highly proprietary and extensively patented technology of the Company. The
Company believes that these patents help to maintain its competitive
position.
Ease of Use and Reliability. The Company has packaged its thermal wave
technology into an easy-to-use and reliable process control metrology
system. This system is configured specifically for use by semiconductor
device manufacturers and features automated wafer handling, automated data
collection and statistical data processing and data management.
Installed Base. Virtually all major semiconductor manufacturers use
Therma-Probe systems to monitor and control their ion implant processes. In
addition, virtually all major manufacturers of ion implant equipment
utilize Therma-Probe systems to help develop and qualify their implanters.
Additionally, the Company's engineers have extensive experience in
addressing many different types of ion implant applications and provide
valuable assistance to the Company's customers, thereby strengthening
Therma-Wave's strong position with its customers. The Company believes that
its significant installed base of Therma-Probe systems acts as a barrier to
entry for its current and potential competitors in the ion implant
measurement market.
Continuous Improvement. Although the Company enjoys over 95% of the
industry sales of nondestructive ion implant metrology systems for product
wafers, it continues to develop, manufacture and market new and improved
Therma-Probe models to enhance system capability and the return on
investment to the customer. For example, the Company recently introduced
the TP-500 model, which provides enhanced performance, improved software,
advanced image processing and improved reliability. The Company is
currently in the process of developing a Therma-Probe model with the
capacity to accommodate wafer sizes of 300 millimeters.
The following table summarizes the Company's improvements to the Therma-
Probe system and current product development activities:
<TABLE>
<CAPTION>
YEAR
INTRODUCED/
EXPECTED
MODEL INTRODUCTION DESCRIPTION OF INNOVATION/ADVANCEMENT
----- ------------ -------------------------------------
<C> <C> <S>
TP-200 1985 Introduced first nondestructive process control metrology
system to measure ion implantation.
TP-300 1987 Added cassette-to-cassette wafer handling and automation
software to the capability of the TP-200.
TP-400 1992 Significantly improved repeatability and added second
cassette station for tool calibration.
TP-500 1996 Built on the same platform as the OP-2600, added pattern
recognition and improved reliability and throughput.
TP-630* 1998 Expands wafer measurement capability to 300 millimeters.
</TABLE>
- --------
* Currently under development.
Opti-Probe System
The Opti-Probe system was developed by the Company to address the
limitations of conventional thin film metrology systems. The Opti-Probe
system, introduced in 1992, combines the thin film metrology capabilities of
spectrometers and ellipsometers into a single integrated system and utilizes
two new proprietary measurement technologies to enhance their capabilities. By
the end of June 1997, more than 460 Opti-Probe systems have been installed in
major semi-conductor fabs worldwide. By the end of 1996, the Company believes
that the Opti-Probe system had captured over 30% of the thin film measurement
market, an increase of approximately 5 percentage points over the previous
year. The Company estimates that sales of thin film measurement systems for
the semiconductor industry were approximately
49
<PAGE>
$234 million in 1996. From Fiscal 1992 through Fiscal 1997, net revenues from
the sale of Opti-Probe systems have grown at a CAGR of 141.7%. The selling
price for a current model of the Opti-Probe system ranges from $400,000 to
$600,000.
The Company believes that its Opti-Probe system offers particular
technological advantages and features that distinguish it from traditional
thin film metrology systems:
Proprietary Technology. Conventional spectrometers and ellipsometers are
unable to meet the current and future requirements of the semiconductor
fabs. These requirements include the ability to measure in very small areas
on product wafers, high precision and repeatability for very thin as well
as thick films, and the ability to simultaneously measure thickness and
optical parameters on one or more films. To help provide these
capabilities, the Company has developed and patented two new proprietary
optical measurement technologies and combined them with conventional
measurement technologies in one measurement system. Because of the wealth
of data that can be obtained from these combined optical technologies, it
is possible to perform measurements on the thickness and optical parameters
of one or more films simultaneously. In addition, since the Company's
proprietary technologies employ a highly focused laser beam, it is possible
to perform measurements with a spot size that is the smallest in the
industry. Although the Company's competitors have now introduced systems
that combine elements of spectrometry and ellipsometry in one system, the
Company believes that its particular combination of technologies results in
a superior product.
Ease of Use and Reliability. The Company believes that the Opti-Probe
system is regarded as easy-to-use and highly reliable as compared to the
thin film measurement systems of its competitors. This system is configured
specifically for use by semiconductor device manufacturers and features
automated wafer handling, advanced image processing, automated data
collection and statistical data processing and data management.
Proprietary Software. The Company believes that not only is its hardware
in the Opti-Probe system superior to the competition, but so also is its
software. During the fabrication of semiconductors, many different films
and film stacks, consisting of several layers of different films, are
deposited and selectively removed from the silicon wafer. This in turn
means that hundreds of film measurement data analysis algorithms
("recipes") must be developed and stored in the computer of a thin film
metrology system. Thus the full benefit of a thin film metrology system to
the customer is a result of a combination of superior measurement
capability and superior recipe development. The Company has a staff of over
fifty experienced applications scientists and engineers stationed worldwide
near all major customers who provide full applications support to develop
new recipes as the device manufacturing processes change.
Continuous Improvement. While the Company has achieved rapid market share
growth in the thin film metrology market with its current Opti-Probe
systems, it continues to develop, manufacture and market new and improved
models. For example, the Company has recently introduced the OP-2600 DUV
model which extends the spectrometer range of the Opti-Probe further into
the ultra-violet region of the optical spectrum. The Company believes that
it now provides the semiconductor industry with a thin film metrology tool
that operates further into the ultra-violet spectrum than the competition.
This is of paramount importance since device manufacturers are now
developing patterning technology utilizing optical radiation in this ultra-
violet region. In addition, the Company has recently introduced the 3000
series Opti-Probe systems that provide the same superior measurement
capability of the 2000 series but with increased speed, thus enhancing the
systems' productivity.
50
<PAGE>
OP-5240 Product Development
The Company is currently in the process of developing the OP-5240 model,
which will integrate two additional measurement technologies into the Opti-
Probe system. As a result, the Opti-Probe 5240 will have up to five independent
but fully integrated measurement technologies. The Company believes that
current competitive products include no more than two independent measurement
technologies. The two additional technologies that will be integrated into the
OP-5240 are spectroscopic ellipsometry and absolute laser ellipsometry, each of
which will expand the Opti-Probe's measurement capabilities and improve
measurement integrity.
Spectroscopic ellipsometry has long been recognized as a powerful thin film
characterization technology. However, it has generally not been successfully
transferred to fab production because it suffers from slow measurement time and
poor measurement integrity. The poor measurement integrity arises from high
sensitivity to small process changes because of the difficulties of measuring
thickness and material parameters simultaneously with only wavelength dependent
technologies. The Opti-Probe 5240 has been designed to overcome these
limitations by integrating spectroscopic ellipsometry with up to four other
independent measurement technologies to accelerate the ability to determine the
correct thin film solution. Furthermore, by integrating spectroscopic
ellipsometry, a wavelength dependent measurement, with the Company's
proprietary beam profile reflectometry, an angle dependent measurement, the
Company expects that the Opti-Probe 5240 will overcome the excessive
sensitivity to small process changes.
The addition of absolute laser ellipsometry to the Opti-Probe enables stable,
reference-free absolute measurements on ultra-thin films with high precision
and repeatability. The Company believes that integrating absolute laser
ellipsometry with the Company's proprietary beam profile ellipsometry will
provide fast, precise and small spot size film measurements. The Company
believes that the successful introduction of the OP-5240 will further
strengthen the Company's technological capabilities in the thin film
measurement market. The Company expects that beta-testing on the OP-5240 will
begin in 1998. The Company has expended and expects to continue to expend
substantial research, development and engineering resources to develop the OP-
5240. There can be no assurance that the Company will not experience
difficulties or delays in developing the OP-5240, that such efforts will be
successful or that the OP-5240 will satisfy customer requirements or achieve
market acceptance.
The following table summarizes the Company's improvements to the Opti-Probe
system and current product development activities:
<TABLE>
<CAPTION>
YEAR
INTRODUCED/
EXPECTED
MODEL INTRODUCTION DESCRIPTION OF INNOVATION/ADVANCEMENT
----------- ------------ -------------------------------------
<C> <C> <S>
OP-1000 1992 Introduced a new patented optical technology known as
beam profile reflectometry ("BPR") to measure thin
film deposition and removal.
OP-2000 1993 Integrated BPR with a new patented optical technology
known as beam profile ellipsometry ("BPE") to enhance
measurement capabilities.
OP-2600 1994 Integrated BPR, BPE and Spectrometry to further
enhance measurement capabilities.
OP-2600 DUV 1996 Integrated deep ultra-violet reflectance ("DUV
Reflectance") with the existing system to expand
measurement range.
OP-3260 1996 Increased throughput of Opti-Probe system.
OP-3620 DUV 1996 Increased throughput of Opti-Probe with DUV
Reflectance.
OP-5240* 1998 Integrates BPR, BPE and DUV Reflectance with
Spectroscopic Ellipsometry and Absolute Laser
Ellipsometry.
OP-5340* 1998 Expands wafer measurement capability to 300
millimeters.
</TABLE>
- --------
* Currently under development.
51
<PAGE>
Meta-Probe Product Development
An important new product being developed by the Company is the Meta-Probe
system. The Meta-Probe is a thin film metrology system specifically designed to
measure the thickness and material properties of opaque and metallic thin
films. These materials are increasingly being used by semiconductor
manufacturers as the industry moves to 0.25 micron and 0.18 micron technologies
with an increase in the number and complexity of the metal layers. The Company
believes that existing metal film metrology systems are unable to perform the
required measurements with the required precision and repeatability. In
addition, most current existing metal film metrology systems cannot perform
tests on product wafers and thus the Company believes these systems will not be
economically viable for the next generation 300 millimeter wafer size. The
Meta-Probe utilizes an enhanced proprietary thermal wave technology, known as
multi-dimensional scanning, to enable it to measure metal film thickness and
material parameters on product wafers simultaneously, thereby ensuring high
measurement integrity. The Company expects to begin beta-testing for the Meta-
Probe before the end of 1998. The Company has expended and expects to continue
to expend substantial research, development and engineering resources to
develop the Meta-Probe. There can be no assurance that the Company will not
experience difficulties or delays in developing the Meta-Probe, that such
efforts will be successful or that the Meta-Probe will satisfy customer
requirements or achieve market acceptance.
CUSTOMERS
Therma-Wave sells its products to leading semiconductor manufacturers
throughout the world. Certain of the Company's top customers in Fiscal 1997 are
listed below:
Advanced Micro Devices, Inc. LG Semicon Samsung
Hyundai Corporation Lucent Technologies Siemens Microelectronics
Intel NEC Semiconductor Taiwan Semiconductor
Manufacturing Company
Sales to Samsung and Intel represented approximately 10% and 13%,
respectively, of the Company's net revenues for Fiscal 1997 and approximately
15% and 17%, respectively, for Fiscal 1996. Sales to Intel, Taiwan
Semiconductor Manufacturing Company and Hyundai Corporation represented
approximately 22%, 13% and 13%, respectively, of the Company's net revenues for
the first quarter of Fiscal 1998. The Company's top twenty customers accounted
for substantially all of the Company's net revenues for the first quarter of
Fiscal 1998 and approximately 78% of its net revenues in Fiscal 1997 and 81% in
Fiscal 1996.
The Company provides its customers with comprehensive support and service
before, during and after delivery of its systems. Prior to shipment, Therma-
Wave's support personnel typically assist the customer in site preparation and
inspection and typically provide customers with training at the Company's
facilities or at the customer's location. The Company's customer training
programs include instructions in the maintenance of the Company's systems and
in system hardware and software tools for optimizing the performance of the
Company's systems. The Company's field support personnel work with the
customers' employees to install the system and demonstrate system readiness. In
addition, the Company maintains a group of highly skilled applications
scientists to respond to customer process needs worldwide when a higher level
of technical expertise is required.
The Company generally warrants its products for a period of up to 12 months
from system acceptance for materials and labor to repair the product and to
provide training and applications support. Installation and initial training
are customarily included in the price of the system. After the warranty period,
customers may enter into support agreements covering both field service and
field applications support. The Company's field service engineers may also
provide customers with call out repair and maintenance services on a fee basis.
The Company's applications engineers and scientists are also available to work
with the customers on recipe development. The Company also trains customer
employees, for a fee, to perform routine service and provides telephone
consultation services.
52
<PAGE>
SALES AND MARKETING
The Company utilizes a combination of 10 in-house sales staff and 12
manufacturers' sales representatives to sell its products to end users. The
Company sells products typically on 80% to 90% net 30-day terms with the
remainder due after customer acceptance. Some foreign customers are required to
deliver a letter of credit payable in U.S. dollars upon system shipment.
Therma-Wave maintains sales offices and regional sales representatives
throughout the world. In the United States, the Company maintains sales offices
in California, Oregon, Pennsylvania and Texas. The Company also utilizes
manufacturers' sales representatives to cover those regions of the United
States with too few customers to support a direct sales effort. In Asia, the
Company maintains sales and support offices in Japan, Korea and Taiwan. The
Japanese and Taiwanese offices work with manufacturers' sales representatives
to sell the Company's products to customers in Japan and Taiwan, while the
Korean office sells to customers directly. The Company also works with
manufacturers' sales representatives in Singapore, Malaysia, Thailand and
China. In Europe, the Company maintains a sales office in the United Kingdom
and works with manufacturers' sales representatives throughout the rest of
Europe.
In addition, the Company provides direct customer support in most parts of
the world. In some locations, field service is still provided by the same
manufacturers' sales representative that handles the sales function, but
applications support is provided by the Company's employees in the territory.
In the United States, field service and applications engineers are located in
customer support offices in Arizona, California, Colorado, Florida,
Massachusetts, New Mexico, Oregon, Pennsylvania and Texas. Certain dedicated
site-specific field service and applications engineers are contracted by
certain customers such as Intel. In Asia, the Company provides customer support
through its offices in Japan, Taiwan, Korea and Singapore. In Europe, the
Company maintains a customer support office in the United Kingdom to support
customers there and to assist the field service engineers of its European
manufacturers sale representatives in the rest of Europe. Applications
personnel to support continental Europe are stationed in France and Germany.
53
<PAGE>
The following table summarizes the Company's U.S. operations and those of its
wholly owned subsidiary in Japan (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 6, 1997
-------------------------------------------
UNITED ADJUSTMENTS/
STATES JAPAN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue....................... $103,578 $10,991 $(5,076) $109,493
Income from operations.............. $ 20,974 $ 1,632 $ 763 $ 23,369
Identifiable assets................. $ 67,764 $ 7,497 $(6,641) $ 68,620
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1996
-------------------------------------------
UNITED ADJUSTMENTS/
STATES JAPAN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue....................... $ 75,020 $11,303 $(7,030) $ 79,293
Income from operations.............. $ 11,200 $ 503 $ 1,875 $ 13,578
Identifiable assets................. $ 52,653 $ 9,229 $(8,826) $ 53,056
<CAPTION>
FISCAL YEAR ENDED APRIL 2,1995
-------------------------------------------
UNITED ADJUSTMENTS/
STATES JAPAN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue....................... $ 50,965 $ 8,010 $(3,300) $ 55,675
Income from operations.............. $ 9,488 $ (655) $ 665 $ 9,498
Identifiable assets................. $ 45,252 $ 9,006 $(9,177) $ 45,081
<CAPTION>
THREE-MONTH PERIOD ENDED JULY 6,1997
-------------------------------------------
UNITED ADJUSTMENTS/
STATES JAPAN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue....................... $ 27,665 $ 975 $ (435) $ 28,205
Income from operations.............. $ 2,494 $ 117 $ (71) $ 2,540
Identifiable assets................. $ 84,466 $ 3,926 $(6,052) $ 82,340
</TABLE>
Export sales, representing sales from the United States to customers in
foreign countries, primarily in Asia and Europe, were approximately $54.4
million, $34.5 million, $24.5 million and $11.5 million of total United States
revenue for Fiscal 1997, 1996, 1995 and the first quarter of Fiscal 1998,
respectively.
RESEARCH AND DEVELOPMENT AND ENGINEERING
The process control metrology market is characterized by continuous
technological development and product innovations. The Company believes that
continued and timely development of new products and enhancements to existing
products is necessary to maintain its competitive position. Accordingly, the
Company devotes a significant portion of its personnel and financial resources
to engineering, research and development programs. The Company's research,
development and engineering staff is comprised of 62 persons (as of July 6,
1997), of which 32 hold advanced degrees. The Company seeks to maintain its
close relationships with customers to make improvements in its products which
respond to customers' needs. For example, the Opti-Probe 2600 system was
developed in cooperation with one of the Company's major customers to address
the need for a more capable thin film measurement system.
The Company's ongoing engineering and research and development efforts can be
classified into three categories: new products; feature enhancements (such as
features to improve precision, speed and automation); and customer-driven
product enhancements (such as new measurement recipes or algorithms). The
Company has research and engineering staffs which work both in developing new
products and features and in responding to the particular needs of customers.
54
<PAGE>
Engineering and research and development expenses were $13.1 million in
Fiscal 1997, $10.1 million in Fiscal 1996, and $5.9 million in Fiscal 1995, or
12%, 13% and 11% of net revenues for those periods, respectively. The Company
expects that engineering and research and development expenditures will
continue to represent a substantial percentage of net revenues for the
foreseeable future.
MANUFACTURING
The Company's manufacturing strategy is to produce high-quality, cost
effective systems and assemblies. The Company currently performs the majority
of its system assembly activities in-house. In order to lower production costs
in the future, the Company intends to perform only those manufacturing
activities that add significant value or that require unique technology or
specialized knowledge. In the future, the Company expects to rely increasingly
on subcontractors and turnkey suppliers to fabricate components, build
assemblies and perform other activities that can be undertaken more cost
effectively than by the Company. The Company currently does not have any plans
to reduce its production levels during the remainder of Fiscal 1998.
The Company's principal manufacturing activities include assembly and test
work, all of which are conducted at the Company's facility in Fremont,
California. Assembly includes inspection, subassembly and final assembly. Test
includes modular testing, system integration and final test. Components and
subassemblies, such as lasers, robots and stages, are acquired from third party
vendors and integrated into the Company's finished systems. While the Company
uses standard components and subassemblies wherever possible, most mechanical
parts, metal fabrications and critical components are engineered and
manufactured to Company specifications. Certain of the components and
subassemblies are obtained from a limited group of suppliers, and occasionally
from a single source supplier. The Company has not entered into any formal
agreements with such limited source suppliers, other than long-term purchase
orders and, in some cases, volume pricing agreements. Those specific parts
coming from a limited group of suppliers are monitored by management to ensure
that adequate supplies are available to maintain manufacturing schedules and to
reduce the Company's dependence on these suppliers, should supply lines for any
of these parts be interrupted. The partial or complete loss of such suppliers
could increase the Company's manufacturing costs or delay product shipments
while the Company qualifies new suppliers and could also require the Company to
redesign products, thereby having a material adverse effect on the Company's
results of operations and customer relationships. Further, a significant
increase in the price of one or more of the components supplied by such
suppliers could adversely affect the Company's financial position and results
of operations.
The Company schedules production based upon firm customer commitments and
anticipated orders during the planning cycle. The Company has structured its
production process and facility to be driven by both orders and forecasts and
has adopted a modular system architecture to increase assembly efficiency and
test flexibility. The Company's cycle times for its products are currently
three to four months. The Company believes that these cycle times will improve
as the Company continues to place increased emphasis on manufacturing
capability in its new product design.
The Company conducts the assembly of certain optical components and final
testing of its systems in clean-room environments where personnel are properly
clothed. This procedure is intended to reduce the amount of particulates and
other contaminants in the final assembled system and to test the Company's
products against customers' acceptance criteria prior to shipment. Following
the final test, the completed system is packaged within triple vacuum sealed
bags to maintain a high level of cleanliness during shipment and installation.
