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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1997
REGISTRATION NO. 333-29871
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3 TO
FORM S-4
REGISTRATION STATEMENT
UNDERTHE SECURITIES ACT OF 1933
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THERMA-WAVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3823 94-3000561
(PRIMARY STANDARD INDUSTRIALCLASSIFICATION CODE NUMBER)
(I.R.S.
(STATE OR OTHER EMPLOYERIDENTIFICATION
JURISDICTION OF NO.)
INCORPORATION OR
ORGANIZATION)
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1250 RELIANCE WAY FREMONT, CALIFORNIA 94539 TELEPHONE: (510) 490-3663
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ALLAN ROSENCWAIG, CHAIRMAN AND CHIEF COPY TO:
EXECUTIVE OFFICER THERMA-WAVE, INC.1250 DENNIS M. MYERS
RELIANCE WAYFREMONT, CALIFORNIA KIRKLAND & ELLIS
94539TELEPHONE: (510) 490-3663 200 EAST RANDOLPH DRIVE
CHICAGO, ILLINOIS 60601
(NAME, ADDRESS, INCLUDING ZIP CODE, AND (312) 861-2000
TELEPHONE NUMBER,INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 1997
PROSPECTUS
SEPTEMBER 10, 1997
THERMA-WAVE, INC.
OFFER TO EXCHANGE ITS SERIES B 10 5/8% SENIOR NOTES DUE 2004 FOR ANY AND ALL OF
ITS OUTSTANDING 10 5/8% SENIOR NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER 13,
1997, UNLESS EXTENDED.
Therma-Wave, Inc., a Delaware corporation (the "Company"), hereby offers (the
"Exchange Offer"), upon the terms and conditions set forth in this Prospectus
(the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange $1,000 principal amount of its Series B 10 5/8%
Senior Notes due 2004, (the "New Notes"), registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to a Registration
Statement of which this Prospectus is a part, for each $1,000 principal amount
of its outstanding 10 5/8% Senior Notes due 2004 (the "Old Notes"), of which
$115,000,000 principal amount is outstanding. The form and terms of the New
Notes are the same as the form and term of the Old Notes (which they replace),
except that the New Notes will bear a Series B designation and will have been
issued in a transaction that has been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer and will not
contain certain provisions relating to liquidated damages which were included
in the terms of the Old Notes in certain circumstances relating to the timing
of the Exchange Offer. The New Notes will evidence the same debt as the Old
Notes (which they replace) and will be issued under and be entitled to the
benefits of an Indenture, dated as of May 15, 1997 (the "Indenture"), between
the Company and IBJ Schroder Bank & Trust Company, as trustee, governing the
Old Notes and the New Notes. The Old Notes were issued in connection with the
recapitalization of the Company (the "Recapitalization"), which was completed
on May 16, 1997. The Old Notes and the New Notes are sometimes referred to
herein collectively as the "Notes." See "The Exchange Offer" and "Description
of Notes."
The Notes bear interest at a rate of 10 5/8% per annum, payable semi-annually
on May 15 and November 15 of each year, commencing November 15, 1997. The Notes
will mature on May 15, 2004. On or after May 15, 2001, the Company may redeem
the Notes, in whole or in part, at the redemption prices set forth herein, plus
accrued and unpaid interest to the date of redemption. Notwithstanding the
foregoing, at any time on or before May 15, 2000, the Company may redeem up to
40% (provided that such percentage shall decrease to 35% if an Initial Public
Offering (as defined on page 90 of this Prospectus) has not been consummated on
or prior to November 15, 1998) of the original aggregate principal amount of
the Notes with the net proceeds of one or more Equity Offerings (as defined on
page 89 of this Prospectus) of the Company at a redemption price equal to
110.625% of the principal amount thereof, plus accrued and unpaid interest to
the date of redemption; provided that at least $69.0 million aggregate
principal amount of the Notes remains outstanding after each such redemption.
In the event an Initial Public Offering is consummated prior to May 15, 2000,
the Company may be obligated to purchase Notes in addition to Notes purchased
pursuant to an optional redemption. Upon a Change of Control (as defined on
page 87 of this Prospectus), the Company will be required to make an offer to
purchase all of the outstanding Notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest to the date of purchase. See
"Description of Notes."
The New Notes will be, as the Old Notes (which they replace) are, senior
unsecured obligations of the Company, and will, as the Old Notes (which they
replace), rank pari passu in right of payment to all existing and future senior
indebtedness of the Company, junior in right of payment to all secured
indebtedness of the Company and senior in right of payment to any subordinated
indebtedness of the Company. As of July 6, 1997, the aggregate principal
indebtedness of the Company, including the Notes, was approximately $115.2
million, including $0.2 million of secured indebtedness. In addition, as of
July 6, 1997, the Company had unused borrowing capacity under the Bank Credit
Facility (as defined on page 64 of this Prospectus) of $22.2 million and cash
and cash equivalents of approximately $14.0 million. The Company's pro forma
earnings were insufficient to cover fixed charges by $1.1 million for the first
quarter of Fiscal 1998. See "Capitalization" and "Description of Notes." The
Indenture permits the Company to incur additional indebtedness, subject to
certain limitations.