As part of the ongoing quality program, all machines are monitored by Therma-
Wave during the installation process.
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COMPETITION
The market for semiconductor capital equipment is highly competitive. The
Company faces substantial competition from established companies in each of the
markets that it serves, some of which have greater financial, engineering,
manufacturing and marketing resources than the Company. Significant competitive
factors in the market for metrology systems include system performance, ease of
use, reliability, return on investment to the customer, and technical service
and support. The Company believes it competes favorably on the basis of these
factors in each of the Company's served markets. The Company competes with both
larger and smaller United States and Japanese companies in the markets it
serves. European companies are generally not significant competitors in the
Company's served markets.
The Company's Therma-Probe system competes primarily with other metrology
systems designed to measure ion implant dosage, particularly destructive four-
point probe measurement systems including those manufactured by KLA-Tencor
Instruments, Kokusai Electric Ltd. and Bio-Rad Semiconductor Systems. The
Therma-Probe system is the semiconductor industry's predominant noncontact,
nondestructive ion implant monitor for product wafers. Jenoptik has recently
begun to manufacture and market its TWIN and TWIN SC systems, each of which
nondestructively measures ion implant doses on product wafers using thermal
wave technology. The Company has filed patent infringement suits against
Jenoptik in both the U.S. and Germany alleging that manufacture by Jenoptik of
these products infringes on several of the Company's patents. See " Legal
Proceedings." To date, the introduction of these products by Jenoptik has not
had a material impact on the Company's market position. The Company's Opti-
Probe system primarily competes with thin film metrology systems manufactured
by the Prometrix division of KLA-Tencor Instruments, Rudolph Technologies,
Nanometrics and Dai Nippon Screen.
KLA Corporation recently acquired a competitor of the Company, Tencor
Corporation, to form KLA-Tencor Corporation. The Company expects that similar
acquisitions and business combinations by competitors and potential competitors
of the Company may continue in the future. Acquisitions by the Company's
competitors and potential competitors could allow them to expand their product
offerings, which could afford such competitors and potential competitors an
advantage in meeting customers' demands. The greater resources, including
financial and marketing and support resources, of competitors engaged in these
acquisitions could permit them to accelerate the development and
commercialization of new competitive products and the marketing of existing
competitive products to their larger installed bases. Accordingly, such
business combinations and acquisitions by competitors and potential competitors
could have an adverse impact on both the Company's market share and the pricing
of its products, which could have a material adverse effect on the Company's
business and results of operations.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that the success of its business depends as much on the
technical competence, creativity and marketing abilities of its employees, as
on the protection derived from its patents and other proprietary rights.
Nevertheless, the Company's success will depend, at least in part, on its
ability to obtain and maintain patents and proprietary rights to protect its
technology.
The Company has a policy of seeking patents where appropriate on inventions
concerning new products and improvements as part of its ongoing engineering,
research and development activities. The Company has acquired a number of
patents relating to its two key products, the Opti-Probe and Therma-Probe
systems. The Company owns 24 U.S. patents with expiration dates ranging from
1999 to 2013 and has filed applications for two additional U.S. patents. In
addition, the Company owns 45 foreign patents with expiration dates ranging
from 1999 to 2013 and has filed applications for nine additional foreign
patents.
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<PAGE>
There can be no assurance that any of the Company's pending patent
applications will be approved, that the Company will develop additional
proprietary technology that is patentable, that any patents owned by or issued
to the Company will provide the Company with competitive advantages or that
these patents will not be challenged by any third parties. Furthermore, there
can be no assurance that third parties will not design around the Company's
patents. Any of the foregoing results could have a material adverse effect on
the Company's business or financial condition.
In addition to patent protection, the Company relies upon trade secret
protection for its confidential and proprietary information and technology. The
Company routinely enters into confidentiality agreements with its employees.
However, there can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach or that the
Company's confidential and proprietary information and technology will not be
independently developed by or become otherwise known by third parties.
The Company also owns seven U.S. trademark registrations and has filed
applications for five trademark applications in the U.S. and for two in Japan
as well as an intent to use trademark application for the U.S.
FACILITIES
The Company's executive offices and manufacturing, engineering, research and
development operations are located in a 102,000 square foot building in
Fremont, California with approximately 800 square feet of Class 100 "clean
rooms" for customer demonstrations and approximately 10,000 square feet of
Class 1000 "clean rooms" for manufacturing. This facility is occupied under a
lease expiring in 2006 at an aggregate annual rental expense of approximately
$1.0 million. The Company has the option of extending this lease for another 15
years after 2006. In addition, the Company has a three-year option on a six-
acre lot adjacent to its current facility. The Company owns substantially all
of the equipment used in its facilities. The Company believes that its existing
facilities and capital equipment are adequate to meet its current requirements
and that suitable additional or substitute space is readily available as
needed.
The Company also leases sales and customer support offices in Arizona,
California, Florida, Massachusetts, Texas, Japan, Korea, Taiwan and the United
Kingdom.
EMPLOYEES
As of July 6, 1997, the Company employed 378 persons, including 62 in
engineering, research and development, 95 in manufacturing, 161 in customer
support, 23 in sales and marketing and 37 in executive and administrative
functions. Many of the Company's employees are highly-trained, holding advanced
post-graduate degrees in science and engineering. None of the Company's
employees are represented by a labor union or covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
The Company has low employee turnover and has been able to attract and retain a
highly talented group of managers, designers and engineers which has enabled it
to continually improve its products and customer service and support.
LEGAL PROCEEDINGS
On July 19, 1994, the Company filed a patent infringement suit against
Jenoptik, a German company, in the U.S. District court for the Northern
District of California. The Company alleges that the manufacture and sale by
Jenoptik of Jenoptik's TWIN and TWIN SC systems infringe several of the
Company's U.S. patents that are related to the Company's Therma-Probe ion
implant metrology system. Jenoptik denies infringement and claims that the
Company's patents are invalid and unenforceable. The trial is scheduled to
begin in the middle of October 1997. Although the Company believes that it is
likely to succeed in this lawsuit it is impossible to predict its outcome.
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<PAGE>
On February 1, 1996, the Company filed another patent infringement suit
against Jenoptik in the Patent Court in Dusseldorf, Germany. The Company
alleges that the manufacture and sale by Jenoptik of Jenoptik's TWIN and TWIN
SC systems infringes the Company's German counterpart to one of the Company's
U.S. patents being asserted against Jenoptik in the U.S. lawsuit. A technical
expert appointed by the Patent Court recently opined that Jenoptik is not
infringing the Company's German patent. In addition, based upon a nullity
action filed by Jenoptik, the Nullity Board of the Patent Court recently ruled
that the Company's German patent is invalid. The Company plans to challenge
both determinations. On average, the Company sells one Therma-Probe system per
year to customers located in Germany.
The technical expert's opinion that Jenoptik is not infringing the Company's
German patent was based upon a claim limitation in the German patent that is
not present in its U.S. counterpart. In order to infringe a patent claim, each
of the limitations in the claim must be met. Because the Company's German
patent contains a limitation that is not present in its U.S. counterpart, the
U.S. patent could be infringed without the German patent also being infringed.
Thus, the technical expert's opinion will not affect the U.S. District Court's
determination of whether Jenoptik is infringing the Company's U.S. counterpart
patent. Moreover, the U.S. lawsuit involves U.S. patents other than the U.S.
counterpart patent.
A material adverse effect on the Company's business or the Company's
financial condition could occur if one or more of the Company's U.S. patents
and the Company's German patent are found to be invalid or unenforceable and
such a finding is upheld on appeal because such a finding might affect the
Company's ability to exclude competitors, including Jenoptik, from making or
selling competing products in these jurisdictions.
In letters to the Company dated July 14, 1995 and October 31, 1996,
Nanometrics, Inc. ("Nanometrics"), one of the Company's competitors, inquired
as to whether the Company was interested in licensing the use of Nanometrics'
U.S. Patent No. Re 34,783. This patent covers a method for measuring the
reflectance of a specimen by comparing the measured intensity of reflected
ultraviolet ("UV") radiation from an unknown sample with that of a known
sample. After analyzing Nanometrics' patent, the Company has concluded that it
does not infringe Nanometrics' patent and that the Nanometrics' patent is
invalid. For these reasons, the Company believes that a license is not
necessary. Nanometrics has neither accused the Company of patent infringement
nor threatened a lawsuit against the Company.
If the Company is found to infringe Nanometrics' patent, the Company believes
that the patent could only cover those Opti-Probe devices to which the Company
has recently added UV capability. Through September 1997, the Company has sold
approximately 55 units of UV-equipped Opti-Probe system and did not sell any
such systems prior to 1996. However, because of Nanometrics' willingness to
license its patent and the relatively small number of Opti-Probe systems
affected, the Company does not believe that any conflict with Nanometrics
regarding its patent is likely to have a material adverse effect on the
Company's business or the Company's financial condition.
The Company is also involved in various legal proceedings from time to time
arising in the ordinary course of business, none of which are expected to have
a material adverse effect on the Company's business or financial condition.
ENVIRONMENTAL MATTERS
The Company, like all manufacturing companies, is subject to various federal,
state and local environmental statutory requirements. The Company believes that
it is in material compliance with existing applicable environmental laws and
regulation and has all necessary permits and licenses.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Executive officers, Directors and certain key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Allan Rosencwaig........ 56 Chairman of the Board, President, and Chief Executive Officer
Anthony W. Lin.......... 46 Executive Vice President, Chief Financial Officer and Director
Charlotte Holland....... 38 Vice President, Finance and Administration
David Mak............... 39 Vice President, Manufacturing
Jon L. Opsal............ 56 Vice President, Research and Development
James E. Rhoades........ 53 Vice President, Sales
W. Lee Smith............ 48 Vice President, Strategic Marketing
Donald J. Strand........ 46 Vice President, Customer Service
David Willenborg........ 47 Vice President, Marketing
G. Leonard Baker, Jr.... 54 Director
David Dominik........... 40 Director
Adam W. Kirsch.......... 36 Director
</TABLE>
The Company anticipates that two additional directors not otherwise
affiliated with the Company or any of its significant stockholders will be
appointed to the Board of Directors following the completion of the Offering.
ALLAN ROSENCWAIG co-founded the Company in January 1982 and has served as its
Chairman and Chief Executive Officer since that time. Prior to founding the
Company, Dr. Rosencwaig was a Group Leader at the Lawrence Livermore National
Laboratory from 1977 to 1982 and a Member of Technical Staff at AT&T Bell
Laboratories from 1969 to 1977. Dr. Rosencwaig holds Bachelor of Science,
Master of Science and Ph.D. degrees in Physics from the University of Toronto.
ANTHONY W. LIN joined the Company in June 1985 and has held a variety of
administrative positions since that time, including Corporate Controller,
Director of Finance, Vice President, Finance and Administration and Vice
President, Customer Support. Mr. Lin has served as a Director of the Company
since the Recapitalization. Prior to joining the Company, Mr. Lin was Corporate
Controller for MAD Intelligence Systems from 1984 to 1985, Accounting Manager
at Altos Computer Systems from 1982 to 1984, Staff Accountant at Deloitte,
Haskins & Sells from 1979 to 1982 and Senior Financial Analyst at Digital
Equipment Corporation from 1976 to 1979. Mr. Lin holds a Bachelor of Science
degree in Chemistry from National Taiwan University and a Master of Business
Administration degree from Harvard University and is licensed by the State of
California as a Certified Public Accountant.
CHARLOTTE HOLLAND joined the Company in August 1990 and, since that time, has
served as Director of Finance and Corporate Controller. Prior to joining the
Company, Ms. Holland served as Field Service Controller, Assistant Corporate
Controller and Financial Reporting Manager for Network Equipment Technologies,
Inc., General Accounting Manager and Financial Reporting Manager for Convergent
Technologies, Inc., Senior Accountant for Atari, Inc. and Senior Accountant for
Peat, Marwick, Mitchell & Co. Ms. Holland holds a Bachelor of Science degree in
Business Administration from San Jose State University and is licensed by the
State of California as a Certified Public Accountant.
DAVID MAK joined the Company in October 1992 and, since that time, has served
as the Manufacturing Manager and Director of Manufacturing. Prior to joining
the Company, Mr. Mak served in a variety of positions at Tencor Instruments,
including Manufacturing Engineering Manager, Mechanical Design Engineering
Manager, and Project Manager. Mr. Mak also served as Senior Mechanical Engineer
for Priam Corp., Advisory Engineer for Optimem, and Product Engineer for
Memorex Corp. Mr. Mak holds a Bachelor of Science degree in Mechanical
Engineering from the Polytechnic Institute of New York.
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<PAGE>
JON L. OPSAL joined the Company in September 1982 and has served in several
research and management positions since that time, including Senior Scientist,
Manager of Analytical Software, Manager of the Physics Department, Manager of
Research and Development and Director of Research and Development. Prior to
joining the Company, Dr. Opsal was an engineer at the Lawrence Livermore
National Laboratory from 1978 to 1982 and a Research Associate and Assistant
Professor at Michigan State University from 1974 to 1978. Dr. Opsal holds a
Bachelor of Arts degree in Physics and Mathematics from Eastern Washington
University and Master of Science and Ph.D. degrees in Physics from Michigan
State University.
JAMES E. RHOADES joined the Company in 1992 and, prior to holding his current
position as Vice President, Sales, served as the International Sales Manager
and Director of International Sales. Prior to joining the Company, Mr. Rhoades
served as the Director of International Sales for Silicon Valley Group, a
manufacturer of automated wafer processing equipment, since 1990. Mr. Rhoades
holds a Bachelor of Science degree in Business Administration from San Jose
State University and a Master of Arts degree in International Commerce and
Finance from the American Institute of Foreign Trade.
W. LEE SMITH joined the Company in March 1983 and, since that time, has
served as its Research Group Leader, Applications Manager, Director of
Applications, Vice President, Product Development and Vice President,
Marketing. From 1976 to 1983, Dr. Smith was a Physicist and Nonlinear Optics
Group Leader at the Lawrence Livermore National Laboratory. Dr. Smith holds a
Bachelor of Science degree in Physics from North Carolina State University and
a Ph.D. in Physics from Harvard University.
DONALD J. STRAND joined the Company in July 1996. Prior to joining the
Company, Mr. Strand served as the Director of Customer Service for Watkins-
Johnson Company, Director of Western Regional Sales for Ulvac Technology,
Manager of Field Operations for the Ion Implant Division of Applied Materials,
Product Marketing Manager for Varian Associates and Director of Customer
Service for the Ion Implant Division of Eaton Corporation. Mr. Strand served in
the United States Air Force and holds an Associate of Science degree in
Electrical Engineering from Brown Institute.
DAVID WILLENBORG co-founded the Company with Dr. Rosencwaig in January 1982
and, since that time, has served as Director of Engineering, Vice President,
Engineering and Vice President, Technology. Prior to founding the Company, Mr.
Willenborg was an engineer at the Lawrence Livermore National Laboratory from
1975 to 1982 and at McDonnell-Douglas Aerospace from 1972 to 1973. Mr.
Willenborg holds Bachelor of Science and Master of Science degrees in
Electrical Engineering from the University of Illinois.
G. LEONARD BAKER, JR. has served as a Director of the Company since the
Recapitalization. Mr. Baker has been a General Partner of Sutter Hill Ventures
since 1974. Mr. Baker joined Sutter Hill Ventures in 1973, and, prior to that
time, was Manager of Product Planning for Europe, Africa and India at Cummins
Engine Company, where he also held various manufacturing positions. He serves
on the board of several companies primarily in the high-technology area.
DAVID DOMINIK has served as a Director of the Company since the
Recapitalization. Mr. Dominik has been a General Partner of Information
Partners, L.P. since January 1990 and Managing Director of Information
Partners, Inc. since June 1993. In addition, Mr. Dominik has been a Managing
Director of Bain Capital since May 1993. Mr. Dominik also serves as a director
of Oasis Healthcare Inc. and several privately held companies.
ADAM W. KIRSCH has served as a Director of the Company since the
Recapitalization. Mr. Kirsch has been a Managing Director of Bain Capital since
May 1993 and a general partner of Bain Venture Capital since 1990. Mr. Kirsch
joined Bain Venture Capital in 1985 as an associate, and, prior to joining Bain
Venture Capital, Mr. Kirsch was a consultant at Bain & Company where he worked
in mergers and acquisitions. He serves on the board of several companies
including Brookstone, Inc., Dade International Inc. and Wesley Jessen
VisionCare, Inc.
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<PAGE>
At present, all Directors are elected and serve until a successor is duly
elected and qualified or until his or her earlier death, resignation or
removal. All members of the Board of Directors set forth herein were elected
pursuant to a stockholders agreement that was entered into in connection with
the Recapitalization. See "Certain Relationships and Related Transactions."
There are no family relationships between any of the Directors or executive
officers of the Company. Executive officers of the Company are elected by and
serve at the discretion of the Board of Directors.
Prior to the completion of the Offering, the Board will be divided into three
classes, as nearly equal in number as possible, with each Director serving a
three-year term and one class being elected at each year's annual meeting of
stockholders. The two additional directors anticipated to be appointed by the
Board will be in the class of directors whose term expires at the 1998 annual
meeting of the Company's stockholders. Messrs. Lin and Dominik will be in the
class of directors whose term expires at the 1999 annual meeting of the
Company's stockholders. Messrs. Rosencwaig, Kirsch and Baker will be in the
class of directors whose term expires at the 2000 annual meeting of the
Company's stockholders. At each annual meeting of the Company's stockholders,
successors to the class of directors whose term expires at such meeting will be
elected to serve for three-year terms and until their respective successors are
elected and qualified.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation for
Fiscal 1997 for the Chief Executive Officer and the four other most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers"). The Company did not grant any stock options in Fiscal
1997 and did not have any options outstanding at the end of Fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- ----------------
OTHER ANNUAL ALL OTHER
NAME AND POSITION SALARY ($) BONUS ($) COMPENSATION ($)(1) COMPENSATION ($)
- ----------------- ---------- --------- ------------------- ----------------
<S> <C> <C> <C> <C>
Allan Rosencwaig ....... $332,846 $243,989(2) -- $4,446(3)
Chairman, President and
Chief Executive
Officer
Anthony W. Lin ......... 211,460 84,760(2) -- --
Executive Vice
President and Chief
Financial Officer
Jon L. Opsal ........... 168,184 56,637(2) -- --
Vice President,
Research and
Development
W. Lee Smith ........... 135,442 94,399(4) -- --
Vice President,
Strategic Marketing
David Willenborg ....... 154,479 50,778(2) -- --
Vice President,
Marketing
</TABLE>
- --------
(1) None of the perquisites and other benefits paid to each Named Executive
Officer exceeded the lesser of $50,000 or 10% of the total annual salary
and bonus received by each Named Executive Officer.
(2) Reflects bonuses paid to Messrs. Rosencwaig, Lin, Opsal and Willenborg in
Fiscal 1998 as a result of the Company achieving certain performance
targets in Fiscal 1997.
(3) Reflects insurance premiums paid by the Company on behalf of Dr.
Rosencwaig.
(4) Reflects sales commissions earned by Mr. Smith during Fiscal 1997.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company currently does not have a compensation committee. The
compensation arrangements for each of its executive officers following the
Recapitalization was established pursuant to the terms of the respective
employment agreements between the Company and each executive officer. The terms
of the employment agreements were established pursuant to arms-length
negotiations between representatives of Bain Capital and each executive
officer. On a going forward basis, any changes in the compensation arrangements
of the executive officers of the Company will be determined by the Board of
Directors, which is controlled by the Bain Capital Funds.
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to the Offering, the Board of Directors of the Company (the "Board of
Directors" or the "Board") had no formal committees. Immediately prior to the
completion of the Offering, the Board of Directors will establish two
committees: (i) an Audit Committee and (ii) a Compensation Committee.