(Cover continued on following page)
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SEE "RISK FACTORS," BEGINNING ON PAGE 14, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE
OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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(Cover page continued)
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time on October 13, 1997,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
The Old Notes were sold by the Company on May 16, 1997 to the Initial Purchaser
(as defined on page 6 of this Prospectus) in a transaction not registered under
the Securities Act in reliance upon an exemption under the Securities Act (the
"Initial Offering"). The Initial Purchaser subsequently resold the Old Notes to
qualified institutional buyers in reliance upon Rule 144A under the Securities
Act and to a limited number of institutional "accredited investors" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act). Accordingly, the
Old Notes may not be reoffered, resold or otherwise transferred in the United
States unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is
available. The New Notes are being offered hereunder in order to satisfy the
obligations of the Company under the Registration Agreement (as defined on page
6 of this Prospectus) entered into by the Company and the Initial Purchaser in
connection with the Initial Offering. See "The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and Exchange
Commission (the "Commission") to third parties, the Company believes the New
Notes issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by any holder thereof (other than any such holder
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business and such holder has
no arrangement or understanding with any person to participate in the
distribution of such New Notes. See "The Exchange Offer--Resale of the New
Notes." Each broker-dealer (a "Participating Broker-Dealer") that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such Participating
Broker-Dealer as a result of marketmaking activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, they will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
There has not previously been any public market for the Old Notes or the New
Notes. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. The Old Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
However, there can be no assurance that an active market for the New Notes will
develop. See "Risk Factors--Absence of a Public Market Could Adversely Affect
the Value of Notes." Moreover, to the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected.
The Company will keep the Exchange Offer open for not less than 30 days (or
longer if required by applicable law) after the date on which notice of the
Exchange Offer is mailed to the holders of the Old Notes. In order to extend
the Exchange Offer, the Company will notify the Exchange Agent of any extension
by oral or written notice and will mail to the registered holders, including
holders that have previously tendered their Old Notes, an announcement thereof,
each prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date. The Registration Agreement provides,
among other things, that the Company shall pay the holders of Old Notes
Additional Interest (as defined on page 66 of the Prospectus) if the Exchange
Offer is not completed within 45 days after the Exchange Offer Registration
Statement (as defined on page i of this Prospectus) is declared effective by
the Commission. As a result, it is unlikely that the Company would extend the
Exchange Offer beyond that time. The Company currently has no plans to extend
the Exchange Offer.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer 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, covering
the issuance of the New Notes being offered hereby. This Prospectus does not
contain all the information set forth in the Exchange Offer Registration
Statement. For further information with respect to the Company and the
Exchange Offer, reference is made to the Exchange Offer 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 Exchange Offer 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 Exchange Offer 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 Web site 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 Exchange Offer Registration Statement being declared
effective by the Commission, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. The obligation of
the Company to file periodic reports and other information with the Commission
will be suspended if the New Notes are held of record by fewer than 300
holders as of the beginning of any fiscal year of the Company other than the
fiscal year in which the Exchange Offer Registration Statement is declared
effective. The Company has agreed pursuant to the Indenture that, whether or
not it is required to do so by the rules and regulations of the Commission,
for so long as any of the Notes remain outstanding, it will furnish to the
holders of the Notes (within 15 days after it is or would have been required
to file with the Commission) and file with the Commission (unless the
Commission will not accept such a filing) (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company was required to file such
forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if the Company was required to file such
reports. In addition, for so long as any of the Notes remain outstanding, the
Company will provide to any holder of the Notes information reasonably
requested by such holder concerning the Company (including financial
statements) necessary in order to permit such holder to sell or transfer Notes
in compliance with Rule 144A under the Securities Act.
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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 the context requires otherwise, references to the
"Company" or "Therma-Wave" mean Therma-Wave, Inc. and its subsidiaries. Therma-
Wave(R), Therma-Probe(R) and Opti-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 any 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. For
Fiscal 1997 on a pro forma basis giving effect to the Recapitalization, the
Company generated net revenues, EBITDA (as defined on page 12 of this
Prospectus) and net income of $109.5 million, $26.1 million and $5.2 million,
respectively, and a pro forma ratio of earnings to fixed charges of 1.6. For
the first quarter of Fiscal 1998 on a pro forma basis giving effect to the
Recapitalization, the Company generated net revenues, EBITDA and incurred a net
loss of $28.2 million, $3.3 million and $(0.6) million, respectively. The
Company's pro forma earnings were insufficient to cover fixed charges by $1.1
million for the first quarter of Fiscal 1998. 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%.
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 and is installed in virtually every major
semiconductor fab worldwide. The Opti-Probe system, introduced in 1992,
significantly improved upon existing thin film metrology systems by
successfully integrating different measurement technologies into one system and
utilizing new 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 virtually all major
semiconductor manufacturers, including Intel Corporation, Samsung Semiconductor
Inc., LG Semicon, Advanced Micro Devices, Inc., Siemens Microelectronics,
Lucent Technologies and NEC Semiconductor. The Company has developed and
consistently maintained strong customer relationships due to the technological
superiority of its products and strong customer support capabilities. In its 15
year history, the Company believes it has never lost a major customer. 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, are among the fastest growing manufacturers in the
semiconductor industry. The Company has a
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strong presence in all major international markets and, as a result, derived
approximately 59.7% of its net revenues from international sales in Fiscal
1997. 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 the Recapitalization, 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 owns approximately 22%
of the outstanding common stock, which represents 13% of the outstanding voting
power, and hold options to acquire an additional 7% of non-voting common stock.