The Audit Committee will make recommendations to the Board of Directors
regarding the independent auditors to be nominated for election by the
stockholders and will review the independence of such auditors, approve the
scope of the annual audit activities of the independent auditors, approve the
audit fee payable to the independent auditors and review such audit results.
The Audit Committee is expected to be comprised of a majority of Directors not
otherwise affiliated with the Company or its stockholders. Ernst & Young LLP
presently serves as the independent auditors of the Company.
The duties of the Compensation Committee will be to provide a general new
review of the Company's compensation and benefit plans to ensure that they meet
corporate objectives. In addition, the Compensation Committee will review the
Chief Executive Officer's recommendations on (i) compensation of all officers
of the Company and (ii) adopting and changing major Company compensation
policies and practices, and report its recommendations to the whole Board of
Directors for approval and authorization. The Compensation Committee will
administer the Company's Stock Plans and is expected to be comprised of at
least two non-employee Directors (as defined in Rule 16b-3 under the Exchange
Act). The Board may also establish other committees to assist in the discharge
of its responsibilities.
EMPLOYMENT AGREEMENTS
In connection with the Recapitalization, the Company entered into an
employment agreement with Allan Rosencwaig (the "Employment Agreement"). The
Employment Agreement provides that Dr. Rosencwaig will serve as the Chairman of
the Board, President and Chief Executive Officer for a period that will end on
the fifth anniversary of the consummation of the Recapitalization (the
"Employment Period"); provided that the Employment Period will automatically
terminate upon Dr. Rosencwaig's resignation, death or disability or termination
for Good Reason (as defined therein), or upon termination by the Company, with
or without Cause (as defined therein). Under the Employment Agreement, Dr.
Rosencwaig will receive: (i) an annual base salary of at least $400,000
(subject to annual review by the Board and certain annual increases beginning
in 1998); (ii) an annual bonus based upon the achievement by the Company of
certain operating targets and the attainment of certain individual goals by Dr.
Rosencwaig, each to be determined by the Board on an annual basis; and (iii)
certain fringe benefits. In addition, Dr. Rosencwaig is also entitled to
receive a deferred payment in the event the Company achieves certain operating
results. See "-- Stock Plans." If the Employment Period is terminated by the
Company without Cause, by Dr. Rosencwaig for Good Reason or as a result of his
disability, Dr. Rosencwaig will be entitled to receive his base salary, bonus
(equal to 50% of base salary) and fringe benefits for 30 months following such
termination. If the Employment Period is terminated by the Company for Cause or
if Dr. Rosencwaig resigns without Good Reason, Dr. Rosencwaig will be entitled
to receive his base salary through the date of termination. Under the
Employment Agreement,
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<PAGE>
Dr. Rosencwaig has agreed not to: (i) compete with the Company during the
period in which he is employed by the Company; (ii) disclose any confidential
information during the period in which he is employed by the Company and for
five years thereafter; (iii) solicit any customer, supplier, licensee,
licensor, franchisee or other business relation of the Company while he is
employed by the Company and for a period of 30 months thereafter; and (iv)
solicit or hire any management employee of the Company for a period of 30
months following the date of termination. In addition, Dr. Rosencwaig has
agreed to disclose to the Company any and all Inventions (as defined in such
employment agreement) relating to Company's business conceived or learned by
him during his employment with the Company and acknowledge that such Inventions
will be the property of the Company.
In connection with the Recapitalization, the Company also entered into
substantially similar employment agreements (the "Executive Employment
Agreements") with Messrs. Willenborg, Smith, Opsal and Lin (collectively, the
"Executives"). Each of the employment agreements provide that such Executive
will serve with the Company in his current position for a period that will end
on the fifth anniversary of the consummation of the Recapitalization (the
"Executive Employment Period"); provided that the Executive Employment Period
will automatically terminate upon such Executive's resignation, death or
disability or termination for Good Reason (as defined therein), or upon
termination by the Company, with or without Cause (as defined therein). Under
the Executive Employment Agreements, Messrs. Willenborg, Smith, Opsal and Lin
will receive (i) an annual base salary of $168,480; $143,859; $197,077; and
$243,023, respectively (subject to review by the Board and the President or
Chief Executive Officer); (ii) an annual bonus based upon the achievement by
the Company of certain operating targets and the attainment of certain
individual goals by such Executive, each to be determined by the Board and the
Company's President or Chief Executive Officer on an annual basis; and (iii)
certain fringe benefits. In addition, each Executive is also entitled to
receive a deferred payment in the event the Company achieves certain operating
results. See "-- Stock Plans." If the Executive Employment Period is terminated
by the Company without Cause, by such Executive for Good Reason or as a result
of his disability, each Executive will be entitled to receive his base salary,
bonus (equal to 30% to 36% of base salary) and fringe benefits for 15 months
following such termination. If the Executive Employment Period is terminated by
the Company for Cause or if such Executive resigns without Good Reason, such
Executive will be entitled to receive his base salary through the date of
termination. Under the Executive Employment Agreements, each Executive has
agreed not to: (i) compete with the Company during the period in which he is
employed by the Company; (ii) disclose any confidential information during the
period in which he is employed by the Company and for all times thereafter;
(iii) solicit any customer, supplier, licensee, licensor, franchisee or other
business relation of the Company while he is employed by the Company and for 39
months thereafter; and (iv) solicit or hire any management employee of the
Company for a period of five years following the date of termination. In
addition, each Executive has agreed to disclose to the Company any and all
Inventions (as defined in such employment agreement) relating to the Company's
business conceived or learned by him during his employment with the Company and
acknowledge that such Inventions will be the property of the Company.
COMPENSATION OF DIRECTORS
Following the Recapitalization, Directors serving on the Board of Directors
will not be entitled to receive any compensation for serving on the Board.
Directors are reimbursed for their out-of-pocket expenses incurred in
connection with such services.
STOCK PLANS
1997 Stock Purchase and Option Plan
In connection with the Recapitalization, the Board of Directors adopted the
Therma-Wave, Inc. 1997 Stock Purchase and Option Plan (the "1997 Stock Plan"),
which authorizes the granting of stock options and the sale of Class A Common
or Class B Common to current or future employees, directors, consultants
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<PAGE>
or advisors of the Company or its subsidiaries. Under the 1997 Stock Plan, the
Board is authorized to sell or otherwise issue any class or classes of Common
Stock at any time prior to the termination of the 1997 Stock Plan in such
quantity, at such price, on such terms and subject to such conditions as
established by the Board up to an aggregate of 3,000,000 shares of Class A
Common and 3,000,000 shares of Class B Common (including shares of Common Stock
with respect to which options may be granted), subject to adjustment upon the
occurrence of certain events to prevent any dilution or expansion of the rights
of participants that might otherwise result from the occurrence of such events.
Options to purchase an aggregate of 1,128,749 shares of Class B Common were
granted under the 1997 Stock Plan in connection with the Recapitalization. In
July 1997, the Company sold an aggregate of 215,001 shares of Class B Common,
which are subject to quarterly vesting over a five-year period, and granted
options to purchase an aggregate of 215,001 shares of Class B Common under the
1997 Stock Plan to certain members of management.
Each of the Management Investors entered into a Stock Agreement, which
provided for the sale of the Class L Common, Class A Common and Class B Common
and established the terms of the options granted pursuant to the 1997 Stock
Plan. Pursuant to the Stock Agreements, the Company: (i) sold shares of Class L
Common and Class A Common at the same price per share as paid by the Bain
Capital Funds (the "Rollover Stock"); (ii) sold shares of Class B Common at the
same price as paid by the Bain Capital Funds, which are subject to quarterly
vesting over a five year period (5% per quarter) (the "Time Vesting Stock");
and (iii) granted options to acquire shares of Class B Common, which were
divided into five equal branches with the exercise prices of $8.93, $10.68,
$12.43, $14.18 and $15.89 per share. The aggregate exercise price of the
options granted under the Stock Agreements was approximately $16.7 million. The
options granted under the Stock Agreements were immediately exercisable. The
shares of Class B Common issuable upon the exercise of such options will vest
(regardless of whether the option has been exercised) on the fifth anniversary
of their date of grant provided that the Management Investor has been
continuously employed by the Company during such period (the "Option Shares").
In addition, some or all of such shares of Class B Common are subject to
earlier vesting upon certain events, including all of such shares vesting
immediately on a sale of the Company.
Pursuant to the terms of the Stock Agreement, each Management Investor is
entitled to pay the exercise price for his options through the issuance of a
promissory note to the Company. The promissory note will be full recourse and
will be repayable upon the earliest of: (i) the consummation of a sale of the
Company; (ii) the later of (a) the fifth anniversary of its date and (b) the
date which is two weeks after the effectiveness of a registration statement
filed under the Securities Act as a result of the exercise of demand
registration rights granted to the Management Investors; (iii) the termination
of the Management Investor's employment with the Company; (iv) the tenth
anniversary of its date; and (v) the date such Management Investor violates the
non-competition provision of his employment. The promissory note will bear
interest at the lesser of: (i) the applicable federal rate at such time or (ii)
the highest rate permitted by applicable law, and will be payable at such time
as the principal under the note is due. The Management Investor is required to
prepay the promissory note upon the receipt of: (i) any cash dividends on the
Option Shares; (ii) any proceeds from the transfer of the Option Shares; and
(iii) any deferred payments under such Management Investor's employment
agreement. The indebtedness evidenced by the promissory note will be secured by
a pledge of all the shares of Common Stock purchased with the proceeds of the
loan. Under the terms of their respective employment agreements, each of the
Management Investors is entitled to receive a deferred payment in an amount
that is sufficient to repay the outstanding principal of such promissory note
if the Company achieves certain operating results.
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<PAGE>
The following table summarizes the shares of capital stock that were
purchased by the Named Executive Officers under the Stock Agreements:
<TABLE>
<CAPTION>
NO. OF SHARES PURCHASED
-----------------------
CLASS A CLASS B CLASS L AGGREGATE NO. OF
NAME COMMON COMMON COMMON PURCHASE PRICE (1) OPTIONS GRANTED
- ---- ------- ------- ------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Allan Rosencwaig.... 993,279 671,875 110,364 $2,497,608 671,875
Anthony W. Lin...... 40,588 127,656 4,510 125,611 127,656
Jon L. Opsal........ 23,427 127,656 2,603 85,183 127,656
W. Lee Smith........ 40,738 100,781 4,526 119,636 100,781
David Willenborg.... 128,299 100,781 14,255 325,890 100,781
</TABLE>
- --------
(1) Substantially all of the purchase price for such shares was funded by
cash payments received by each Named Executive Officer from Toray in
satisfaction of Toray's obligations under the Stock Repurchase Agreement
(as defined herein). See "Certain Relationships and Related
Transactions Stock Repurchase Agreement."
In addition, the Stock Agreements granted the Company and the Bain Capital
Funds (in the event that the Company does not elect to exercise such option)
the right upon certain conditions to repurchase the shares of Class L Common,
Class A Common and Class B Common (including shares received upon the exercise
of options) held by a Management Investor in the event that the Management
Investor ceases to be employed by the Company. The shares that are subject to
such repurchase option and the repurchase price (either fair market value or
original cost) are dependent upon the circumstances under which such
Management Investor's employment was terminated. In general, if the Management
Investor is terminated by the Company with "cause" or the Management Investor
resigns (other than for "good reason"): (i) the unvested Option Shares are
subject to repurchase at a price per share equal to their original cost; (ii)
the unvested Time Vesting Stock will be subject to repurchase at a price per
share equal to the lesser of fair market value or their original cost; (iii)
the vested Option Shares are subject to repurchase at a price per share equal
to fair market value; and (iv) the vested Time Vesting Stock and the Rollover
Stock will be subject to repurchase at a price per share equal to fair market
value, provided that if the Company completes a public offering prior to such
Management Investor's termination, the Rollover Stock, the vested Time Vesting
Stock and the vested Option Shares are not subject to repurchase. If the
Management Investor is terminated without "cause" or the Management Investor
resigns for "good reason": (i) the unvested Option Shares and the unvested
Time Vesting Shares will be subject to repurchase at a price per share equal
to their original cost; (ii) the vested Option Shares and the vested Time
Vesting Stock will be subject to repurchase at a price per share equal to the
greater of fair market value or their original cost; and (iii) the Rollover
Stock will not be subject to repurchase. The Stock Agreements also: (i)
restrict the transfer of the Management Investors' securities, subject to
certain exceptions; (ii) grant each Management Investor certain participation
rights in connection with certain transfers made by the Bain Capital Funds;
and (iii) require each Management Investor to consent to a sale of the Company
approved by holders representing a majority of the shares of Common Stock held
by the Bain Capital Funds.
1997 Equity Incentive Plan
The Board of Directors and the stockholders expect to adopt the Therma-Wave,
Inc. 1997 Equity Incentive Plan within the next two weeks. The New Incentive
Plan will authorize the granting of stock options to those current and future
employees or any of its subsidiaries (other than persons who received options
under the 1997 Stock Plan) as may be selected by the Board of Directors in its
sole discretion (or a committee of the Board if the Board has delegated
administration of the New Incentive Plan to such a committee). The New
Incentive Plan will authorize the granting of stock options up to an aggregate
of 638,460 shares of Common Stock, subject to certain adjustments reflecting
changes in the Company's capitalization. The price payable upon the exercise
of each option granted under the New Incentive Plan as well as the terms under
which the options may be exercised will be determined by the Board or
committee, as the case may be, in its sole discretion at the time of grant.
65
<PAGE>
Upon the adoption of the New Incentive Plan, the Board is expected to grant
options to purchase an aggregate of 383,076 shares of Common Stock. Such
options are expected to vest and become exercisable in four equal installments
beginning on the first anniversary of the Company's initial public offering and
continuing thereafter on an annual basis. Unvested options will terminate in
the event that the optionee ceases to be employed with the Company and vested
but unexercised options will terminate immediately if the optionee is
terminated for cause or after 30 days if the optionee ceases to be employed by
the Company for any other reason (180 days in the case of death or permanent
disability). All of such options expected to be granted under the New Incentive
Plan will have an exercise price equal to the fair market value of the Common
Stock on the date of grant.
EMPLOYEE STOCK PURCHASE PLAN
The Therma-Wave, Inc. Employee Stock Purchase Plan (the "Stock Purchase
Plan") will be adopted by the Board and stockholders prior to the consummation
of the Offering. The Stock Purchase Plan will be established to give employees
desiring to do so a convenient means of purchasing shares of Common Stock
through payroll deductions. The Stock Purchase Plan provides an incentive to
participate by permitting purchases at a discounted price. The Company believes
that ownership of stock by employees will foster greater employee interest in
the success, growth and development of the Company.
Subject to certain restrictions, each employee of the Company is eligible to
participate in the Stock Purchase Plan if he or she has been employed by the
Company for more than six months. Participation is discretionary with each
eligible employee. The Company has reserved shares of Common Stock for
issuance in connection with the Stock Purchase Plan. Each eligible employee is
entitled to purchase a maximum of shares per year. Elections to
participate and purchases of stock will be made on a quarterly basis. Each
participating employee contributes to the Stock Purchase Plan by choosing a
payroll deduction in any specified amount. A participating employee may
increase or decrease the amount of such employee's payroll deduction, including
a change to a zero deduction as of the beginning of any calendar quarter.
Elected contributions will be credited to participants' accounts at the end of
each calendar quarter. In addition, employees may make lump sum contributions
at the end of the year to enable them to purchase the maximum number of shares
available for purchase during the plan year.
Each participating employee's contributions are used to purchase shares for
the employee's share account within 15 days after the last day of each calendar
quarter. The cost per share is 85% of the lower of the closing price of the
Company's Common Stock on the Nasdaq National Market on the first or the last
day of the calendar quarter. The number of shares purchased on each employee's
behalf and deposited in his/her share account is based on the amount
accumulated in such participant's cash account and the purchase price for
shares with respect to any calendar quarter. Shares purchased under the Stock
Purchase Plan carry full rights to receive dividends declared from time to
time. Under the Stock Purchase Plan any dividends attributable to shares in the
employee's share account are automatically used to purchase additional shares
for such employee's share account. Share distributions and share splits are
credited to the participating employee's share account as of the record date
and effective date, respectively. A participating employee has full ownership
of all shares in his/her share account and may withdraw them for sale or
otherwise by written request to the Committee following the close of each
calendar quarter. Subject to applicable federal securities and tax laws, the
Board of Directors has the right to amend or to terminate the Stock Purchase
Plan. Amendments to the Stock Purchase Plan will not affect a participating
employee's right to the benefit of the contributions made by such employee
prior to the date of any such amendment. In the event the Stock Purchase Plan
is terminated, the Committee is required to distribute all shares held in each
participating employee's share account plus an amount of cash equal to the
balance in each participating employee's cash account.
66
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company as of September 30, 1997 by: (i) each person or entity
known to the Company to own more than 5% of any class of outstanding voting
securities of the Company and (ii) each Director of the Company, each Named
Executive Officer and all of the Company's Directors and executive officers as
a group. All of the outstanding shares of Class A Common, Class B Common and
Class L Common will be reclassified into shares of Common Stock in the
Reclassification. The actual number of shares of Common Stock to be issued to
each holder of Class L Common in the Reclassification is subject to change
based upon changes in the initial public offering price and the completion date
of the Offering. See "The Reclassification." To the knowledge of the Company,
each of such stockholders has sole voting and investment power as to the shares
shown unless otherwise noted. Beneficial ownership of the securities listed in
the table has been determined in accordance with the applicable rules and
regulations promulgated under the Exchange Act.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------------------------------------------------------
CLASS A CLASS B CLASS L
COMMON STOCK COMMON STOCK COMMON STOCK PREFERRED STOCK
-------------------- -------------------- -------------------- --------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
NAME AND ADDRESS OF SHARES OF CLASS OF SHARES OF CLASS OF SHARES OF CLASS OF SHARES OF CLASS
- ---------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
Bain Capital Funds (1)........... 5,536,948 61.0% -- -- % 615,217 61.0% -- -- %
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Sutter Hill Ventures (2)......... 1,642,382 18.1 -- -- 182,487 18.1 -- --
755 Page Mill Road
Palo Alto, California 94304
Toray Industries, Inc. (3)....... 996,913 11.0 -- -- 45,363 4.5 588,653 78.6
8-1, Mihama 1-chome
Urayasu, Chiba 279, Japan
Shimadzu Corporation (4)......... 271,112 3.0 -- -- 12,336 1.2 160,085 21.4
1, Nishinokyo-Kuwabaracho
Nakagyo-ku, Kyoto 604, Japan
DIRECTORS AND EXECUTIVE OFFICERS:
Allan Rosencwaig (5)............. 993,279 10.9 1,343,750 50.0 110,364 10.9 -- --
Anthony W. Lin (6)............... 40,588 * 255,312 9.5 4,510 * -- --
Jon L. Opsal (7)................. 23,427 * 255,312 9.5 2,603 * -- --
W. Lee Smith (8)................. 40,738 * 201,562 7.5 4,526 * -- --
David Willenborg (9)............. 128,299 1.4 201,562 7.5 14,255 1.4 -- --
G. Leonard Baker, Jr. (10)....... 1,642,382 18.1 -- -- 182,487 18.1 -- --
David Dominik (11)............... 5,536,948 61.0 -- -- 615,217 61.0 -- --
Adam W. Kirsch (11).............. 5,536,948 61.0 -- -- 615,217 61.0 -- --
All Directors and executive
officers
as a group (8 persons).......... 8,405,650 93.0 2,687,500 84.0 933,960 92.4 -- --
</TABLE>
- --------
* Less than one percent.