Such equity ownership represents a significant economic commitment to and
participation in the continued success of the Company.
INDUSTRY OVERVIEW
The Company operates in the process control metrology systems market of the
semiconductor capital equipment industry. Dataquest, an independent
semiconductor industry research firm, reports that sales of process control
metrology systems and instruments were approximately $1.4 billion in 1996,
having increased at a CAGR of approximately 22.4% from 1991 to 1996. Within the
process control metrology market, the Company operates specifically in the ion
implant metrology and the thin film measurement segments. The Company estimates
that sales of ion implant metrology and thin film measurement systems for the
semiconductor industry were approximately $60 million and $209 million,
respectively, in 1996. 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.
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 16.6% to approximately
$138.6 billion in 1996. Such growth is primarily the result of: (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, particularly
in the previously closed or emerging markets in Southeast Asia, China and Latin
America. To meet this increased demand for semiconductors, manufacturers have
been required to make capital expenditures to increase their existing capacity
by constructing new fabs and expanding their existing fabs. In addition,
manufacturers must continually construct and equip new fabs to replace existing
fabs and production equipment that are rendered obsolete as a result of
improvements in semiconductor manufacturing processes arising from the need for
higher performance semiconductor devices. As a result of these factors, capital
equipment expenditures by semiconductor manufacturers have increased at a CAGR
of 27.2% from 1991 to 1996 (as reported by Dataquest).
While the semiconductor industry has experienced long-term secular growth, it
is cyclical and has historically experienced periods of slower revenue growth
or decline, which have often resulted in a decrease in the level of capital
expenditures made by the semiconductor manufacturers. The semiconductor
industry experienced such a period in 1996, during which worldwide industry
revenues declined by an estimated 9.4% (as reported by Dataquest). As a result,
there has been an overall decrease in the demand for semiconductor capital
equipment during the first half of 1997, which is expected to continue
throughout the remainder of 1997. Nonetheless, the semiconductor capital
equipment market is expected to continue its long-term growth as a result of
the increase in the demand for semiconductors.
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Growing Importance of Process Controls. Demand for process control metrology
systems is also increasing as a result of such systems becoming more critical
to the manufacture of semiconductors. Industries that use semiconductors are
demanding increasingly complex, higher performance devices leading to a more
complex semiconductor manufacturing process with an increasing number of
process steps. With the increase in wafer process complexity and resulting
increase in wafer value, 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 37.2% as compared to a
CAGR of 27.2% 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
29.1%. The Company believes that increasing demand for semiconductors in
general, combined with the need for more comprehensive and sophisticated
process control of semiconductor device manufacturing, will result in increased
demand for process control metrology systems.
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
invasive 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.
. 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 55.5% 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 Corporation, the largest microprocessor manufacturer
worldwide; (ii) Samsung Semiconductor Inc., 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. In addition, no single customer accounted for more than
13% and 22% of the Company's net revenues in Fiscal 1997 and the first
quarter of Fiscal 1998, respectively.
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. STRONG CUSTOMER RELATIONSHIPS. The Company believes that it has developed
and consistently maintained excellent customer relationships. In its 15 year
history, the Company believes that it has never lost a major customer. 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 systems to many of its
customers. Engineering, sales and management personnel collaborate with
customer counterparts to determine customers' needs and specifications. For
example, the model 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 been at the forefront of addressing the increasing globalization of the
semiconductor industry. 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.
. 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 Recapitalization,
the Company's senior management own approximately 22% of the outstanding
common stock, which represents 13% of the outstanding voting power, and hold
options to acquire an additional 7% of non-voting 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
will include 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
increased demand for metrology systems. 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. In its 15 year history, the Company believes it
has never lost a major customer. 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 systems to many of its customers. Furthermore, the Company intends
to continue to
4
<PAGE>
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, developed in conjunction 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
believes that it has increased its market share in the thin film measurement
market by approximately 10 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 $209 million in 1996 and
has grown at CAGR of 37.2% from 1991 to 1996.
. CONTINUE TO FOCUS ON TECHNOLOGICAL INNOVATION. The Company expects to
continue its emphasis on engineering and research and development in an
effort to anticipate and address technological advances in semiconductor
manufacturing. During its last five fiscal years, the Company has spent on
average approximately 14% of its net revenues on research and development
activities. Since its 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. The Company intends to capitalize on its market
leadership position, advanced technologies and portfolio of 69 U.S. and
foreign patents to further broaden its existing high quality product lines.
Management believes that continued product innovation and investment in
research and development will help the Company increase its leadership
position and overall profitability.
. 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's executive offices are located at 1250 Reliance Way, Fremont,
California 94539. The Company's telephone number is (510) 490-3663.
THE RECAPITALIZATION
Bain Capital began discussions with the Company's existing stockholders
regarding a potential transaction in April 1996 and executed a letter of intent
regarding such a transaction in August 1996. The letter of intent, among other
things, outlined the general terms of the transaction and established the
Company's equity value for purposes of a transaction. On December 18, 1996,
investment funds associated with Bain Capital, the then existing stockholders
of the Company and the Company entered into a Recapitalization Agreement. In
pursuing the Recapitalization, Bain Capital considered, among other things, the
following investment considerations: (i) the favorable long-term trends within
the process control metrology market; (ii) the Company's dominant position in
the process control metrology segments; and (iii) the Company's strong and
experienced management team. Bain Capital believes that these favorable
investment considerations, together with increases in EBITDA
5
<PAGE>
multiples for publicly-traded companies within the semiconductor capital
equipment industry since the execution of the letter of intent in August 1996,
made the Company an attractive investment opportunity for participants in the
Recapitalization.
In connection with the Recapitalization, the Company: (i) redeemed from its
Existing Stockholders (as defined herein) approximately 86.6% of its
outstanding capital stock for $96.9 million; (ii) converted its remaining
outstanding capital stock to newly issued shares of preferred stock and common
stock; (iii) repaid substantially all of its outstanding borrowings of
approximately $27.1 million under existing loan agreements; and (iv) paid the
fees and expenses of approximately $11.0 million related to the
Recapitalization. In order to finance the Recapitalization, the Company: (i)
issued $115.0 million in aggregate principal amount of Notes in the Offering;
(ii) received an equity contribution of $20.0 million in cash from an investor
group comprised of investment funds associated with Bain Capital and their
related investors (collectively, 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 of its Existing Stockholders having a value of $15.0 million into
newly issued shares of preferred stock and common stock (collectively with the
equity investments to be made by the investors described in item (ii), the
"Equity Contribution"). In connection with their participation in the
Recapitalization, the Management Investors were also granted certain equity-
based incentives. As a result of the Recapitalization, the Bain Capital Funds,
Sutter Hill, the Management Investors and the Existing Stockholders hold
securities representing approximately 58%, 17%, 13% and 12%, respectively, of
the outstanding voting power of the Company. See "The Recapitalization,"
"Management" and "Principal Stockholders."
THE INITIAL OFFERING
Notes..................... The Old Notes were sold by the Company on May 16,
1997 to BT Securities Corporation (the "Initial
Purchaser") pursuant to a Purchase Agreement dated
May 16, 1997 (the "Purchase Agreement"). The
Initial Purchaser subsequently resold the Old Notes
to qualified institutional buyers pursuant to Rule
144A under the Securities Act and to a limited
number of institutional "accredited investors" (as
defined in Rule 501(a)(1),(2),(3) or (7) under the
Securities Act).
Registration Rights Pursuant to the Purchase Agreement, the Company and
Agreement................ the Initial Purchaser entered into a Registration
Agreement, dated as of May 15, 1997 (the
"Registration Agreement"), which grants the holders
of the Old Notes certain exchange and registration
rights. The Exchange Offer is intended to satisfy
such exchange rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered........ $115,000,000 aggregate principal amount of Series B
10 5/8% Senior Notes due 2004 of the Company.
The Exchange Offer........ $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. As
of the date hereof, $115,000,000 aggregate
principal amount of Old Notes are outstanding. The
Company will issue the New Notes to holders on or
promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other
than any such holder which is an "affiliate"
6
<PAGE>
of the Company within the meaning of Rule 405 under
the Securities Act) without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes
are acquired in the ordinary course of such
holder's business and that such holder does not
intend to participate and has no arrangement or
understanding with any person to participate in the
distribution of such New Notes. Each holder
accepting the Exchange Offer is required to
represent to the Company in the Letter of
Transmittal that, among other things, the New Notes
will be acquired by the holder in the ordinary
course of business and the holder does not intend
to participate and has no arrangement or
understanding with any person to participate in the
distribution of such New Notes. Any holder that is
unable to make such representations to the Company
will not be eligible to participate in the Exchange
Offer.
Any Participating Broker-Dealer that acquired Old
Notes for its own account as a result of market-
making activities or other trading activities may
be a statutory underwriter. Each Participating
Broker-Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer
in connection with resale of New Notes received in
exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading
activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, they
will make this Prospectus, as amended or
supplemented, available to any Participating
Broker-Dealer for use in connection with any such
resale (provided that the Company has received
notice from any Participating Broker-Dealer of its
status as a Participating Broker-Dealer within 30
days after the Expiration Date). See "Plan of
Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the New Notes
could not rely on the position of the staff of the
Commission enunciated in no-action letters and, in
the absence of an exemption therefrom, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any resale transaction. Failure to comply with
such requirements in such instance may result in
such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company.
Expiration Date...........
5:00 p.m., New York City time, on October 13, 1997
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended. The Company will keep the Exchange Offer
open for not less than 30 days (or longer if
required by applicable law) after the date on
7
<PAGE>
which notice of the Exchange Offer is mailed to the
holders of the Old Notes. In order to extend the
Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral and written
notice and will mail to the registered holders,
including the holders who have previously tendered
their Old Notes, an announcement thereof, each
prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled
expiration date. The Registration Agreement
provides, among other things, that the Company
shall pay the holders of Old Notes Additional
Interest if the Exchange Offer is not completed
within 45 days after the Exchange Offer
Registration Statement is declared effective by the
Commission. As a result, it is unlikely that the
Company would extend the Exchange Offer beyond that
time. The Company currently has no plans to extend
the Exchange Offer.
Accrued Interest on the
New Notes and the Old Each New Note will bear interest from its issuance
Notes.................... date. Holders of Old Notes that are accepted for
exchange will receive, in cash, accrued interest
thereon to, but not including, the issuance date of
the New Notes. Such interest will be paid with the
first interest payment on the New Notes to the
persons who are registered holders of the New
Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the
New Notes.