(1) Includes: 1,084,115 shares of Class A Common and 120,457 shares of Class
L Common held by Bain Capital Fund V, L.P. ("Fund V"); 2,823,028 shares
of Class A Common and 313,670 shares of Class L Common held by Bain
Capital Fund V-B, L.P. ("Fund V-B"); 648,340 shares of Class A Common and
49,155 shares of Class L Common held by BCIP Associates ("BCIP"); and
981,466 shares of Class A Common and 131,935 shares of Class L Common
held by BCIP Trust Associates, L.P. ("BCIP Trust" and Fund V, Fund V-B
and BCIP have been defined herein as the "Bain Capital Funds").
(2) Also includes shares held by certain affiliates and related parties of
Sutter Hill.
(3) The 996,913 shares of Class A Common included in the table represent: (i)
408,260 shares of Class A Common; and (ii) 588,653 shares of Preferred
Stock, which are immediately convertible into an equal number of shares
of Class A Common at the option of the holder thereof. A portion of each
class of the listed shares are held by Toray Industries (America), Inc.,
a wholly owned subsidiary of Toray.
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<PAGE>
(4) The 271,112 shares of Class A Common included in the table represent: (i)
111,027 shares of Class A Common; and (ii) 160,085 shares of Preferred
Stock, which are immediately convertible into an equal number of shares
of Class A Common at the option of the holder thereof.
(5) The 1,343,750 shares of Class B Common included in the table represent:
(i) 671,875 shares of Class B Common, which are subject to vesting; and
(ii) 671,875 shares of Class B Common that can be acquired upon the
exercise of outstanding options. The address of Dr. Rosencwaig is
c/o Therma-Wave, Inc., 1250 Reliance Way, Fremont, California 94539.
(6) The 255,312 shares of Class B Common included in the table represent: (i)
127,656 shares of Class B Common, which are subject to vesting; and (ii)
127,656 shares of Class B Common that can be acquired upon the exercise
of outstanding options.
(7) The 255,312 shares of Class B Common included in the table represent: (i)
127,656 shares of Class B Common, which are subject to vesting; and (ii)
127,656 shares of Class B Common that can be acquired upon the exercise
of outstanding options.
(8) The 201,562 shares of Class B Common included in the table represent: (i)
100,781 shares of Class B Common, which are subject to vesting; and (ii)
100,781 shares of Class B Common that can be acquired upon the exercise
of outstanding options.
(9) The 201,562 shares of Class B Common included in the table represent: (i)
100,781 shares of Class B Common, which are subject to vesting; and (ii)
100,781 shares of Class B Common that can be acquired upon the exercise
of outstanding options.
(10) Mr. Baker is a General Partner of Sutter Hill. As a result, the shares of
Class A Common and Class L Common acquired by Sutter Hill may be deemed
to be beneficially owned by Mr. Baker, who disclaims beneficial ownership
of any such shares in which he will not have a pecuniary interest. The
address of Mr. Baker is c/o Sutter Hill Ventures, 755 Page Mill Road,
Palo Alto, California 94304.
(11) Messrs. Dominik and Kirsch are each Managing Directors of Bain Capital
and limited partners of Bain Capital Partners V, L.P., the sole general
partner of Fund V and Fund V-B. Accordingly, Messrs. Dominik and Kirsch
may be deemed to beneficially own shares owned by Fund V and Fund V-B.
Messrs. Dominik and Kirsch are each general partners of BCIP and BCIP
Trust and, accordingly, may be deemed to beneficially own shares owned by
such funds. Each such person disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest. The address of
such persons is c/o Bain Capital, Inc., Two Copley Place, Boston,
Massachusetts 02116.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS TO EXECUTIVE OFFICERS
In connection with the Recapitalization, the Company made loans, in aggregate
principal amount of $303,344, to certain executive officers of the Company in
connection with their purchase of shares of capital stock under the Stock
Agreements. These loans are secured by a pledge of the shares of Common Stock
owned by such executive officers and bear interest at a rate equal to the
applicable federal rate at the time of the Recapitalization. The loans are
payable upon a sale of the Company or earlier under certain circumstances. The
following executive officers received the following aggregate amount of loans:
Allan Rosencwaig, Chairman, President and Chief Executive Officer, $151,172;
Anthony W. Lin, Executive Vice President and Chief Financial Officer, $28,723;
Jon L. Opsal, Vice President, $28,723; W. Lee Smith, Vice President, $22,676;
and David Willenborg, Vice President, $22,676. In addition, the Company made
loans to such executive officers to pay certain tax liabilities associated with
the distribution from Toray in the following amounts: Allan Rosencwaig-
$874,000; Anthony W. Lin-$35,663; Jon L. Opsal-$20,583; W. Lee Smith-$35,790;
and David Willenborg-$112,723. Such loans do not bear interest and mature upon
the consummation of an "Approved Sale" of Company, which is defined in the
Stock Agreements to include a sale of all or substantially all of the Company's
assets determined on a consolidated basis or a sale of all of the Company's
capital stock to a independent third party or group of independent third
parties, which has been approved by the holders of a majority of the shares of
Common Stock held by the Bain Group (as defined in the Stock Agreements to
include the Bain Capital Funds and Randolph Street Partners). Each loan must be
prepaid in the event that such executive officer receives: (i) any cash
dividends or distributions on the Rollover Stock or (ii) any proceeds from the
transfer of the Rollover Stock. The loans are secured by a pledge of the
Rollover Stock. Furthermore, the Company agreed to loan to each holder of
options granted in connection with the Recapitalization the exercise price
therefor upon exercise of such options. See "Management--Stock Plans."
ADVISORY AGREEMENT
In connection with the Recapitalization, the Company entered into an Advisory
Agreement with Bain Capital pursuant to which Bain Capital agreed to provide:
(i) general executive and management services; (ii) identification, support,
negotiation and analysis of acquisitions and dispositions; (iii) support,
negotiation and analysis of financial alternatives; (iv) finance, marketing and
human resource functions; and (v) other services agreed upon by the Company and
Bain Capital. In exchange for such services, Bain Capital receives: (i) an
annual management fee of $1.0 million, plus reasonable out-of-pocket expenses
(payable quarterly); and (ii) a transaction fee in connection with the
consummation of each additional acquisition by the Company of an additional
business in an amount equal to 1% of the aggregate transaction value. In
connection with the Recapitalization, Bain Capital received a transaction fee
of $1.8 million. The Advisory Agreement has an initial term of ten years,
subject to automatic one-year extensions unless the Company or Bain Capital
provides written notice of termination.
STOCKHOLDERS AGREEMENT
In connection with the Recapitalization, the Company, the Bain Capital Funds
(together with certain of their designees that execute a counterpart to such
agreement, including Randolph Street Partners (the "Bain Group")), Sutter Hill
and the Existing Stockholders entered into a stockholders agreement (the
"Stockholders Agreement"). The Stockholders Agreement: (i) requires that each
of the parties thereto vote all of his voting securities and to take all other
necessary or desirable actions to cause the size of the Board of Directors to
be established at five members and to cause three designees of the Bain Capital
Funds to be elected to the Board of Directors; (ii) grants the Company, the
Bain Group and Sutter Hill a right of first refusal on any proposed transfer of
shares held by the Existing Stockholders; (iii) grants the Existing
Stockholders certain participation rights in connection with certain transfers
made by the Bain Group; and (iv) requires the Existing Stockholders to consent
to a sale of the Company to
69
<PAGE>
an independent third party if such sale is approved by holders representing a
majority of the shares held by the Bain Group (an "Approved Sale"). In
addition, the Company agreed not to issue, sell or otherwise transfer for
consideration to any member of the Bain Group or Sutter Hill or any affiliates
thereof at any time prior to a registered initial public offering, any shares
of Common Stock (or securities convertible into or otherwise exercisable or
exchangeable for Common Stock or securities containing any profit participation
features or options) unless each of the Existing Stockholders is given the
opportunity to subscribe for and purchase their pro rata portion of such
additional shares at the same price and on the same terms. All of the foregoing
provisions of the Stockholders Agreement (other than those described in items
(ii) and (iii)) will terminate upon the consummation of an initial public
offering registered under the Securities Act (a "Public Offering"). The
provisions described in items (ii) and (iii) will terminate upon the earlier
of: (i) the date the shares subject to such provision are transferred in a
public sale; (ii) the consummation of an Approved Sale; or (iii) the
consummation of a Public Offering.
INTERESTS OF CERTAIN EXPERTS
Randolph Street Partners purchased 84,906 shares of Class A Common and 9,434
shares of Class L Common in the Recapitalization. In connection therewith,
Randolph Street Partners entered into the Stockholders Agreement and is
considered part of the Bain Group under the Stock Agreements and the
Registration Agreement. Certain partners of Kirkland & Ellis are partners in
Randolph Street Partners. Kirkland & Ellis has provided legal services to the
Company and Bain Capital from time to time and expects to continue to do so in
the foreseeable future.
STOCK REPURCHASE AGREEMENT
In connection with the Existing Stockholders' acquisition of the Company in
October 1991, Toray and certain key employees of the Company (which included
all of the Management Investors) entered into a Key Employee Stock Agreement,
as amended on December 16, 1994 (the "Key Employee Agreement"). Pursuant to the
terms of the Key Employee Agreement, each key employee retained a portion of
his outstanding options that had been granted to such key employee under the
Company's 1986 Stock Option Plan (the "Key Employee Options") and was granted
rights to require Toray to purchase such Key Employee Options or shares of Old
Common Stock issued upon the exercise of such Key Employee Options (the "Key
Employee Shares") beginning on April 1, 1996 upon the terms and conditions set
forth therein. In January 1996, Toray and the key employees entered into an
agreement (the "Stock Repurchase Agreement"), pursuant to which, among other
things, Toray acquired from the key employees on April 1, 1996 the Key Employee
Shares and Key Employee Options held by such key employees for approximately
$11.0 million in cash and terminated the Key Employee Agreement. The execution
of the Stock Repurchase Agreement was designed to fulfill Toray's obligations
under the Key Employee Agreement and was not entered into in anticipation of a
future sale or reorganization of the Company. The per share purchase price for
the Employee Shares under the Stock Repurchase Agreement was equal to the price
established under the Key Employee Agreement, which was the price paid by the
Existing Stockholders in their acquisition of the Company, plus a 12% annual
return on such amount from the date of the acquisition.
In addition, the Stock Repurchase Agreement provided that the key employees
would be entitled to receive an additional payment from Toray in the event that
there was a "sale" of the Company during the periods specified therein. Under
the terms of the Stock Repurchase Agreement, the Recapitalization was
considered a sale of the Company and resulted in the key employees being
entitled to receive additional payments. In general, the amount of the
additional payment due to the key employees was determined by calculating the
difference between the per share consideration received by Toray for the Old
Common Stock in the Recapitalization and the price paid for such Employee
Shares by Toray under the Stock Repurchase Agreement. In connection with the
Recapitalization, the key employees received
70
<PAGE>
the following amounts of cash from Toray in satisfaction of Toray's obligations
under the Stock Repurchase Agreement:
<TABLE>
<CAPTION>
NAME CASH
---- ----------
<S> <C>
Allan Rosencwaig............................................... $2,339,718
Anthony W. Lin................................................. 95,612
Jon L. Opsal................................................... 55,183
W. Lee Smith................................................... 95,952
David Willenborg............................................... 302,207
</TABLE>
VOTING AGREEMENT
Pursuant to the Recapitalization, the Company, the Bain Group, Sutter Hill
and certain key employees of the Company, including the Management Investors,
entered into a voting agreement (the "Voting Agreement") pursuant to which each
party thereto agreed to vote his or its voting securities and to take all
necessary or desirable actions to cause the size of the Board to be set at five
directors and to cause three designees of the Bain Group and two management
employees of the Company designated by Dr. Rosencwaig to be elected to the
Board of Directors. The Voting Agreement terminates by its terms upon the
completion of an initial public offering and sale of Common Stock pursuant to
an effective registration statement under the Securities Act.
OPTION AGREEMENTS AMONG INVESTORS
Pursuant to certain option agreements, each dated May 16, 1997, among the
Bain Group, Sutter Hill, Antares International Partners, Inc. (collectively,
the "Investors") and each of the Management Investors (collectively, the
"Option Agreements"), the Investors granted the Management Investors options to
purchase an aggregate of 2,687,500 shares of Class A Common at an exercise
price equal to $0.235 per share. Such options become exercisable upon: (i) any
sale by the Investors (an "Investor Sale") of all or a portion of the shares of
Class A Common or Class L Common issued to the Investors pursuant to the
Recapitalization (the "Investors' Investment"); and (ii) the fifth anniversary
of the date of the Option Agreements (the "Fifth Anniversary"). The number of
options exercisable upon an Investor Sale or on the Fifth Anniversary is
dependent upon the fair market value of the Investors' Investment and the
shares of Common Stock issued to the Management Investors in the
Recapitalization. No options are exercisable until the fair market value of
such shares is equal to or greater than $500 million.
RECAPITALIZATION AGREEMENT
The Recapitalization Agreement contains customary provisions for such
agreements, including representations and warranties with respect to the
condition and operations of the business, covenants with respect to the conduct
of the business prior to the closing date of the Recapitalization and various
closing conditions, including the obtaining of financing and the continued
accuracy of representations and warranties.
Pursuant to the Recapitalization Agreement, the Existing Stockholders agreed
to jointly indemnify the Bain Capital Funds and Sutter Hill against any and all
losses resulting from any misrepresentation or breach of warranty made by them
in the Recapitalization Agreement, a claim for which must be made (in most
cases) no later than 18 months after the closing date of the Recapitalization.
The indemnification obligations of the Existing Stockholders under the
Recapitalization Agreement are generally subject to a $2.0 million minimum
aggregate threshold amount and limited to an aggregate payment of no more than
$30.0 million. Notwithstanding the foregoing, the Existing Stockholders have
jointly agreed to indemnify the Company, the Bain Capital Funds and Sutter Hill
for any and all losses with respect to: (i) taxes for all taxable periods prior
to March 31, 1996; and (ii) any breach of the representation relating to taxes
in the Recapitalization Agreement (subject to the limitations of the
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<PAGE>
preceding sentence). In addition, the Company agreed to indemnify the Existing
Stockholders against any and all losses arising out of: (i) any employee
benefit plan of the Company; (ii) the severance of any employee of the Company
or its subsidiaries on or after the closing date; and (iii) subject to certain
exceptions, violations of Environmental Laws (as defined therein).
In addition, the Existing Stockholders have agreed for a period of three
years after the closing date of the Recapitalization not to compete with the
Company in the business of manufacturing, marketing or selling: (i) measuring
equipment used for material characterization (such as ion implantation
monitoring or measurements in metal films); (ii) thin film measurement
equipment; or (iii) equipment that utilizes the intellectual property of the
Company. The Existing Stockholders have also agreed for a period of two years
after the closing date not to solicit the employment of the employees of the
Company without the prior written consent of the Bain Capital Funds.
DEVELOPMENT LICENSE AGREEMENT
In 1992, the Company entered into a Development License Agreement with Toray
and Shimadzu (the "Development License Agreement"). The purpose of the
Development License Agreement was to allow the parties to share patents and
technology related to: (i) the entire field of thermal wave technology; (ii)
the field of laser technology related to thin film metrology; (iii) the field
of optical processing; and (iv) any other fields designated by a research and
development committee to be formed by the parties (collectively, the "Field of
Research"). Under the Development License Agreement: (i) the Company granted to
each of Toray and Shimadzu a royalty-free, non-exclusive license to use the
Company's patents and technology related to the Field of Research for the
purpose of conducting research and new product development activities in Japan;
and (ii) Toray and Shimadzu granted to the Company a royalty-free, non-
exclusive license to use those of Toray's and Shimadzu's patents and technology
determined to be useful in connection with certain development projects for the
purpose of conducting research and new product development activities in the
U.S. and Japan. The Development License Agreement may be terminated by the
parties thereto in June 1999.
The Development License Agreement requires the parties to take certain steps
to coordinate their research and development activities. All enhancements,
modifications and improvements to certain of the Company's products existing at
the time the agreement was entered into will be owned by the Company,
regardless of which party creates such enhancements, modifications, and
improvements. However, to the extent any such enhancements, modifications and
improvements are based upon patents and technology owned by Toray or Shimadzu,
the Company will have to pay a development fee or royalty to those parties.
Other developments ("New Developments") will be jointly owned by the party or
parties who created the New Development and the party or parties whose patents
or technology were used in such New Development. The commercialization,
marketing and other use of each New Development will be governed by the terms
of a separate agreement to be entered into by the relevant parties on a case-
by-case basis ("New Development Agreements"). To date, only one New Development
Agreement has been entered into between the parties, which relates to certain
film measurement equipment.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
BANK CREDIT FACILITY
In connection with the Recapitalization, the Company entered into a bank
credit facility (the "Bank Credit Facility") with Bankers Trust Company (the
"Agent"), which provides for a revolving credit facility of $30.0 million. The
Company may borrow amounts under the Bank Credit Facility to finance its
working capital requirements and other general corporate purposes. All
revolving loans incurred under the Bank Credit Facility will mature on May 16,
2002. Subsequent to the Recapitalization, the Company used $7.8 million of
available borrowings under the Bank Credit Facility to issue letters of credit.
At July 6, 1997, the Company had unused borrowing capacity under the Bank
Credit Facility of $22.2 million.
Indebtedness of the Company under the Bank Credit Facility will be guaranteed
by each of the Company's domestic subsidiaries and will be secured by (i) a
first priority security interest in all receivables, contracts, contract
rights, equipment, intellectual property, inventory and all other tangible and
intangible assets of the Company and each of its domestic subsidiaries, subject
to certain customary exceptions, (ii) a pledge of all capital stock of each
direct and indirect domestic subsidiary of the Company, and (iii) a pledge of
65% of the capital stock of each first-tier foreign subsidiary of the Company.
The Company's borrowings under the Bank Credit Facility will bear interest at
a floating rate and may be maintained as Base Rate Loans (as defined in the
Bank Credit Facility) or, beginning 90 days after the Closing Date (or earlier
upon syndication) at the Company's option, as Eurodollar Loans (as defined in
the Bank Credit Facility). Base Rate Loans shall bear interest at the Base Rate
(defined as the higher of (x) the applicable prime lending rate of Bankers
Trust Company and (y) the Federal Reserve reported certificate of deposit rate
plus of 1%) plus 1.75%. Eurodollar Loans shall bear interest at the Eurodollar
Rate (as defined in the Bank Credit Facility) applicable for one, two, three,
six or twelve month periods, in each case plus 3.00%.
Amounts borrowed under the Bank Credit Facility may be repaid and reborrowed.
The Company will be required to pay to the lenders under the Bank Credit
Facility a commitment fee equal to 1/2 of 1% per annum, payable in arrears on a
quarterly basis, on the average unused portion of the Bank Credit Facility
during such quarter (provided, that such commitment fee increases to 3/4 of 1%
per annum if during any quarterly payment period the daily average outstanding
borrowings were less than 1/2 of the total revolving loan commitment). The
Company will also be required to pay to the lenders a letter of credit fee with
respect to each letter of credit outstanding equal to 3.00% per annum of the
average daily stated amount of such letter of credit and an additional fronting
fee of 1/4 of 1% on such average daily stated amount to the lender issuing such
letter of credit, in each case payable in arrears on a quarterly basis. The
Agent and the lenders will receive and continue to receive such other fees as
have been separately agreed upon with the Agent.
The Bank Credit Facility requires the Company to meet certain financial
tests, including, without limitation, minimum levels of EBITDA (as defined in
the Bank Credit Facility), minimum interest coverage, maximum leverage ratio,
and maximum amount of capital expenditures. The Bank Credit Facility contains
certain covenants which among other things limit the incurrence of additional
indebtedness, investments, dividends, transactions with affiliates, asset
sales, acquisitions, mergers and consolidations, prepayments of other
indebtedness (including the Notes), liens and encumbrances and other matters
customarily restricted in such agreements.
The Bank Credit Facility contains customary events of default, including
without limitation, payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to certain other indebtedness in
excess of $1.5 million, certain events of bankruptcy and insolvency, judgment
defaults
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<PAGE>
in excess of $1.5 million that are otherwise not covered by insurance, failure
of any guaranty or security document supporting the Bank Credit Facility to be
in full force and effect and change of control of the Company.
The foregoing summary of the material provisions of the Bank Credit Facility
is qualified in its entirety by reference to all of the provisions of the Bank
Credit Facility, which has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. See "Additional Information."
SENIOR NOTES
The Notes were issued pursuant to the Indenture, dated as of May 15,1997
(the "Indenture"), by and between the Company and IBJ Schroder Bank & Trust
Company, as trustee (the "Trustee"). The Notes are limited in aggregate
principal amount to $115,000,000 and will mature on May 15, 2004. Interest on
the Notes accrues at the rate of 10 5/8% per annum and is payable semiannually
in cash on each May 15 and November 15, commencing on November 15, 1997, to
the persons who are registered holders of the Notes at the close of business
on May 1 and November 1, respectively, immediately preceding the applicable
interest payment date. The Notes are not entitled to the benefit of any
mandatory sinking fund. The Notes are senior unsecured obligations of the
Company, ranking pari passu in right of payment with all other senior
unsecured obligations of the Company. The Notes were initially sold to BT
Securities Corporation in an underwritten private placement.
The Notes are redeemable, at the Company's option, in whole at any time or
in part from time to time, on and after May 15, 2001, upon not less than 30
nor more than 60 days' notice, at the following redemption prices (expressed
as percentages of the principal amount thereof) if redeemed during the twelve-
month period commencing on May 15 of the year set forth below, plus, in each
case, accrued interest to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................... 105.313%
2002........................................................... 102.656
2003........................................................... 100.000
</TABLE>
At any time, or from time to time, on or prior to May 15, 2000, the Company
may, at its option, use the net cash proceeds of one or more equity offerings
to redeem up to 40% (provided that such percentage decreases to 35% if an
initial public offering has not been consummated on or prior to November 15,
1998) of the aggregate principal amount of Notes originally issued at a
redemption price equal to 110.625% of the principal amount thereof plus
accrued and unpaid interest thereon, if any, to the date of such redemption;
provided that at least $69.0 million aggregate principal amount of Notes
originally issued remains outstanding immediately after any such redemption.
If the Company consummates an initial public offering prior to May 15, 2000,
the Company is required to apply the net cash proceeds relating to such
initial public offering to make an offer to purchase from all holders on a pro
rata basis that amount of Notes equal to the net cash proceeds from such
initial public offering at a price equal to 110.625% of the aggregate
principal amount of Notes to be repurchased, plus accrued and unpaid interest
thereon, if any, to the date of purchase. The aggregate amount of net cash
proceeds required to be applied pursuant to this provision is reduced dollar-
for-dollar (i) to the extent such net cash proceeds are used to prepay
indebtedness under the Bank Credit Facility and effect a permanent reduction
in the availability thereunder and (ii) by the aggregate amount of net cash
proceeds of one or more equity offerings consummated prior to the consummation
of the initial public offering to the extent used to redeem Notes. The Company
is not required pursuant to this provision to redeem an aggregate principal
amount of Notes in excess of 40% of the aggregate principal amount of Notes
originally issued (or 35% if the initial public offering is consummated on or
after November 15, 1998).
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<PAGE>
The Indenture provides that upon the occurrence of a Change of Control, each
Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes, at a purchase price equal to 101% of the
principal amount thereof plus accrued interest thereon to the date of purchase.
"Change of Control" is defined under the Indenture to include one or more of
the following events: (i) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Company to any person or group of related persons (a
"Group"), together with any affiliates thereof; (ii) the approval by the
holders of capital stock of the Company of any plan or proposal for the
liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (iii) any Person or Group
(other than Bain Capital, Sutter Hill or their respective related parties)
shall become the owner, directly or indirectly, beneficially or of record, of
shares representing more than 50% of the aggregate ordinary voting power
represented by the issued and outstanding capital stock of the Company; or (iv)
the first day within any two-year period on which a majority of the members of
the Board of Directors of the Company are not continuing directors.
The following events are defined in the Indenture as "Events of Default": (i)
the failure to pay interest on any Notes and such default continues for a
period of 30 days; (ii) the failure to pay the principal on any Notes; (iii) a
default in the observance or performance of any other covenant or agreement
contained in the Indenture which default continues for a period of 30 days;
(iv) the failure to pay at final stated maturity the principal amount of any
indebtedness of the Company or any Restricted Subsidiary (as defined therein)
of the Company and such failure continues for a period of 20 days or more, if
the aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to pay
principal at final maturity or which has been accelerated, aggregates $5.0
million or more at any time; (v) one or more judgments in an aggregate amount
in excess of $5.0 million shall have been rendered against the Company or any
of its Significant Subsidiaries (as defined therein) and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such judgment or
judgments become final and non-appealable; and (vi) certain events of
bankruptcy affecting the Company or any of its Significant Subsidiaries.
The Indenture contains certain covenants for the benefit of the holders of
the Notes that, among other things, limit the ability of the Company and any of
its Restricted Subsidiaries to: (i) enter into certain transactions with
affiliates; (ii) pay dividends or make certain other restricted payments; (iii)
consummate certain asset sales; (iv) enter into certain transactions with
affiliates; (v) incur indebtedness that is senior in right of payment to the
Notes; (vi) incur liens; (vii) impose restrictions on the ability of a
subsidiary to pay dividends or make certain payments to the Company and its
subsidiaries; (viii) merge or consolidate with any other person; or (ix) sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of the assets of the Company.
The foregoing summary of the material provisions of the Indenture is
qualified in its entirety by reference to all of the provisions of the
Indenture, which has been filed as an exhibit to the Registration Statement, of
which this Prospectus forms a part. See "Additional Information."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
Upon completion of the Offering, the total amount of authorized capital stock
of the Company will consist of 25,000,000 shares of Common Stock and 5,000,000
shares of preferred stock, par value $0.01 per share (the "Serial Preferred
Stock"). As of September 30, 1997, the Company had outstanding 9,073,534 shares
of Class A Common, 1,343,750 shares of Class B Common, 1,008,170 shares of
Class L Common and 748,739 shares of Preferred Stock. Prior to the completion
of the Offering, all of the outstanding shares of Class A Common, Class B
Common and Class L Common will be reclassified to shares of Common Stock in the
Reclassification. See "The Reclassification." In addition, all of the
outstanding Preferred Stock will be redeemed by the Company immediately
following the Offering. After giving effect to the Offering, the Company will
have shares of Common Stock ( shares if the Underwriters' over-
allotment option is exercised in full) and no shares of Serial Preferred Stock
outstanding. As of September 30, 1997, the Company had 37 stockholders of
record. The following summary of certain provisions of the Company's capital
stock describes all material provisions of, but does not purport to be complete
and is subject to, and qualified in its entirety by, the Restated Certificate
and the By-laws, which are included as exhibits to the Registration Statement
of which this Prospectus forms a part, and by the provisions of applicable law.
The Restated Certificate and By-laws contain certain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of
delaying, deferring or preventing a future takeover or change in control of the
Company unless such takeover or change in control is approved by the Board of
Directors.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock to be issued by the Company in connection with the Offering will
be, validly issued, fully paid and nonassessable. Subject to the prior rights
of the holders of any Serial Preferred Stock, the holders of outstanding shares
of Common Stock are entitled to receive dividends out of assets legally
available therefor at such time and in such amounts as the Board of Directors
may from time to time determine. See "Dividend Policy." The shares of Common
Stock are not convertible and the holders thereof have no preemptive or
subscription rights to purchase any securities of the Company. Upon
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive pro rata the assets of the Company which are
legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of Serial Preferred
Stock then outstanding. Each outstanding share of Common Stock is entitled to
one vote on all matters submitted to a vote of stockholders. There is no
cumulative voting.
The Company has applied to have the Common Stock approved for inclusion on
the Nasdaq National Market under the symbol "THWV."
SERIAL PREFERRED STOCK
The Company's Board of Directors may, without further action by the Company's
stockholders, from time to time, direct the issuance of shares of Serial
Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Satisfaction of any
dividend preferences of outstanding shares of Serial Preferred Stock would
reduce the amount of funds available for the payment of dividends on shares of
Common Stock. Holders of shares of Serial Preferred Stock may be entitled to
receive a preference payment in the event of any liquidation, dissolution or
winding-up of the Company before any payment is made to the holders of shares
of Common Stock. Under certain circumstances, the issuance of shares of Serial
Preferred Stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
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<PAGE>
block of the Company's securities or the removal of incumbent management. Upon
the affirmative vote of a majority of the total number of Directors then in
office, the Board of Directors of the Company, without stockholder approval,
may issue shares of Serial Preferred Stock with voting and conversion rights
which could adversely affect the holders of shares of Common Stock. There are
no shares of Serial Preferred Stock outstanding, and the Company has no present
intention to issue any shares of Serial Preferred Stock.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate provides for the Board to be divided into three
classes, as nearly equal in number as possible, serving staggered terms.
Approximately one-third of the Board will be elected each year. See
"Management." Under the Delaware General Corporation Law, directors serving on
a classified board can only be removed for cause. The provision for a
classified board could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of the Board until the
second annual stockholders meeting following the date the acquiror obtains the
controlling stock interest. The classified board provision could have the
effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the Company and could increase the
likelihood that incumbent directors will retain their positions.
The Restated Certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The Restated Certificate and the By-laws provide
that, except as otherwise required by law, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the Board
of Directors or by the Chief Executive Officer of the Company. Stockholders
will not be permitted to call a special meeting or to require the Board to call
a special meeting.
The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and who
has given to the Company's Secretary timely written notice, in proper form, of
the stockholder's intention to bring that business before the meeting. Although
the By-laws do not give the Board the power to approve or disapprove
stockholder nominations of candidates or proposals regarding other business to
be conducted at a special or annual meeting, the By-laws may have the effect of
precluding the conduct of certain business at a meeting if the proper
procedures are not followed or may discourage or defer a potential acquiror
from conducting a solicitation of proxies to elect its own slate of directors
or otherwise attempting to obtain control of the Company.
The Restated Certificate and By-laws provide that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required to amend, alter, change or repeal certain of
their provisions. This requirement of a super-majority vote to approve
amendments to the Restated Certificate and By-laws could enable a minority of
the Company's stockholders to exercise veto power over any such amendments.
CERTAIN PROVISIONS OF DELAWARE LAW
Following the consummation of the Offering, the Company will be subject to
the "Business Combination" provisions of the Delaware General Corporation Law.
In general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction
which the person became an "interested stockholder," unless: (i) the
transaction is approved by the Board of
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<PAGE>
Directors prior to the date the "interested stockholder" obtained such status;
(ii) upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder," owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by (a) persons who are directors and also
officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date the "business combination" is approved by the Board of Directors
and authorized at an annual or special meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the "interested stockholder." A "business combination" is defined
to include mergers, asset sales and other transactions resulting in financial
benefit to a stockholder. In general, an "interested stockholder" is a Person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of a corporation's voting stock. The statute could prohibit or
delay mergers or other takeover or change in control attempts with respect to
the Company and, accordingly, may discourage attempts to acquire the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate limits the liability of Directors to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
Restated Certificate provides that the Company shall indemnify Directors and
officers of the Company to the fullest extent permitted by such law. The
Company expects to enter into indemnification agreements with its current
Directors and executive officers prior to the completion of the Offering and
expects to enter into a similar agreement with any new Directors or executive
officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is
.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there was no market for the Common Stock of the
Company. The Company can make no predictions as to the effect, if any, that
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of the Common Stock in the public market, or the perception that such sales may
occur, could adversely affect prevailing market prices. See "Risk Factors --
Potential Adverse Impact from Shares Eligible for Future Sale."
SALE OF RESTRICTED SHARES
Upon completion of the Offering, the Company will have shares of Common
Stock outstanding. In addition, shares of Common Stock are issuable
upon the exercise of outstanding stock options. Of the shares outstanding after
the Offering, shares of Common Stock ( shares if the
Underwriters' over-allotment is exercised in full) are freely tradeable without
restriction under the Securities Act, except for any such shares which may be
held or acquired by an "affiliate" of the Company (an "Affiliate"), as that
term is defined in Rule 144 promulgated under the Securities Act ("Rule 144"),
which shares will be subject to the volume limitations and other restrictions
of Rule 144 described below. An aggregate of shares of Common Stock
held by existing stockholders of the Company upon completion of the Offering
will be "restricted securities" (as that phrase is defined in Rule 144) and may
not be resold in the absence of registration under the Securities Act or
pursuant to an exemption from such registration, including among others, the
exemptions provided by Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least one year has elapsed since
the later of the date the "restricted securities" were acquired from the
Company or the date they were acquired from an Affiliate, then the holder of
such restricted securities (including an Affiliate) is entitled to sell in the
public market a number of shares within any three-month period that does not
exceed the greater of 1% of the then outstanding shares of the Common Stock
(approximately shares immediately after the Offering) or the average
weekly reported volume of trading of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding such sale. The holder may only
sell such shares through "brokers' transactions" or in transactions directly
with a "market maker" (as such terms are defined in Rule 144). Sales under Rule
144 are also subject to certain requirements regarding providing notice of such
sales and the availability of current public information concerning the
Company. Affiliates may sell shares not constituting restricted securities in
accordance with the foregoing volume limitations and other requirements but
without regard to the two-year holding period. Under Rule 144(k), if a period
of at least two years has elapsed between the later of the date restricted
securities were acquired from the Company or the date they were acquired from
an Affiliate, as applicable, a holder of such restricted securities who is not
an Affiliate at the time of the sale and has not been an Affiliate for at least
three months prior to the sale would be entitled to sell the shares in the
public market without regard to the volume limitations and other restrictions
described above. Beginning 90 days after the date of this Prospectus,
approximately shares of Common Stock will be eligible for sale in
the public market pursuant to Rule 144(k). Beginning May 16, 1998, an
additional shares of Common Stock will be eligible for sale in the
public market pursuant to Rule 144, subject to the volume limitations and the
other restrictions described above.
OPTIONS
The Company intends to file registration statements on Form S-8 under the
Securities Act to register approximately shares of Common Stock issuable
under the 1997 Stock Plan and the New Incentive Plan. The registration
statements are expected to be filed within six months of the effective date of
the Registration Statement of which this Prospectus is a part and will be
effective upon filing.
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Shares issued upon the exercise of stock options after the effective date of
the Form S-8 registration statements will be eligible for resale in the public
market without restriction, subject to Rule 144 limitations applicable to
Affiliates and the lock-up agreements described below.
LOCK-UP AGREEMENTS
Notwithstanding the foregoing, the Company and its executive officers,
Directors and certain existing stockholders (who collectively own
shares of Common Stock), have agreed not to offer, sell, contract to sell or
otherwise dispose of any Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of BT Alex. Brown
Incorporated, except, in the case of the Company, for the shares of Common
Stock to be issued in connection with the Offering or pursuant to employee
benefit plans existing on the date of this Prospectus and in the case of the
executive officers, Directors and existing stockholders, for the shares of
Common Stock sold in connection with the Offering (if any), sales or
dispositions to the Company, certain permitted transfers to related parties
that agree to be bound by the foregoing restrictions and certain permitted
sales of shares acquired in the open market following the completion of the
Offering.
REGISTRATION AGREEMENT
Pursuant to the Recapitalization, the Company, the Bain Group, Sutter Hill,
the Existing Stockholders and the Management Investors entered into a
registration agreement (the "Registration Agreement"). Under the Registration
Agreement, the holders of a majority of the registerable securities owned by
the Bain Group and Sutter Hill have the right at any time, subject to certain
conditions, to require the Company to register any or all of their shares of
Common Stock under the Securities Act on Form S-1 (a "Long-Form Registration")
on three occasions at the Company's expense or on Form S-2 or Form S-3 (a
"Short-Form Registration") on six occasions at the Company's expense. In
addition, at any time after a Public Offering, the holders of a majority of the
registrable securities owned by the Existing Stockholders have the right,
subject to certain conditions, to require either a Long-Form Registration or a
Short-Form Registration on one occasion at the Company's expense. Further, at
any time after the later of the fifth anniversary of the closing of the
Recapitalization and 180 days after a Public Offering, the Management Investors
have the right, subject to certain conditions, to require either a Long-Form
Registration or a Short-Form Registration, at the Company's expense, with
respect to a number of shares of Common Stock the proceeds of which (subject to
certain limitations) would be sufficient to pay taxes incurred by them upon
receipt of the deferred bonuses under their employment contracts. See
"Management Employment Agreements." The Company is not required, however, to
effect any such Long-Form Registration or Short-Form Registration within six
months after the effective date of a prior demand registration and may postpone
the filing of such registration for up to six months if the Company believes
that such a registration would reasonably be expected to have an adverse effect
on any proposal or plan by the Company or any of its subsidiaries to engage in
an acquisition, merger or similar transaction. In addition, all holders of
registerable securities are entitled to request the inclusion of any shares of
Common Stock subject to the Registration Agreement in any registration
statement at the Company's expense whenever the Company proposes to register
any of its securities under the Securities Act (other than (i) in connection
with a Public Offering, unless any holders of registrable securities are
permitted to participate in the Public Offering, (ii) pursuant to a demand
registration, or (iii) pursuant to a registration on Form S-4 or S-8). In
connection with all such registrations, the Company has agreed to indemnify all
holders of registerable securities against certain liabilities, including
liabilities under the Securities Act. In addition, all the parties to the
Registration Agreement have agreed not to make any public sales of their
registerable securities for a period beginning seven days prior to the
effective date of any registration statement and continuing for a period of 180
days thereafter (other than registerable securities included in such
registration statement). Beginning 180 days after the completion of the
Offering, the holders of an aggregate of shares of Common Stock will
have certain rights to require the Company to register their shares of Common
Stock under the Securities Act at the Company's expense.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), the Underwriters named below (the "Underwriters"),
through their representatives, BT Alex. Brown Incorporated, Lehman Brothers
Inc. and Montgomery Securities (the "Representatives") have severally agreed to
purchase from the Company the following respective numbers of shares of Common
Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BT Alex. Brown Incorporated...........................................
Lehman Brothers Inc...................................................
Montgomery Securities.................................................
---
Total.................................................................
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all the shares of Common Stock offered hereby if any of such shares
are purchased. In the event of default by an Underwriter, the Underwriting
Agreement provides that, in certain circumstances, purchase commitments of the
nondefaulting Underwriters may be increased or the Underwriting Agreement may
be terminated.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the Offering, the
public offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable at any
time and from time to time during the 30-day period from the date of this
Prospectus, to purchase up to an aggregate of additional shares of
Common Stock at the public offering price set forth on the cover page of this
Prospectus, less the underwriting discount. The Underwriters may exercise such
option to purchase additional shares solely for the purpose of covering over-
allotments, if any, incurred in connection with the Offering. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in
the preceding table bears to the total number of shares in such table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
At the request of the Company, the Underwriters have reserved up to
shares of Common Stock for the sale at the initial public offering price to
certain eligible employees and persons having business relationships with the
Company and its subsidiaries. The number of shares of Common Stock available to
the general public will be reduced to the extent these persons purchase the
reserved shares. Any reserved shares of Common Sock that are not so purchased
by such employees at the closing of the Offering will be offered by the
Underwriters to the general public on the same terms as the other shares in the
Offering.