Conditions to the The Exchange Offer is subject to certain customary
Exchange Offer........... conditions, which may be waived by the Company. See
"The Exchange Offer--Conditions."
Procedures for Tendering Each holder of Old Notes wishing to accept the
Old Notes................ Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof or transmit an Agent's Message (as defined
on page 69 of this Prospectus) in connection with a
book-entry transfer, in accordance with the
instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or
such facsimile, or such Agent's Message, together
with the Old Notes and any other required
documentation to the Exchange Agent (as defined on
page 10 of this Prospectus) at the address set
forth herein. By executing the Letter of
Transmittal or Agent's Message, each holder will
represent to the Company that, among other things,
the New Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of
business of the person receiving such New Notes,
whether or not such person is the holder, that
neither the holder nor any such other person (i)
has any arrangement or understanding with any
person to participate in the distribution of such
New Notes, (ii) is engaging or intends to engage in
the distribution of such New Notes, or (iii) is an
"affiliate," as defined under Rule 405 of the
Securities Act, of the Company. See "The Exchange
Offer--Purpose and Effect of the Exchange Offer"
and "--Procedures for Tendering."
Untendered Old Notes...... Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate but
who do not tender their Old Notes will not have any
further exchange rights and such Old Notes will
continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market
for such Old Notes could be adversely affected.
Consequences of Failure
to Exchange.............. The Old Notes that are not exchanged pursuant to
the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
8
<PAGE>
resold only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act, (iii) outside the United States to
a foreign person pursuant to the requirements of
Rule 904 under the Securities Act, or (iv) pursuant
to an effective registration statement under the
Securities Act. See "The Exchange Offer--
Consequences of Failure to Exchange."
Shelf Registration If any holder of the Old Notes (other than any such
Statement................ holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities
Act) is not eligible under applicable securities
laws to participate in the Exchange Offer, and such
holder has provided information regarding such
holder and the distribution of such holder's Old
Notes to the Company for use therein, the Company
has agreed to register the Old Notes on a shelf
registration statement (the "Shelf Registration
Statement") and use its best efforts to cause it to
be declared effective by the Commission as promptly
as practical on or after the consummation of the
Exchange Offer. The Company has agreed to maintain
the effectiveness of the Shelf Registration
Statement for, under certain circumstances, a
maximum of two years, to cover resales of the Old
Notes held by any such holders.
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer
of registered ownership may take considerable time.
The Company will keep the Exchange Offer open for
not less than twenty business days in order to
provide for the transfer of registered ownership.
Guaranteed Delivery Holders of Old Notes who wish to tender their Old
Procedures............... Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date
must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Old Notes
and Delivery of New The Company will accept for exchange any and all
Notes.................... Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
9
<PAGE>
Use of Proceeds........... There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
Exchange Agent............ IBJ Schroder Bank & Trust Company.
THE NEW NOTES
General................... The form and terms of the New Notes are the same as
the form and terms of the Old Notes (which they
replace) except that (i) the New Notes bear a
Series B designation, (ii) the New Notes will be
issued in a transaction that has been registered
under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof, and
(iii) the holders of New Notes will not be entitled
to certain rights under the Registration Rights
Agreement, including the provisions providing for
liquidated damages in certain circumstances
relating to the timing of the Exchange Offer, which
rights will terminate when the Exchange Offer is
consummated. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer." The New Notes will
evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture. See
"Description of Notes." The Old Notes and the New
Notes are referred to herein collectively as the
"Notes."
Maturity Date............. May 15, 2004
Interest and Payment May 15 and November 15 of each year, commencing
Dates.................... November 15, 1997.
Optional Redemption....... The New Notes are redeemable, in whole or in part,
at the option of the Company on or after May 15,
2001, at the redemption prices set forth herein
plus accrued and unpaid interest to the date of
redemption. In addition, at any time on or before
May 15, 2000, the Company, at its option, may
redeem up to 40% (provided that such percentage
shall decrease to 35% if an Initial Public Offering
has not been consummated on or prior to November
15, 1998), of the aggregate principal amount of the
Notes originally issued with the net proceeds of
one or more Equity Offerings at the redemption
prices set forth herein plus accrued and unpaid
interest to the date of redemption; provided that
at least $69.0 million aggregate principal amount
of the Notes remains outstanding immediately after
such redemption. "Description of Notes--
Redemption--Optional Redemption."
Mandatory Redemption...... In the event an Initial Public Offering is
consummated prior to May 15, 2000, the Company
shall be obligated to make an offer to purchase
Notes in addition to Notes purchased pursuant to an
optional redemption with the Net Cash Proceeds (as
defined on page 91 of the Prospectus) thereof,
subject to certain conditions. See "Description of
Notes--Redemption--Mandatory Redemption Following
Initial Public Offering."
Change of Control......... Upon a Change of Control, the Company will be
obligated to make an offer to repurchase all of the
outstanding New Notes at a price equal to 101% of
the principal amount thereof plus accrued and
unpaid interest and Additional Interest (as defined
on page 66 of the Prospectus), if any, to the date
of repurchase. See "Description of Notes--Change of
Control."