The Company and its executive officers, Directors and certain existing
stockholders who collectively own shares of Common Stock have agreed not
to offer, sell, contract to sell or otherwise dispose of any Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
81
<PAGE>
consent of BT Alex. Brown Incorporated, except, in the case of the Company, for
the shares of Common Stock to be issued in connection with the Offering or
pursuant to employee benefit plans existing on the date of this Prospectus and
in the case of the executive officers, Directors and existing stockholders,
sales or dispositions to the Company, certain permitted transfers to related
parties that agree to be bound by the foregoing restrictions and certain
permitted sales of shares acquired in the open market following the completion
of the Offering.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
In order to facilitate the offering of the Common Stock, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price
of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares
of the Common Stock in the open market. The Underwriters may also reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the offering, if the Underwriters repurchase previously
distributed Common Stock in transactions to cover their short positions, in
stabilization transactions or otherwise. Finally, the Underwriters may bid for,
and purchase, shares of the Common Stock in market making transactions and
impose penalty bids. These activities may stabilize or maintain the market
price of the Common Stock above market levels that may otherwise prevail. The
Underwriters are not required to engage in these activities, and, if commenced,
may end any of these activities at any time.
Prior to this Offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock has been determined by
negotiations between the Company and the Representatives. Among the factors
considered in such negotiations were the prevailing market conditions, the
results of operations of the Company in recent periods, the market
capitalization and stages of development of other companies which the Company
and the Representatives believed to be comparable to the Company, estimates of
the business potential of the Company, the present state of the Company's
development and other factors deemed relevant. The Company has applied to have
the Common Stock approved for quotation on the Nasdaq National Market under the
symbol "THWV."
Bankers Trust Company, an affiliate of BT Alex. Brown Incorporated, is the
administrative agent and a lender under the Bank Credit Facility. In addition,
BT Securities Corporation, which merged with Alex. Brown & Sons Incorporated to
form BT Alex. Brown Incorporated, served as the initial purchaser of the Notes.
See "Description of Certain Indebtedness."
EXPERTS
The consolidated financial statements of Therma-Wave, Inc. at April 6, 1997
and March 31, 1996 and for each of the three fiscal years in the period ended
April 6, 1997, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Kirkland & Ellis, Chicago, Illinois. Certain partners of Kirkland &
Ellis are partners in Randolph Street Partners, which purchased 84,906 shares
of Class A Common and 9,434 shares of Class L Common in the Recapitalization.
Certain legal matters in connection with this Offering will be passed upon for
the Underwriters by Ropes & Gray, Boston, Massachusetts. Kirkland & Ellis and
Ropes & Gray have, from time to time, represented, and may continue to
represent, certain of the Underwriters in connection with various legal matters
and the Bain Capital Funds and certain of their affiliates (including the
Company) in connection with certain legal matters.
82
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-
1 (the "Registration Statement," which term shall encompass all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and
the rules and regulations promulgated thereunder, with respect to the shares of
Common Stock offered hereby. This Prospectus, which constitutes part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the document or matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement, including the exhibits thereto, can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the
Regional Offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a website
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of such site is http://www.sec.gov.
As a result of the Company's Registration Statement on Form S-4 (Registration
No. 333-29871) being declared effective by the Commission on September 10,
1997, the Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file periodic reports and other information
with the Commission. The reports and other information filed by the Company
with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission as described above.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent accounting firm, and
to make available quarterly reports containing unaudited financial information
for the first three quarters of each fiscal year.
83
<PAGE>
GLOSSARY
ASIC.................. Application Specific Integrated Circuit. A custom-
designed integrated circuit that performs specific
functions which would otherwise require a number of
off-the-shelf integrated circuits to perform. The use
of an ASIC in place of a conventional integrated
circuit reduces product size and cost and also improves
reliability.
beta-testing.......... Testing a new product under full operational
conditions, generally at a customer's facility.
clean-room............ A room with an environment that is kept to a high
degree of cleanliness by a constant flow of clean air
throughout the room. The level of cleanliness of clean
rooms is designated by Class Number. For example, a
Class 1000 clean room has fewer than 1000 particles
larger than a minimum size per cubic centimeter of air,
while a Class 100 clean room has fewer than 100 such
particles per cubic centimeter. Persons working in a
clean room must wear appropriate gowns, caps, gloves
and shoes so as to minimize their effect on the clean
room environment.
DRAM.................. Dynamic Random Access Memory. A type of volatile memory
product that is used in electronic systems to store
data and program instructions. It is the most common
type of RAM and must be refreshed with electricity
thousands of times per second or else its memory will
fade away.
ellipsometer.......... An optical metrology instrument that measures the
degree of change in the polarization of a beam of light
that is reflected from the surface of a sample.
Ellipsometers are used to measure the thickness and, in
some cases, the optical properties of thin films.
etching............... Removal of film from the surface of a wafer through wet
chemical or dry plasma processes.
fab................... A manufacturing facility that fabricates
semiconductors.
image processing...... Computer processing of a magnified video image in order
to locate an area of interest on a patterned wafer.
integrated circuit.... A combination of two or more transistors on a base
material, usually silicon. All semiconductor devices
are just very complicated integrated circuits with
thousands of transistors.
ion implantation...... Implanting of ions, such as boron, phosphorus or
arsenic, into selected areas of a silicon wafer in
order to alter the electrical properties of the silicon
in these areas. The implantation is performed by
bombarding the silicon wafer with a high energy beam of
ions.
metrology............. The science of quantitative measurement.
photolithography......
Generating a pattern on the surface of a wafer by first
coating the surface with a light sensitive material
called a photoresist and then exposing the photoresist
to light (usually of a short wavelength) through a
patterned mask. The exposure replicates the mask
pattern onto the photoresist.
G-1
<PAGE>
planarization......... A process by which the surface of a patterned wafer
that may contain severe topographical features is made
flat by mechanical or chemical means.
reflectance........... The ratio of the amount of light reflected from a
surface to the amount of light incident on that
surface. Reflectance is usually a function of
wavelength and the angle of incidence.
semiconductor......... A material with electrical conducting properties in
between those of metals and insulators. (Metals always
conduct and insulators never conduct, but
semiconductors sometimes conduct.) Essentially,
semiconductors transmit electricity only under certain
circumstances, such as when given a positive or
negative electric charge. Therefore, a semiconductor's
ability to conduct can be turned on or off by
manipulating those charges, which allows the
semiconductor to act as an electric switch. The most
common semiconductor material is silicon, used as the
base of most semiconductor devices today because it is
relatively inexpensive and easy to create.
spectrometer.......... An optical metrology instrument that measures the
amount of light reflected from a surface as a function
of the wavelength of the light. Spectrophotometers are
used to measure the thickness, and in some cases, the
optical properties of thin films.
thermal wave physics.. The physics of how to generate and detect high
frequency thermal or heat waves, and how these thermal
waves interact with materials.
thin film deposition.. The deposition of thin films onto a wafer surface by
chemical or plasma processes.
thin film removal..... The removal or etching of thin films from a wafer
surface by chemical or plasma processes.
transistor............ An individual circuit that can amplify or switch
electric current. This is the building block of all
integrated circuits and semiconductors.
ultra-violet.......... That region of the optical spectrum that extends from
the violet region to shorter wavelengths, typically
from 400nm to 150nm.
wafer................. Thin, round, flat piece of silicon that is the base of
most semiconductors. Wafers typically come in sizes of
100 millimeters to 200 millimeters in diameter. A
single 200 millimeter wafer could have hundreds of
semiconductor devices fabricated on it.
G-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THERMA-WAVE, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets as of March 31, 1996 and April 6, 1997....... F-3
Consolidated Statements of Income for the years ended April 2, 1995,
March 31, 1996 and April 6, 1997........................................ F-4
Consolidated Statements of Shareholders' Equity for the years ended April
2, 1995, March 31, 1996 and April 6, 1997............................... F-5
Consolidated Statements of Cash Flows for the years ended April 2, 1995,
March 31, 1996 and April 6, 1997........................................ F-6
Notes to Consolidated Financial Statements............................... F-7
THERMA-WAVE, INC. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets as of April 6, 1997 and
July 6, 1997........................................................... F-16
Unaudited Condensed Consolidated Statements of Income for the three-
month periods ended July 7, 1996 and July 6, 1997...................... F-17
Unaudited Condensed Consolidated Statements of Cash Flows for the three-
month periods ended July 7, 1996 and July 6, 1997...................... F-18
Notes to Unaudited Condensed Consolidated Financial Statements.......... F-19
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Therma-Wave, Inc.
We have audited the accompanying consolidated balance sheets of Therma-Wave,
Inc. as of April 6, 1997 and March 31, 1996, and the related consolidated
statements of income, shareholders' equity (net capital deficiency), and cash
flows for the years ended April 6, 1997, March 31, 1996 and April 2, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Therma-Wave, Inc. at April 6, 1997 and March 31, 1996 and the consolidated
results of its operations and its cash flows for the years ended April 6, 1997,
March 31, 1996 and April 2, 1995, in conformity with generally accepted
accounting principles.
San Jose, California
May 8, 1997, except for Notes 8 and 9, as to which the date is September 30,
1997
- --------------------------------------------------------------------------------
Neither a share price nor a range has been determined for common shares in
this offering, which precludes management from calculating the pro forma net
income per share under the method discussed in Note 1 to the consolidated
financial statements. The foregoing report is in the form that will be signed
upon determination of the share price, if no other events have occurred from
September 30, 1997 to the date of such determination that would affect the
consolidated financial statements and notes thereto.
ERNST & YOUNG LLP
San Jose, California
September 30, 1997
F-2
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, APRIL 6,
1996 1997
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 7,690 $ 16,741
Accounts receivable, net of allowance for doubtful
accounts of $284 in 1996 and $1,622 in 1997 ............ 18,830 20,107
Receivable from parent................................... 1,425 1,425
Inventories:
Purchased materials.................................... 5,760 8,937
Systems in process..................................... 5,619 7,252
Finished systems....................................... 1,756 1,238
-------- --------
Total inventories........................................ 13,135 17,427
Deferred income taxes.................................... 3,201 5,556
Other current assets..................................... 339 383
-------- --------
Total current assets....................................... 44,620 61,639
Property and equipment:
Laboratory and test equipment............................ 3,667 3,721
Office furniture and equipment........................... 2,402 4,292
Machinery and equipment.................................. 1,421 1,521
Leasehold improvements................................... 2,921 2,237
-------- --------
10,411 11,771
Less accumulated depreciation and amortization........... 4,165 5,928
-------- --------
Net property and equipment................................. 6,246 5,843
Goodwill and purchased intangibles, net of accumulated
amortization of $8,286 at March 31, 1996.................. 1,275 --
Patents, net of accumulated amortization of $912 in 1996
and $985 in 1997.......................................... 496 481
Security deposits and other................................ 419 657
-------- --------
Total assets........................................... $ 53,056 $ 68,620
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term notes payable................................. $ 5,019 $ 3,834
Accounts payable......................................... 3,344 4,076
Accrued compensation and related expenses................ 3,344 2,922
Income taxes payable..................................... 904 1,507
Accrued warranty costs................................... 2,594 4,990
Other accrued liabilities................................ 4,174 4,427
Deferred service revenue................................. 1,333 1,075
Capital lease obligations due within one year............ 168 88
-------- --------
Total current liabilities.................................. 20,880 22,919
Notes payable.............................................. 23,100 23,100
Capital lease obligations due after one year............... 539 429
Deferred taxes............................................. 1,544 1,685
Deferred rent and other.................................... 90 342
Commitments and contingencies
Shareholders' equity
Common stock, $0.001 par value; 50,000,000 shares
authorized; 45,515,339 shares issued and outstanding.... 45 45
Additional paid-in capital............................... 60,465 60,465
Accumulated deficit...................................... (52,028) (38,927)
Notes receivable from shareholders....................... (524) --
Accumulated foreign currency translation adjustments..... (1,055) (1,438)
-------- --------
Total shareholders' equity................................. 6,903 20,145
-------- --------
Total liabilities and shareholders' equity............. $ 53,056 $ 68,620
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
APRIL 2, MARCH 31, APRIL 6,
1995 1996 1997
------- --------- --------
<S> <C> <C> <C>
Net revenues...................................... $55,675 $79,293 $109,493
Cost of revenues.................................. 25,024 35,027 49,795
------- ------- --------
Gross margin...................................... 30,651 44,266 59,698
Operating expenses:
Research and development........................ 5,942 10,072 13,050
Selling, general and administrative............. 13,299 18,704 22,004
Amortization of goodwill and purchased
intangibles.................................... 1,912 1,912 1,275
------- ------- --------
Total operating expenses.......................... 21,153 30,688 36,329
------- ------- --------
Operating income.................................. 9,498 13,578 23,369
Other income (expense):
Interest expense................................ (1,998) (1,722) (1,621)
Interest income................................. 102 247 346
Other income and expense........................ (115) (138) 14
------- ------- --------
(2,011) (1,613) (1,261)
------- ------- --------
Income before provision for income taxes.......... 7,487 11,965 22,108
Provision for income taxes........................ -- 4,684 9,007
------- ------- --------
Net income........................................ $ 7,487 $ 7,281 $ 13,101
======= ======= ========
Pro forma net income per share.................... $
======= ======= ========
Pro forma weighted average number of shares
outstanding......................................
======= ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
NOTES FOREIGN
COMMON STOCK ADDITIONAL RECEIVABLE CURRENCY
----------------- PAID-IN ACCUMULATED FROM TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT SHAREHOLDERS ADJUSTMENTS TOTAL
---------- ------ ---------- ----------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 27,
1994................... 26,420,550 $26 $44,213 $(66,796) $-- $ (288) $(22,845)
Issuance of common
stock................. 19,094,789 19 15,568 -- (524) -- 15,063
Tax benefit from
exercise of employee
options............... -- -- 420 -- -- -- 420
Foreign currency
translation
adjustments........... -- -- -- -- -- (504) (504)
Net income............. -- -- -- 7,487 -- -- 7,487
---------- --- ------- -------- ---- ------- --------
Balance at April 2,
1995................... 45,515,339 45 60,201 (59,309) (524) (792) (379)
Foreign currency
translation
adjustments........... -- -- -- -- -- (263) (263)
Tax benefit from
exercise of employee
options............... -- -- 264 -- -- -- 264
Net income............. -- -- -- 7,281 -- -- 7,281
---------- --- ------- -------- ---- ------- --------
Balance at March 31,
1996................... 45,515,339 45 60,465 (52,028) (524) (1,055) 6,903
Foreign currency
translation adjustment
...................... -- -- -- -- -- (383) (383)
Repayment of notes
receivable from
shareholders ......... -- -- -- -- 524 -- 524
Net income ............ -- -- -- 13,101 -- -- 13,101
---------- --- ------- -------- ---- ------- --------
Balance at April 6,
1997................... 45,515,339 $45 $60,465 $(38,927) $-- $(1,438) $ 20,145
========== === ======= ======== ==== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------
APRIL 2, MARCH 31, APRIL 6,
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 7,487 $ 7,281 $ 13,101
Adjustments to reconcile net income to net cash
provided by activities:
Depreciation and amortization................. 2,998 3,607 3,744
Deferred income taxes......................... (1,204) (453) (2,214)
Changes in assets and liabilities:
Accounts receivable......................... (12,228) (1,381) (1,277)
Inventories................................. (1,953) (5,061) (5,006)
Other current assets........................ 132 (142) (44)
Accounts payable............................ 1,135 (545) 732
Accrued compensation and related expenses... 2,419 (587) (422)
Income taxes payable........................ 756 688 603
Other accrued liabilities................... 1,991 2,220 2,649
Deferred service revenue.................... 349 333 (258)
Deferred rent and other..................... (6) (93) 252
-------- ------- --------
Net cash provided by operating activities....... 1,876 5,867 11,860
INVESTING ACTIVITIES
Purchases of property and equipment............. (1,616) (4,361) (1,091)
Increase in other assets........................ (432) (604) (484)
-------- ------- --------
Net cash used in investing activities........... (2,048) (4,965) (1,575)
FINANCING ACTIVITIES
Receivable from parent.......................... (1,425) -- --
Proceeds from notes payable..................... 2,800 -- 250
Repayments on notes payable..................... (10,557) (1,231) (1,435)
Principal payments under capital lease
obligations.................................... (96) (311) (190)
Tax benefit from exercise of stock options...... 420 264 --
Issuance of common stock........................ 15,063 -- --
Proceeds from notes receivable from
shareholders................................... -- -- 524
-------- ------- --------
Net cash (used in) provided by financing
activities..................................... 6,205 (1,278) (851)
Effect of exchange rate changes on cash......... (504) (263) (383)
-------- ------- --------
Net (decrease) increase in cash and cash
equivalents.................................... 5,529 (639) 9,051
Cash and cash equivalents at beginning of
period......................................... 2,800 8,329 7,690
-------- ------- --------
Cash and cash equivalents at end of period...... $ 8,329 $ 7,690 $ 16,741
======== ======= ========
Supplementary disclosures:
Cash paid for interest........................ $ 2,012 $ 2,228 $ 2,059
======== ======= ========
Cash paid for income taxes.................... $ 102 $ 5,039 $ 10,661
======== ======= ========
Noncash financing activity:
Common stock issued for notes receivable from
shareholders................................. $ 524 -- --
======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Therma-Wave, Inc. (the "Company") develops, manufactures, and markets process
control metrology systems for use in the manufacture of semiconductors. These
systems are based on the Company's proprietary thermal wave and optical
technologies. The Company's sole shareholders are two Japanese Companies, Toray
Industries ("Toray") and Shimadzu Corporation ("Shimadzu") subsequent to their
acquisition of all outstanding shares of the Company's capital stock in
December, 1991. The Company sells its products to major semiconductor
manufacturing companies throughout the world, generally requires no collateral
and maintains an allowance for doubtful accounts for credit losses.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Therma-Wave, Inc. and its wholly owned subsidiaries. All significant
intercompany transactions and balances are eliminated in consolidation.
In December 1991 Toray and Shimadzu purchased all outstanding shares of the
Company's capital stock in an acquisition accounted for as a purchase. The
purchase price was allocated to the identifiable assets based on their
estimated fair market values at the date of acquisition utilizing an
independent valuation. The remaining purchased intangibles and goodwill are
being amortized over their estimated useful lives of five years.
Revenue Recognition
Revenue from system sales and spare parts is generally recognized at the time
of shipment. Revenue on service contracts is deferred and recognized on a
straight-line basis over the period of the contract. Estimated contractual
warranty obligations are recorded when related sales are recognized.
Major Customers/Sources of Supply
Sales to customers representing 10% or more of net revenues during fiscal
1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
APRIL 2, MARCH 31, APRIL 6,
CUSTOMER 1995 1996 1997
-------- -------- --------- --------
<S> <C> <C> <C>
A............................................. 17% 17% 13%
B............................................. 18% 15% 10%
</TABLE>
Certain of the components and subassemblies included in the Company's systems
are obtained from a single source or a limited group of suppliers. Although the
Company seeks to reduce dependence on those sole and limited source suppliers,
the partial or complete loss of certain of these sources could have at least a
temporary adverse effect on the Company's results of operations and damage
customer relationships. Further, a significant increase in the price of one or
more of these components could adversely affect the Company's results of
operations.
F-7
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounts receivable from three customers accounted for approximately 16%, 15%
and 13% of total accounts receivable at March 31, 1996. Accounts receivable
from three customers accounted for approximately 28%, 13% and 10% of total
accounts receivable at April 6, 1997.
Cash and Cash Equivalents
The Company maintains its cash and cash equivalents in depository accounts,
money market accounts and certificates of deposit with several financial
institutions.
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Foreign Currency Translation
The Company has determined that the functional currency of its foreign
operations is the local foreign currency. The accumulated effects of foreign
translation rate changes related to net assets located outside the United
States are included as a component of shareholders' equity. Foreign currency
transaction gains (losses) are included in other income and expense in the
accompanying consolidated statements of income and amounted to $(11,000)
$(217,000) and $74,000, for the years ended April 2, 1995, March 31, 1996 and
April 6, 1997, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided on the straight-line method over the estimated useful lives of the
respective assets, generally five years. Leasehold improvements and assets
recorded under capital leases are amortized using the straight-line method over
the shorter of the assets' useful lives or lease terms.