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<PAGE>
Certain Asset Sales....... In the event of certain Asset Sales, the Company is
obligated to make a offer to repurchase on a pro
rata basis that amount of Notes equal to the Net
Proceeds Offer Amount at a price equal to 100% of
the principal amount thereof plus accrued and
unpaid interest thereon. See "Description of
Notes--Certain Covenants--Limitations on Asset
Sales."
Ranking................... The New Notes will be, as the Old Notes (which they
replace) are, senior unsecured obligations of the
Company and will rank pari passu with any present
and future senior indebtedness of the Company. The
New Notes will be, as the Old Notes (which they
replace) are, effectively subordinated in right of
payment to all existing and future secured
indebtedness and will be senior in right of payment
to all existing and future subordinated
indebtedness of the Company. As of July 6, 1997,
the Company had approximately $0.2 million of
secured indebtedness outstanding. In addition, as
of July 6, 1997, the Company had unused borrowing
capacity under the Bank Credit Facility of $22.2
million. See "Description of Bank Credit Facility."
Certain Covenants......... 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 (as defined
herein) 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.
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 tendering the Old Notes in exchange for the New Notes. Such risks
include, among others, that: (i) the Company has a high level of indebtedness
and its ability to service such debt is dependent on its future operating
performance; (ii) the Company is restricted by the terms of its indebtedness;
(iii) the Company is dependent on the semiconductor industry, which experienced
a downturn in 1996; (iv) the Company relies, in part, on patent, trade secret
and trademark law to protect the technology used in its principal products; (v)
the Company's operations are characterized by relatively high fixed costs; (vi)
the semiconductor capital equipment industry is highly competitive; (vii) two
customers accounted for approximately 13% and 10% of the Company's net revenues
in Fiscal 1997, and three customers accounted for 21%, 13% and 13% of the
Company's net revenues for the three-month period ended July 6, 1997; (viii)
approximately 50% of the Company's sales are made through independent sales
representatives; (ix) 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; (x) the semiconductor capital equipment industry as
a whole is characterized by rapidly changing technology and industry standards;
(xi) the Company's systems typically have lengthy sales cycles; (xii) certain
of the components and subassemblies included in the Company's systems are
obtained from a single source or a limited group of suppliers; and (xiii) the
Company produces all of its products in a single manufacturing facility located
in Fremont, California.
11
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following summary 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 were derived from the audited consolidated financial statements
of the Company included elsewhere in this Prospectus. The summary historical
financial data as of March 28, 1993, March 27, 1994 and April 2, 1995 and for
the Fiscal Years ended March 28, 1993 and March 27, 1994 was derived from the
audited consolidated financial statements of the Company not included 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 information contained in this table
should be read in conjunction with "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>
THREE-MONTH
FISCAL YEAR (1) PERIOD ENDED (1)
--------------------------------------------- ------------------
JULY 7, JULY 6,
1993 (2) 1994 1995 1996 1997 1996 1997
-------- ------- ------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
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 --
Recapitalization and
related expenses....... -- -- -- -- -- -- 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
======== ======= ======= ======= ======== ======== ========
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 (3).............. (7,936) (2,117) 12,496 17,185 27,113 7,475 3,576
Cash provided by (used
in) operating
activities............. (9,797) (6,006) 451 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 7,630 (1,278) (851) (532) 184
Capital expenditures.... 1,031 60 1,616 4,361 1,091 554 780
Ratio of earnings to
fixed charges (4)...... N/A N/A 4.4x 6.9x 11.8x 14.9x 1.2x
BALANCE SHEET DATA:
Working capital......... $(3,800) $(6,484) $17,240 $23,740 $38,720 $ 42,333
Total assets............ 22,368 23,039 45,081 53,056 68,620 82,340
Long-term debt.......... 23,692 24,171 24,838 25,556 25,273 115,000
Shareholders' equity
(net capital
deficiency)............ (18,191) (22,845) (379) 6,903 20,145 (69,774)
</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) In Fiscal 1993, the Company's results were affected by several factors that
reduced the Company's overall operating income and EBITDA. The Company's
financial results included: (i) an increase in selling, general and
administrative expenses primarily as a result of the expansion of the
Company's Japanese subsidiary; (ii) a decrease in gross margin associated
with a discontinued product line; and (iii) an increase in research and
development expenses associated with the development of the Opti-Probe
system.
(3) "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 reported by other companies.
(4) For purposes of computing this ratio, earnings consists of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and the estimated interest portion of rent expense. Earnings were
insufficient to cover fixed charges by $11.1 million and $4.7 million for
the Fiscal Years ended March 28, 1993 and March 27, 1994, respectively.