Pro forma net income per share
Pro forma net income per share is based upon the pro forma net income and the
number of common and preferred shares outstanding as a result of the Company's
May 1997 Recapitalization. (See Note 8). The pro forma net income per share
calculation gives effect to additional interest expense resulting from the
recapitalization and to the shares issued as if the recapitalization occurred
as of the beginning of the period presented. The number of pro forma common
shares outstanding has also been adjusted to give effect to the
reclassification of the class A, B and L common stock into one class of Common
Stock based upon the respective exchange ratios of each class. (See Note 9.) No
historical earnings per share information is presented as the Company does not
consider such data to be meaningful as a result of the recapitalization.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingencies at the date of the financial statements and the reported
F-8
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates, and such differences could affect the
results of operations reported in future periods.
Accounting Period
The Company's fiscal year is a 52 to 53-week year ending on the Sunday on or
nearest preceding March 31 for periods prior to 1997 and the Sunday on or
following March 31 of each year for periods thereafter.
Advertising Costs
The Company expenses advertising and promotional costs, which are not
material, as they are incurred.
Fair Value of Financial Instruments
The Company believes that as of April 6, 1997, the fair value of its short
and long-term debt approximates the carrying value of those obligations. The
fair value of the Company's debt is estimated based on the Company's current
incremental borrowing rates on similar debt obligations guaranteed by Toray and
Shimadzu.
2. TRANSACTIONS WITH TORAY AND SHIMADZU
Account balances with Toray and Shimadzu are as follows (in thousands);
<TABLE>
<CAPTION>
MARCH 31, APRIL 6,
1996 1997
--------- --------
<S> <C> <C>
Due from (due to) Toray and Shimadzu:
Accounts receivables.................................... $ 84 $ 18
Receivable from parent.................................. 1,425 1,425
Accrued expenses........................................ -- (25)
------ ------
$1,509 $1,418
====== ======
</TABLE>
Transactions with Toray and Shimadzu are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
APRIL 2, MARCH 31, APRIL 6,
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Sales............................................ $42 $ -- $590
Purchases of inventories, at cost................ 3 -- 94
</TABLE>
The Company incurred expenses of approximately $426,000, $739,000 and
$559,000 for the fiscal years ended April 2, 1995, March 31, 1996 and April 6,
1997, respectively, for employees loaned to the Company by Toray and Shimadzu.
In December 1994 and March 1995, Toray and Shimadzu purchased 16,666,667
additional common shares of the Company for $15,000,000.
3. FINANCING ARRANGEMENTS
The Company has a credit agreement with a Japanese bank for an unsecured,
renewable note payable with a outstanding principal balance at April 6, 1997,
of $3,834,000. The renewable note, guaranteed by Toray, is due at May 31, 1997
and bears interest at an annual rate of 1.625%.
F-9
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has $23,100,000 of unsecured long-term debt under four separate
loan agreements with banks at April 6, 1997. This debt was transferred from the
Company's principal shareholders in connection with the acquisition described
in Note 1. The debt is guaranteed by Toray and Shimadzu, bears interest at
variable rates tied to the federal funds rate plus 0.5% (approximately 6.3% as
of April 6, 1997), and matures on May 30, 1997. Although management expects to
have the ability to extend the terms of the loan agreements, the instruments
were refinanced on a long-term basis in conjunction with the Recapitalization
Agreement. (See Note 8).
The Company also has unsecured line of credit agreements with four banks
which provide for borrowings of up to $6,200,000 and are guaranteed by Toray
and Shimadzu. At April 6, 1997, there were no outstanding borrowings under
these agreements.
4. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases its facilities under noncancellable operating leases which
require the Company to pay maintenance and operating expenses, such as taxes,
insurance and utilities. The Company is required pursuant to the terms of a
facility lease to maintain a standby letter of credit that is collateralized by
a $650,000 certificate of deposit.
Property and equipment include equipment recorded under capital leases of
approximately $999,000 and $1,050,000 and related accumulated amortization of
$413,000 and $547,000 at March 31, 1996 and April 6, 1997.
Rent expense was approximately $606,000, $897,000 and $1,524,000 for the
fiscal years ended April 2, 1995, March 31, 1996 and April 6, 1997,
respectively.
At April 6, 1997, future minimum lease payments under capital and
noncancellable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
<S> <C> <C>
1998.................................................... $120 $ 1,242
1999.................................................... 103 1,158
2000.................................................... 90 1,146
2001.................................................... 88 1,142
2002 and thereafter..................................... 212 5,525
---- -------
Future minimum lease payments........................... 613 $10,213
=======
Less amounts representing interest...................... (96)
----
Present value of future minimum lease payments.......... 517
Less current portion.................................... (88)
----
$429
====
</TABLE>
Contingencies
LEGAL PROCEEDINGS
On July 19, 1994, the Company filed a patent infringement suit against
Jenoptik, a German company, in the U.S. District court for the Northern
District of California. The Company alleges that the manufacture and sale by
Jenoptik of Jenoptik's TWIN and TWIN SC systems infringe several of the
Company's U.S.
F-10
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
patents that are related to the Company's Therma-Probe ion implant metrology
system. Jenoptik denies infringement and claims that the Company's patents are
invalid and unenforceable. The trial is scheduled to begin in the middle of
October 1997.
On February 1, 1996, the Company filed another patent infringement suit
against Jenoptik in the Patent Court in Dusseldorf, Germany. The Company
alleges that the manufacture and sale by Jenoptik of Jenoptik's TWIN and TWIN
SC systems infringes the Company's German counterpart to one of the Company's
U.S. patents being asserted against Jenoptik in the U.S. lawsuit. A technical
expert appointed by the Patent Court recently opined that Jenoptik is not
infringing the Company's German patent. In addition, based upon a nullity
action filed by Jenoptik, the Nullity Board of the Patent Court recently ruled
that the Company's German patent is invalid. The Company plans to challenge
both determinations. On average, the Company sells one Therma-Probe system per
year to customers located in Germany.
The technical expert's opinion that Jenoptik is not infringing the Company's
German patent was based upon a claim limitation in the German patent that is
not present in its U.S. counterpart. In order to infringe a patent claim, each
of the limitations in the claim must be met. Because the Company's German
patent contains a limitation that is not present in its U.S. counterpart, the
U.S. patent could be infringed without the German patent also being infringed.
Thus, the technical expert's opinion will not affect the U.S. District Court's
determination of whether Jenoptik is infringing the Company's U.S. counterpart
patent. Moreover, the U.S. lawsuit involves U.S. patents other than the U.S.
counterpart patent.
A material adverse effect on the Company's business or the Company's
financial condition could occur if one or more of the Company's U.S. patents
and the Company's German patent are found to be invalid or unenforceable and
such a finding is upheld on appeal because such a finding might affect the
Company's ability to exclude competitors, including Jenoptik, from making or
selling competing products in these jurisdictions.
The Company is involved in various other legal proceedings from time to time
arising in the ordinary course of business, none of which management expects to
have a material adverse effect on the Company's results of operations or
financial condition.
5. INCOME TAXES
The domestic and foreign components of income before provision for income
taxes are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
APRIL 2, MARCH 31, APRIL 6,
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Domestic...................................... $7,808 $ 9,814 $19,419
Foreign....................................... (321) 2,151 2,689
------ ------- -------
Total....................................... $7,487 $11,965 $22,108
====== ======= =======
</TABLE>
F-11
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------
APRIL 2, MARCH 31, APRIL 6,
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Current:
Federal...................................... $ 1,007 $4,429 $ 9,696
State........................................ 197 708 1,525
Foreign...................................... -- -- --
------- ------ -------
1,204 5,137 11,221
Deferred:
Federal...................................... (882) (313) (1,921)
State........................................ (322) (140) (293)
Foreign...................................... -- -- --
------- ------ -------
(1,204) (453) (2,214)
------- ------ -------
Total provision.............................. $ -- $4,684 $ 9,007
======= ====== =======
</TABLE>
A reconciliation between income tax provisions at the U.S. federal statutory
rate and the effective rate reflected in the statements of operations is as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
APRIL 2, MARCH 31, APRIL 6,
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Provision at statutory rate.................. 34.0% 35.0% 35.0%
State taxes, net of federal benefit.......... 1.7 3.8 3.6
Amortization of goodwill and purchased
intangibles................................. 8.7 5.6 2.0
Foreign losses not benefitted................ 4.9 -- --
Utilization of net operating loss and credit
carryforwards............................... (29.8) (5.4) (3.2)
Other changes in valuation allowances........ (23.6) (4.8) --
Other........................................ 4.1 4.9 3.3
----- ---- ----
0.0% 39.1% 40.7%
===== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands):
<TABLE>
<CAPTION>
MARCH 31, APRIL 6,
1996 1997
--------- --------
<S> <C> <C>
Deferred tax assets:
Accrued costs and expenses.......................... $ 2,956 $ 4,359
State taxes......................................... 248 534
Other............................................... 209 663
Net operating loss.................................. 1,205 491
------- -------
Total gross deferred tax assets..................... 4,618 6,047
Less valuation allowance............................ (1,205) (491)
------- -------
Net deferred tax assets............................. $ 3,413 $ 5,556
======= =======
Deferred tax liabilities:
Deferred revenue on foreign sales................... $(1,571) $(1,424)
Other............................................... (185) (261)
------- -------
Net deferred tax liabilities........................ $(1,756) $(1,685)
======= =======
</TABLE>
The net changes in the total valuation allowance for fiscal 1996 and fiscal
1997 were $(1,218,000) and $(714,000), respectively, and relate primarily to
changes in certain foreign net operating losses.
F-12
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At April 6, 1997, the Company has net operating loss carryforwards for
foreign income tax purposes of approximately $1,324,000, which expire in
varying amounts through 2010. Utilization of these carryforwards could be
subject to substantial limitation if it should be determined that a more than
50% change in ownership of the Company's stock has occurred over a three-year
period or if such a change was to occur in the future.
In the year ended March 31, 1996, the Company utilized all Federal and state
research and development tax credit carryforwards as well as its federal
alternative minimum tax credit carryforwards.
6. RETIREMENT PLAN
The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code covering substantially all employees. Discretionary company
contributions which are based on achieving certain operating profit goals, were
$285,000, $499,000 and $540,000 in fiscal 1995, 1996 and 1997, respectively.
7. SEGMENT INFORMATION
The Company operates in one business segment, which includes developing,
manufacturing and marketing process development and control systems for use in
the semiconductor industry. The following table summarizes the Company's
operations from its headquarters located in Fremont, California ("United
States") and its wholly-owned subsidiary in Japan (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 2, 1995
-------------------------------------------
UNITED ADJUSTMENTS/
STATES JAPAN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue.................... $ 50,965 $ 8,010 $(3,300) $ 55,675
======== ======= ======= ========
Income (loss) from operations.... $ 9,488 $ (655) $ 665 $ 9,498
======== ======= ======= ========
Identifiable assets.............. $ 45,252 $ 9,006 $(9,177) $ 45,081
======== ======= ======= ========
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1996
-------------------------------------------
UNITED ADJUSTMENTS/
STATES JAPAN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue.................... $ 75,020 $11,303 $(7,030) $ 79,293
======== ======= ======= ========
Income from operations........... $ 11,200 $ 503 $ 1,875 $ 13,578
======== ======= ======= ========
Identifiable assets.............. $ 52,653 $ 9,229 $(8,826) $ 53,056
======== ======= ======= ========
<CAPTION>
FISCAL YEAR ENDED APRIL 6, 1997
-------------------------------------------
UNITED ADJUSTMENTS/
STATES JAPAN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue.................... $103,578 $10,991 $(5,076) $109,493
======== ======= ======= ========
Income from operations........... $ 20,974 $ 1,632 $ 763 $ 23,369
======== ======= ======= ========
Identifiable assets.............. $ 67,764 $ 7,497 $(6,641) $ 68,620
======== ======= ======= ========
</TABLE>
Export sales, representing sales from the United States to customers in
foreign countries primarily in Asia and Europe, was approximately $24,531,000,
$34,503,000 and $54,390,000 of total United States revenue for the fiscal years
ended April 2, 1995, March 31, 1996 and April 6, 1997.
F-13
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. SUBSEQUENT EVENT-RECAPITALIZATION
In December 1996, the Board of Directors approved the Recapitalization
Agreement (the "Recapitalization Agreement"). Pursuant to the Recapitalization
Agreement which closed on May 16, 1997, the Company: (i) redeemed from Toray
and Shimadzu approximately 86.6% of its outstanding capital stock for $96.9
million; (ii) converted their remaining outstanding capital stock to newly
issued shares of preferred stock and common stock; (iii) repaid all outstanding
notes payable of approximately $27.0 million; (iv) canceled the receivable from
parent of $1,425,000 which was recorded as a reduction of additional paid-in
capital; and (v) paid the estimated fees and expenses of $11.0 million related
to the Recapitalization. In order to finance the transactions contemplated by
the Recapitalization Agreement, the Company: (i) issued $115.0 million in
aggregate principal amount of senior notes in a private debt offering; (ii)
received an equity contribution of $20.0 million in cash from an investor
group, including Bain Capital Funds ("Bain"), and members of the Company's
senior management team; and (iii) converted equity securities of Toray and
Shimadzu having a value of $15.0 million into newly issued shares of preferred
stock and common stock.
As a result of the Recapitalization the outstanding equity securities of the
Company consist of 9,073,534 shares of Class A Common; 1,343,750 shares of
Class B Common; 1,008,170 shares of Class L Common; and 748,738 shares of
Preferred Stock. The shares of Class A Common and Class L Common each entitle
the holder thereof to one vote per share on all matters to be voted upon by the
stockholders of the Company and are otherwise identical, except that the shares
of Class L Common are entitled to a preference over Class A Common with respect
to any distribution by the Company to holders of its capital stock equal to the
original cost of such share ($19.085) plus an amount which accrues on a daily
basis at a rate of 12% per annum, compounded annually (the "Preference
Amount"). The Class B Common is identical to the Class A Common except that the
Class B Common is nonvoting and is convertible into Class A Common at any time
following an initial public offering by the Company at the option of the holder
thereof. The Preferred Stock has a liquidation preference of $18.40 per share
and is convertible into one share of Class A Common at the option of the holder
thereof. Dividends on the Preferred Stock accrue at a rate of 6.0% per annum.
The Preferred Stock has a scheduled redemption of the earlier of: (i) the tenth
anniversary of the Recapitalization; and (ii) one day following the scheduled
maturity of the Notes, and is otherwise redeemable by the Company at any time
from time to time after the earlier of: (i) June 30, 1998; and (ii) an initial
public offering by the Company. The Preferred Stock entitles the holder thereof
to one vote for each share of Class A Common issuable upon conversion of such
Preferred Stock.
In connection with the Recapitalization, the Board of Directors adopted the
Therma-Wave, Inc. 1997 Stock Purchase and Option Plan (the "1997 Stock Plan"),
which authorizes the granting of stock options and the sale of Class A Common
or Class B Common to current or future employees, directors, consultants or
advisors of the Company or its subsidiaries. Under the 1997 Stock Plan, the
Board is authorized to sell or otherwise issue any class or classes of Common
Stock at any time prior to the termination of the 1997 Stock Plan in such
quantity, at such price, on such terms and subject to such conditions as
established by the Board of Directors up to an aggregate of 3,000,000 shares of
Class A Common and 3,000,000 shares of Class B Common, subject to adjustment.
Options to purchase an aggregate of 1,128,749 shares of Class B Common were
granted to employees under the 1997 Stock Plan in connection with the
Recapitalization. The options were divided into five equal tranches with the
exercise prices of $8.93, $10.68, $12.43, $14.18 and $15.89 per share. All of
the options granted under the 1997 Stock Plan were immediately exercisable. The
shares of Class B Common issuable upon the exercise of such options will vest
(regardless of whether the option has been exercised) on the fifth anniversary
of their date of grant provided that the optionee has been continuously
employed by the Company during that period.
F-14
<PAGE>
In connection with the Recapitalization Agreement, the Company and the
original purchasers of the $115.0 million of senior notes entered into a
Registration Agreement dated May 15, 1997 which grants the holder of the notes
certain exchange and registration rights. Based upon the terms of such
agreement, the Company will issue new notes with similar terms as the old notes
except that the new notes will be registered under the Securities Act and
therefore will not bear legends restricting their transfer.
9. SUBSEQUENT EVENT-INITIAL PUBLIC OFFERING OF COMMON STOCK AND RELATED EVENTS
In September 1997 the Board of Directors approved the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to sell shares of its common stock to the public.
Prior to the completion of the Offering: (i) all of the outstanding shares of
Class A Common and Class B Common will be reclassified into a single class of
Common Stock on a share-for-share basis; and (ii) all of the outstanding shares
of Class L Common will be reclassified into shares of Common Stock
(collectively, the "Reclassification"). In connection with the
Reclassification, each outstanding share of Class L Common will be reclassified
into one share of Common Stock plus an additional number of shares of Common
Stock determined by dividing the Preference Amount by the value of a share of
Common Stock based on the Offering price. The actual number of shares of Common
Stock that will be issued as a result of the Reclassification is subject to
change based on the actual Offering price and the closing date of this
Offering. Additionally the Company intends to redeem all of the issued and
outstanding Preferred Stock immediately following the completion of the
Offering.
F-15
<PAGE>
THERMA-WAVE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 6, JULY 6,
ASSETS 1997 1997
------ -------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $ 16,741 $ 14,017
Accounts receivable, net.......................... 20,107 23,996
Receivable from parent............................ 1,425 --
Inventories....................................... 17,427 19,019
Other assets...................................... 5,939 6,295
-------- --------
Total current assets............................ 61,639 63,327
Property and equipment, net......................... 5,843 6,157
Deferred financing costs, net....................... -- 10,880
Other assets, net................................... 1,138 1,976
-------- --------
Total assets.................................... $ 68,620 $ 82,340
======== ========
<CAPTION>
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
---------------------------------------------------
<S> <C> <C>
Current liabilities:
Short-term debt................................... $ 3,834 $ --
Other current liabilities......................... 19,085 19,868
-------- --------
Total current liabilities....................... 22,919 19,868
Long-term debt...................................... 23,100 115,000
Other liabilities................................... 2,456 2,320
Mandatorily redeemable preferred stock.............. -- 13,916
Shareholders' Equity (net capital deficit)..........
Common stock...................................... 45 --
Common stock--Class A............................. -- 91
Common stock--Class B............................. -- 11
Common stock--Class L............................. -- 10
Additional paid-in capital........................ 60,465 21,303
Accumulated deficit............................... (38,927) (88,456)
Other............................................. (1,438) (1,723)
-------- --------
Total Shareholders' equity (net capital
deficiency).................................... 20,145 (68,764)
-------- --------
$ 68,620 $ 82,340
======== ========
</TABLE>
See accompanying notes.
F-16
<PAGE>
THERMA-WAVE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
----------------
JULY 7, JULY 6,
1996 1997
------- -------
<S> <C> <C>
Net revenue.................................................. $28,715 $28,205
Cost of revenue.............................................. 12,893 13,263
------- -------
Gross margin................................................. 15,822 14,942
Operating expenses:
Research and development................................... 3,025 4,488
Selling, general and administrative........................ 5,893 5,026
Amortization of goodwill and purchased intangibles......... 478 --
Non-recurring recapitalization and related expenses (non-
cash)..................................................... -- 2,888
------- -------
Total operating expenses................................. 9,396 12,402
------- -------
Operating income............................................. 6,426 2,540
Other income (expense):
Interest expense........................................... (432) (2,193)
Interest income............................................ 45 169
Other...................................................... (26) (5)
------- -------
(413) (2,029)
------- -------
Income before provision for income taxes..................... 6,013 511
Provision for income taxes................................... 2,510 200
------- -------
Net income................................................... $ 3,503 $ 311
=======
Accretion of preferred stock dividend........................ 116
-------
Net income attributable to common shareholders............... $ 195
=======
Pro forma income per share................................... $
=======
Pro forma weighted average number of shares outstanding...... $
=======
</TABLE>
See accompanying notes.
F-17
<PAGE>
THERMA-WAVE
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
JULY 7, JULY 6,
1996 1997
--------- ---------
<S> <C> <C>
Operating Activities:
Net income.............................................. $ 3,503 $ 311
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 1,049 1,036
Noncash recapitalization and related expenses......... -- 2,888
Changes in assets and liabilities:
Accounts receivable................................... (2,847) (3,889)
Inventories........................................... (3,614) (1,841)
Other current assets.................................. (157) (356)
Other current liabilities............................. 4,056 882
-------- ---------
Net cash provided by (used in) operating activities. 1,990 (969)
Investing Activities:
Purchase of property and equipment, net................. (554) (780)
Other................................................... (410) (1,159)
-------- ---------
Net cash used in investing activities............... (964) (1,939)
Financing Activities:
Issuance of Senior Notes................................ -- 115,000
Repayment of notes payable.............................. (1,047) (26,934)
Redemption of common stock.............................. -- (96,900)
Proceeds from issuance of common stock.................. 18,728
Deferred financing costs................................ -- (11,077)
Other................................................... 515 1,367
-------- ---------
Net cash provided (used in) by financing activities. (532) 184
-------- ---------
Net increase (decrease) in cash and cash equivalents...... 494 (2,724)
Cash and cash equivalents at beginning of period.......... 7,690 16,741
-------- ---------
Cash and cash equivalents at end of period................ $ 8,184 $ 14,017
======== =========
Supplementary disclosures:
Cash paid for interest.................................. $ 185 $ 238
======== =========
Cash paid for income taxes.............................. $ 502 $ 165
======== =========
Noncash financing activity:
Common stock issued for notes receivable from
shareholders........................................... $ -- $ 254
======== =========
</TABLE>
See accompanying notes.
F-18
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with generally accepted accounting principles.
However, certain information or footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The information furnished in this
report reflects all adjustments which, in the opinion of management, are
necessary for a fair statement of the consolidated financial position, results
of operations and cash flows as of and for the interim periods. Such
adjustments consist of items of a normal recurring nature. The condensed
consolidated financial statements included herein should be read in conjunction
with the audited financial statements and notes included elsewhere herein.
Results of operations for interim periods are not necessarily indicative of the
results of operations that may be expected for the full fiscal year ending
April 5, 1998 or for any other future period.
Pro forma net income per share
Pro forma net income per share is based upon the pro forma net income and the
pro forma number of common and preferred shares outstanding as a result of the
Company's May 1997 Recapitalization. The pro forma net income per share
calculation gives effect to additional interest expense resulting from the
recapitalization and to the shares issued as if the recapitalization occurred
as of the beginning of the periods presented. The number of pro forma common
shares outstanding has also been adjusted to give effect to the
reclassification of the class A, B and L common stock into one class of Common
Stock based upon the respective exchange ratios of each class. No historical
earnings per share information is presented as the Company does not consider
such data to be meaningful as a result of the recapitalization.
2. RECAPITALIZATION
In December 1996, the Board of Directors approved the Recapitalization
Agreement (the "Recapitalization Agreement"). Pursuant to the Recapitalization
Agreement which closed on May 16, 1997, the Company: (i) redeemed from Toray
Industries, Inc., ("Toray") and Shimadzu Corporation ("Shimadzu") approximately
86.6% of its outstanding capital stock for $96.9 million; (ii) converted its
remaining outstanding capital stock of 6.1 million shares to newly issued
shares of preferred stock and common stock; (iii) repaid substantially all of
its outstanding borrowings of approximately $26.9 million; (iv) canceled its
receivable from Toray and Shimadzu of $1.4 million which was recorded as a
reduction of additional paid-in capital; and (v) paid the estimated fees and
expenses of approximately $11.1 million related to the Recapitalization. In
order to finance the transactions contemplated by the Recapitalization
Agreement, the Company: (i) issued $115.0 million in aggregate principal amount
of senior notes in a private debt offering; (ii) received an equity
contribution of approximately $20.0 million in cash from an investor group,
including Bain Capital Funds ("Bain"), and members of the Company's senior
management team; and (iii) converted equity securities of Toray and Shimadzu
having a value of $15.0 million into newly issued shares of preferred stock and
common stock.
As a result of the Recapitalization the outstanding equity securities of the
Company consist of 9,073,534 shares of Class A Common; 1,343,750 shares of
Class B Common; 1,008,168 shares of Class L Common; and 748,738 shares of
Preferred Stock. The shares of Class A Common and Class L Common each entitle
the holder thereof to one vote per share on all matters to be voted upon by the
stockholders of the Company and are otherwise identical, except that the shares
of Class L Common are entitled to a
F-19
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
preference over Class A Common with respect to any distribution by the Company
to holders of its capital stock equal to the original cost of such share
($19.085) plus an amount which accrues on a daily basis at a rate of 12% per
annum, compounded annually. The Class B Common is identical to the Class A
Common except that the Class B Common is nonvoting and is convertible into
Class A Common at any time following an initial public offering by the Company
at the option of the holder thereof. The Preferred Stock has a liquidation
preference of $18.40 per share and is convertible into one share of Class A
Common at the option of the holder thereof. Dividends on the Preferred Stock
accrue at a rate of 6.0% per annum. The Preferred Stock has a scheduled
redemption of the earlier of: (i) the tenth anniversary of the
Recapitalization; and (ii) one day following the scheduled maturity of the
Notes, and is otherwise redeemable by the Company at any time from time to time
after the earlier of: (i) June 30, 1998; and (ii) an initial public offering by
the Company. The Preferred Stock entitles the holder thereof to one vote for
each share of Class A Common issuable upon conversion of such Preferred Stock.
3. FINANCING ARRANGEMENTS
The $115 million of senior notes issued to finance the recapitalization are
senior unsecured obligations of the Company and will mature on May 15, 2004.
Interest on the Notes will accrue at the rate of 10 5/8% per annum and is
payable semiannually in cash on each May 15 and November 15 commencing on
November 15, 1997, to registered Holders at the close of business on May 1 and
November 1, respectively, immediately preceding the applicable interest payment
date. The Notes are not entitled to the benefit of any mandatory sinking fund
and are redeemable at the Company's option in whole at any time or in part from
time to time, on and after May 15, 2001, upon not less than 30 nor more than 60
days' notice, at the specified redemption prices. At any time, or from time to
time, on or prior to May 15, 2000, the Company may, at its option, use the net
cash proceeds of one or more Equity Offerings to redeem up to 40% of the
aggregate principal amount of Notes originally issued at a redemption price
equal to 110.625% of the principal amount thereof plus accrued and unpaid
interest.
In connection with the Recapitalization Agreement, the original purchasers of
the $115 million of senior notes have been granted certain exchange and
registration rights. Based upon the terms of such agreement, the Company will
issue new notes with similar terms as the old notes except that the new notes
will be registered under the Securities Act and therefore will not bear legends
restricting their transfer.
In conjunction with the Recapitalization, the Company entered into a new bank
credit facility (the "Bank Credit Facility") with Bankers Trust Company which
provides for a revolving credit facility of $30.0 million. The Company may
borrow amounts under the Bank Credit Facility to finance its working capital
requirements and other general corporate purposes. The Bank Credit Facility
requires the Company to maintain specified financial ratios, satisfy certain
financial conditions, is secured by virtually all company assets and matures on
May 16, 2002. At July 6, 1997 there were no outstanding borrowings under the
Bank Credit Facility.
4. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
APRIL JULY 6,
6, 1997 1997
------- -------
<S> <C> <C>
Purchased Materials....................................... $8,937 $10,700
Systems in Process........................................ 7,252 6,137
Finished Systems.......................................... 1,238 2,182
------- -------
$17,427 $19,019
======= =======
</TABLE>
F-20
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DEFERRED BONUS ARRANGEMENTS
Pursuant to the terms of certain management bonus arrangements the Company
may be obligated to pay up to an aggregate of $16.7 million after five years
based upon achieving certain operating results and each employee's continued
employment.
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 10
The Recapitalization...................................................... 19
Use of Proceeds........................................................... 20
The Reclassification...................................................... 21
Capitalization............................................................ 22
Dividend Policy........................................................... 23
Dilution.................................................................. 24
Unaudited Pro Forma Financial Data........................................ 25
Selected Historical Financial Data........................................ 32
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 33
Business.................................................................. 42
Management................................................................ 59
Principal Stockholders.................................................... 67
Certain Relationships and Related Transactions............................ 69
Description of Certain Indebtedness....................................... 73
Description of Capital Stock.............................................. 76
Shares Eligible for Future Sale........................................... 79
Underwriting.............................................................. 81
Experts................................................................... 82
Legal Matters............................................................. 82
Additional Information.................................................... 83
Glossary.................................................................. G-1
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
[LOGO OF THERMA-WAVE, INC.]
Common Stock
------------
PROSPECTUS
------------
BT ALEX. BROWN
LEHMAN BROTHERS
MONTGOMERY SECURITIES
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses, to be paid solely by the
Company, of the issuance and distribution of the securities being registered
hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 11,152
NASD filing fee................................................ 4,180
Nasdaq National Market listing fee............................. *
Blue Sky fees and expenses (including attorneys' fees and
expenses)...................................................... *
Printing expenses.............................................. *
Accounting fees and expenses................................... *
Transfer agent's fees and expenses............................. *
Legal fees and expenses........................................ *
Miscellaneous expenses......................................... *
---------
Total........................................................ $ *
=========
</TABLE>
--------
*To be provided by Amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
General Corporation Law
The Company is incorporated under the laws of the State of Delaware. Section
145 ("Section 145") of the General Corporation Law of the State of Delaware, as
the same exists or may hereafter be amended (the "General Corporation Law"),
inter alia, provides that a Delaware corporation may indemnify any persons who
were, are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director, employee
or agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the corporation's best interests and, with respect
to any criminal action or proceeding, had no reasonable cause to believe that
his conduct was illegal. A Delaware corporation may indemnify any persons who
are, were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reasons of
the fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable
to the corporation. Where an officer, director, employee or agent is successful
on the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
II-1
<PAGE>
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him in
any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
Certificate of Incorporation and By-Laws
The Company's Certificate of Incorporation and By-laws provides for the
indemnification of officers and directors to the fullest extent permitted by
the General Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the last three years, the Company has issued the following securities
without registration under the Securities Act of 1933 as amended (the
"Securities Act"):
(1) The Company completed the Recapitalization on May 16, 1997. In connection
with the Recapitalization, the Company issued:
(a) an aggregate of 6,960,035 shares of Old Common Stock to the Bain Capital
Funds and Sutter Hill (which were later converted into an aggregate of
7,264,236 shares of Class A Common and an aggregate of 807,138 shares of
Class L Common) for an aggregate of $17.1 million;
(b) an aggregate of (i) 1,226,331 shares of Class A Common; (ii) 136,258
shares of Class L Common; and (iii) 1,128,749 shares of Class B Common to
the Management Investors for an aggregate of $2.9 million;
(c) an aggregate of (i) 509,433 shares of Class A Common; (ii) 56,604 shares
of Class L Common; and (iii) 750,000 shares of Preferred Stock to the
Existing Stockholders in exchange for their 6,101,252 shares of Old Common
Stock;
(d) an aggregate of (i) 9,853 shares of Class A Common and (ii) 1,095 shares
of Class L Common to the Existing Stockholders in exchange for an
aggregate of 1,261 shares of Preferred Stock; and
(e) 63,679 shares of Class A Common and 7,075 shares of Class L Common to
Antares International Partners for an aggregate of $150,000.
(2) To finance a portion of the Recapitalization, the Company sold an
aggregate of $115.0 million aggregate principal amount of 10 5/8% Senior
Notes due 2004 to BT Securities Corporation pursuant to a Purchase
Agreement, dated May 16, 1997.
(3) On July 15, 1997, the Company sold an aggregate of 430,002 shares of Class
B Common to certain employees of the Company for an aggregate of $101,050.
The sales and issuances listed above in paragraphs (1)(a), (1)(b), (1)(e),
(2) and (3) were deemed exempt from registration under the Securities Act by
virtue of Section 4(2) thereof, as transactions not involving a public
offering. The issuance of securities listed in paragraphs (1)(c) and(1)(d) were
deemed exempt from registration under the Securities Act by virtue of Section
3(a)(9). Certain defined terms used herein not otherwise defined have the
meanings ascribed to them in the Prospectus, which forms a part of this
Registration Statement.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
**1.1 Form of Underwriting Agreement.
*2.1 Recapitalization Agreement, dated as of December 18, 1996, by and
among Bain Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP
Associates, BCIP Trust Associates, L.P., Toray Industries, Inc., Toray
Industries (America), Inc. and Shimadzu Corporation as amended by
Amendment No. 1 and Supplement to Recapitalization Agreement, dated
May 16, 1997, by and among Therma-Wave, Inc., Toray Industries, Inc.,
Toray Industries (America), Inc., Shimadzu Corporation and Bain
Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP Trust
Associates and BCIP Trust Associates, L.P.+
*3.1 Restated Certificate of Incorporation of Therma-Wave.
*3.2 Amended and Restated By-Laws of Therma-Wave.
*4.1 Purchase Agreement, dated as of May 16, 1997, by and among Therma-Wave
and BT Securities Corporation.
*4.2 Indenture, dated as of May 15, 1997, by and among Therma-Wave and IBJ
Schroder Bank & Trust Company, as trustee.
*4.3 Form of 10 5/8% Senior Notes.
*4.4 Form of Series B 10 5/8% Senior Notes.
*4.5 Registration Rights Agreement, dated as of May 15, 1997, by and among
Therma-Wave and BT Securities Corporation, as Initial Purchaser.
**4.6 Form of certificate representing shares of Class A Common Stock.
**5.1 Opinion of Kirkland & Ellis.
*10.1 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and Dr. Allan Rosencwaig.
*10.2 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and David L. Willenborg.
*10.3 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and W. Lee Smith.
*10.4 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and Jon L. Opsal.
*10.5 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and Anthony W. Lin.
*10.6 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Dr. Allan Rosencwaig.
*10.7 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and David L. Willenborg.
*10.8 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and W. Lee Smith.
*10.9 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Jon L. Opsal.
*10.10 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Anthony W. Lin.
*10.11 Stockholders Agreement, dated as of May 16, 1997, by and among Therma-
Wave and certain stockholders named therein.
*10.12 Development License Agreement, dated June 12, 1992, by and among
Therma-Wave and Therma-Wave K.K., Toray Industries, Inc. and Shimadzu
Corporation.
*10.13 New Development Agreement, dated December 22, 1997, by and between
Therma-Wave and Toray Industries, Inc.
*10.14 Lease Agreement, dated as of May 26, 1995, by and between Therma-Wave
and Sobrato Interests.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*10.15 Advisory Agreement, dated as of May 16, 1996, between Therma-Wave and
Bain Capital, Inc.
*10.16 Voting Agreement, dated as of May 16, 1997, between Therma-Wave and
certain stockholders named therein.
*10.17 Credit Agreement, dated as of May 16, 1997, between Therma-Wave and
Bankers Trust Company, as agent, and certain financial institutions
named therein.+
*10.18 Pledge Agreement, dated as of May 16, 1997, between Therma-Wave and
Bankers Trust Company, as agent.
*10.19 Security Agreement, dated as of May 16, 1997, between Therma-Wave and
Bankers Trust Company, as agent+
*10.20 Therma-Wave, Inc. 1997 Stock Purchase and Option Plan.
*10.21 Registration Agreement, dated as of May 16, 1997, between Therma-Wave
and the stockholders named therein.
*10.22 Agreement, dated as of January 26, 1996, between Toray Industries,
Inc. and the key employees of the Company named therein.
*10.23 Key Employee Stock Agreement, dated as of October 30, 1991, by and
among Toray Industries, Inc., TS Subsidiary Corp., Therma-Wave, Inc.
and the key employees named therein.
**10.24 Therma-Wave, Inc. 1997 Equity Incentive Plan.
**11.1 Statement Regarding Computation of Earnings Per Share.
*21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
*24.1 Powers of Attorney (included in Part II to the Registration
Statement).
*27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated herein by reference to the same numbered exhibit to the
Company's Registration Statement on Form S-4 (Registration No. 333-29871).
** To be filed by Amendment.
+ The Company agrees to furnish supplementally to the Commission a copy of any
omitted schedule or exhibit to such agreement upon request by the
Commission.
(B) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedules are included in this Registration
Statement:
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions, are inapplicable or not material, or the information called
for thereby is otherwise included in the financial statements and therefore
has been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at closing specified in the underwriting agreement certificates in such
denominations and registered in such manner as requested by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrants hereby undertake:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
II-4
<PAGE>
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers
and controlling persons of the registrants pursuant to the provisions
described under Item 20 or otherwise, the registrants have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrants of expenses incurred or paid by a director, officer or
controlling person of the registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrants will, unless in the opinion of their counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Therma-Wave, Inc.
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fremont,
State of California, on October 1, 1997.
THERMA-WAVE, INC.
By: /s/ Allan Rosencwaig
__________________________________
Allan Rosencwaig
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan Rosencwaig, Anthony W. Lin, Charlotte
Holland, Adam W. Kirsch and Ian K. Loring, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this registration statement (and any registration statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, for the offering
which this Registration Statement relates), and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact an
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
* * * *
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form S-1 and Power of Attorney have been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES CAPACITY DATES
---------- -------- -----
<S> <C> <C>
/s/ Allan Rosencwaig Chairman of the Board, October 1, 1997
- --------------------------------- President and Chief
ALLAN ROSENCWAIG Executive Officer
(Principal Executive
Officer)
/s/ Anthony W. Lin Executive Vice President, October 1, 1997
- --------------------------------- Chief Financial Officer,
ANTHONY W. LIN and Director (Principal
Financial Officer)
/s/ Charlotte Holland Vice President, Finance October 1, 1997
- --------------------------------- and Administration
CHARLOTTE HOLLAND (Principal Accounting
Officer)
/s/ G. Leonard Baker, Jr. Director October 1, 1997
- ---------------------------------
G. LEONARD BAKER, JR.
/s/ David Dominik Director October 1, 1997
- ---------------------------------
DAVID DOMINIK
/s/ Adam W. Kirsch Director October 1, 1997
- ---------------------------------
ADAM W. KIRSCH
</TABLE>
II-6
<PAGE>
THERMA-WAVE, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ---------- ----------- --------- ---------
CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING COST ACCOUNTS AT END
DESCRIPTION OF PERIOD AND EXPENSE DESCRIBED OF PERIOD
----------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Year ended April 6, 1997
Deducted from asset accounts;
Allowance for doubtful accounts.. $284 -- $1,338 $1,622
---- --- ------ ------
Total........................... 284 -- 1,338 1,622
==== === ====== ======
Year ended March 31, 1996
Deducted from asset accounts;
Allowance for doubtful accounts.. 280 -- 4 284
Total........................... 280 -- 4 284
==== === ====== ======
Year ended April 2, 1995
Deducted from asset accounts;
Allowance for doubtful accounts.. 30 -- 250 280
==== === ====== ======
Total........................... 30 -- 250 280
==== === ====== ======
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 8, 1997, except for Notes 8 and 9, as to which
the date is September 30, 1997, included in the Prospectus of Therma-Wave, Inc.
that is made part of the Registration Statement (Form S-1) relating to the
offering of up to shares of its Common Stock.
San Jose, California
September 30, 1997
- --------------------------------------------------------------------------------
Neither a share price nor a range has been determined for common shares in
this offering, which precludes management from calculating the pro forma net
income per share under the method discussed in Note 1 to the consolidated
financial statements. The foregoing consent is in the form that will be signed
upon determination of the share price, if no other events have occurred from
September 30, 1997 to the date of such determination that would affect the
consolidated financial statements and notes thereto.
ERNST & YOUNG LLP
San Jose, California
September 30, 1997