12
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following summary unaudited pro forma financial data give effect to the
Recapitalization as if it had occurred as of the beginning of the periods
presented. The summary unaudited pro forma statement of operations data and
other data do not purport to represent what the Company's results of operations
actually would have been if the Recapitalization had actually occurred as of
the beginning of the periods presented or what such results will be for any
future periods. The Old Notes surrendered in exchange for the New Notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the New
Notes will not result in any increase or decrease in the indebtedness of the
Company. As such, no effect has been given to the Exchange Offer in the pro
forma financial data included herein. 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
PRO FORMA PERIOD ENDED(1)
FISCAL YEAR ENDED -------------------------
APRIL 6, 1997(1) JULY 7, 1996 JULY 6, 1997
----------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT 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 --
Recapitalization and related
expenses.......................... -- -- 2,888
-------- ------ ------
Operating income................... 22,369 6,176 2,290
Interest expense................... 13,940 3,507 3,507
Interest income.................... (346) (45) (169)
Other (income) expense, net........ (14) 26 5
-------- ------ ------
Income (loss) before provision for
income taxes...................... 8,789 2,688 (1,053)
Provision for (benefit from) income
taxes............................. 3,581 1,180 (412)
-------- ------ ------
Net income (loss).................. $ 5,208 $1,508 $ (641)
======== ====== ======
OTHER FINANCIAL DATA:
EBITDA calculation:
Operating income................. $ 22,369 6,176 2,290
Depreciation and amortization.... 3,744 1,049 1,036
-------- ------ ------
EBITDA (2)......................... 26,113 7,225 3,326
Depreciation and amortization...... 3,744 1,049 1,036
Capital expenditures............... 1,091 554 780
Ratio of earnings to fixed charges
(3)............................... 1.6x 1.7x N/A
</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" 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.
(3) For purposes of computing this ratio, earnings consists of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and the estimated interest portion of rent expense. The Company's pro forma
earnings were insufficient to cover fixed charges by $1.1 million for the
three-month period ended July 6, 1997.
13
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to the other information set forth in this Prospectus before
tendering the Old Notes for the New Notes. 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.
RISKS ASSOCIATED WITH A HIGH LEVEL OF INDEBTEDNESS AND ABILITY TO SERVICE DEBT
The Company incurred substantial indebtedness in connection with the
Recapitalization. At July 6, 1997, the Company's long-term indebtedness was
approximately $115.2 million and its net capital deficiency (including
mandatorily redeemable preferred stock) was $69.8 million. The Company's pro
forma earnings were insufficient to cover fixed charges by $1.1 million for
the first quarter of Fiscal 1998. 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, 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 to
holders of the Notes, 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 Company's ability to pay interest on the Notes and to satisfy its other
debt obligations will depend upon its future operating performance, which will
be affected by prevailing economic conditions and financial, business and
other factors, certain of which are beyond its control. The Company
anticipates that its operating cash flow, together with borrowings under the
Bank Credit Facility, will be sufficient to meet its operating expenses and to
service its debt requirements as they become due. However, if the Company is
unable to generate sufficient cash flow from operations to service its
indebtedness, it will be forced to adopt an alternative strategy that may
include actions such as reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness, or seeking additional
equity capital. There can be no assurance that any of these strategies could
be effected on satisfactory terms, if at all. In addition, in the event of
bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Notes only after all
Senior Secured Indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Notes then
outstanding. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the Company's ability to: incur
additional indebtedness; incur liens; pay dividends or make certain other
restricted payments; consummate certain asset sales; enter into certain
transactions with affiliates; incur indebtedness that is subordinate in right
of payment to any indebtedness and not subordinated in right of payment to the
Notes; impose restrictions on the ability of a subsidiary to pay dividends or
make certain payments to the Company; merge or consolidate with any other
person; or sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of the assets of the Company. See "Description of Notes--
Certain Covenants." In addition, the Bank Credit Facility contains other and
more restrictive covenants and will prohibit the Company from prepaying its
indebtedness (including the Notes). The Bank Credit Facility also 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
14
<PAGE>
covenants could result in a default under the Bank Credit Facility and/or the
Indenture. If an event of default should occur under the Bank Credit Facility,
the lenders can elect to declare all amounts of principal outstanding under
the Bank Credit Facility, together with all accrued interest, to be
immediately due and payable. If the Company were unable to repay those
amounts, the lenders could proceed against the collateral granted to them to
secure that indebtedness. If the Bank Credit Facility indebtedness were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full that indebtedness and the other indebtedness of
the Company, including the Notes. 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
Bank Credit Facility."
DEPENDENCE ON SEMICONDUCTOR INDUSTRY; CURRENT INDUSTRY CONDITIONS
The Company's business depends in large part 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 a
downturn in 1996, during which industry revenues declined by an estimated 9.4%
(as reported by Dataquest). As a result, there has been an overall decrease in
the level of capital expenditures during the first half of 1997, which is
expected to continue throughout the remainder of 1997. Dataquest forecasts
that sales of semiconductor capital equipment will decrease by approximately
18% 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 ongoing 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
"Industry Overview."
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 additional foreign patents.
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.
15
<PAGE>
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 competitor, 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 rulings in the German proceeding, which the Company plans to appeal.
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 or German patents are
found to be invalid. See "Business--Legal Proceedings."
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 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."
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. Although the Company believes that
it has certain technical and other advantages over its competitors,
maintaining such advantages 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.
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 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.
16
<PAGE>
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 Corporation and Hyundai Corporation accounted for
21%, 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 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. 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."
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. 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 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 unexpected changes
in regulatory requirements, tariffs and other market barriers, political and
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 country 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.
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.
Failure to do so could harm the Company's competitive position. 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, or that products or technologies developed by others
will not render the Company's products or technologies obsolete or
noncompetitive. 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 derives substantially all of its revenues
from sales of its two products, the Opti-Probe and Therma-Probe systems.
17
<PAGE>
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
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.
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 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 of these executives
could have an 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."
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
18
<PAGE>
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 the respond to such environmental
claims.
CONTROLLING STOCKHOLDERS
The Bain Capital Funds hold approximately 58% of the Company's outstanding
voting stock. In addition, the Bain Capital Funds and substantially all of the
Company's other stockholders have entered into a stockholders and/or voting
agreement regarding, among other things, the voting of such stock. By virtue
of such stock ownership and these agreements, the Bain Capital Funds has the
power to control all matters submitted to stockholders of the Company, to
elect a majority of the directors of the Company and to exercise control over
the business, policies and affairs of the Company. The interests of the Bain
Capital Funds as equity holders may differ from the interests of holders of
the Notes. See "Certain Relationships and Related Transactions--Stockholders
Agreement."
ABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control, each holder of Notes will have the right to
require the Company to repurchase its Notes at 101% of the principal amount
thereof plus accrued and unpaid interest outstanding, if any, to the date of
repurchase. The source of funds for any such repurchase will be the Company's
available cash or cash generated from operating or other sources, including
borrowing, sales of assets, sales of equity or funds provided by a new
controlling person. A Change of Control will likely trigger an event of
default under the Bank Credit Facility which would permit the lenders thereto
to accelerate collection of the debt under the Bank Credit Facility. However,
there can be no assurance that sufficient funds will be available at the time
of any Change of Control to make any required repurchases of Notes tendered
and to repay debt under the Bank Credit Facility. Any future credit agreements
or other agreements relating to secured indebtedness to which the Company may
become party may contain similar restrictions and provisions. See "Description
of Notes" and "Description of Bank Credit Facility."
In addition, the provisions of the Indenture relating to a Change of Control
may not afford holders of the Notes protection in the event of a highly
leveraged transaction, reorganization, restructuring, merger, spin-off or
similar transaction that may adversely affect holders, if such transaction
does not constitute a Change of Control. Moreover, certain events with respect
to the Company which may involve an actual change of control of the Company
may not constitute a Change of Control for purposes of the Indenture.
RISKS ASSOCIATED WITH FRAUDULENT CONVEYANCE LIABILITY
In connection with the Recapitalization, the Company incurred substantial
indebtedness, including the indebtedness under the Notes. If under relevant
federal and state fraudulent conveyance statutes in a bankruptcy,
reorganization or rehabilitation case or similar proceeding or a lawsuit by or
on behalf of unpaid creditors of the Company, a court were to find that, at
the time the Notes were issued, (i) the Company issued the Notes, with the
intent of hindering, delaying or defrauding current or future creditors or
(ii)(A) the Company received less than reasonably equivalent value or fair
consideration for issuing the Notes, and (B) the Company, (1) was insolvent or
was rendered insolvent by reason of the Recapitalization and/or such related
transactions, (2) was engaged, or about to engage, in a business or
transaction for which its assets constituted unreasonably small capital, (3)
intended to incur, or believed that it would incur, debts beyond its ability
to pay as such debts matured
19
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(as all of the foregoing terms are defined in or interpreted under such
fraudulent conveyance statutes) or (4) was a defendant in an action for money
damages, or had a judgment for money damages docketed against it (if, in
either case, after final judgment, the judgment is unsatisfied), such court
could avoid or subordinate the Notes to presently existing and future
indebtedness of the Company and take other action detrimental to the holders
of the Notes, including, under certain circumstances, invalidating the Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the federal or local law that is being applied in any such
proceeding. Generally, however, the Company would be considered insolvent if,
at the time it incurs the indebtedness constituting the Notes, either (i) the
fair market value (or fair saleable value) of its assets is less than the
amount required to pay its total existing debts and liabilities (including the
probable liability on contingent liabilities) as they become absolute and
matured or (ii) it is incurring debts beyond its ability to pay as such debts
mature.
The Company's Board of Directors (as constituted following the
Recapitalization) and management believe that at the time of its issuance of
the Notes, the Company: (i) will (A) be neither insolvent nor rendered
insolvent thereby, (B) have sufficient capital to operate its business
effectively and (C) be incurring debts within its ability to pay as the same
mature or become due and (ii) will have sufficient resources to satisfy any
probable money judgment against it in any pending action. In reaching the
foregoing conclusions, the Company has relied upon its analysis of internal
cash flow projections and estimated values of assets and liabilities of the
Company. There can be no assurance, however, the such analysis will prove to
be correct or that a court passing on such questions would reach the same
conclusions.
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF THE NOTES
The Old Notes were issued to, and the Company believes are currently owned
by, a relatively small number of beneficial owners. Prior to the Exchange
Offer, there has not been any public market for the Old Notes. The Old Notes
have not been registered under the Securities Act and will be subject to
restrictions on transferability to the extent that they are not exchanged for
New Notes by holders who are entitled to participate in this Exchange Offer.
The holders of Old Notes (other than any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act) who are
not eligible to participate in the Exchange Offer are entitled to certain
registration rights, and the Company is required to file a Shelf Registration
Statement with respect to such Old Notes. The New Notes will constitute a new
issue of securities with no established trading market. The Company does not
intend to list the New Notes on any national securities exchange or seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System. The Initial Purchaser has advised the Company that
it currently intends to make a market in the New Notes, but it is not
obligated to do so and may discontinue such market making at any time. In
addition, such market making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act and may be limited during the Exchange
Offer and the pendency of the Shelf Registration Statement. The liquidity of
the New Notes could be adversely affected if there are a relatively small
number of holders of the New Notes or if only a limited amount of New Notes
are issued as a result of Old Notes not being tendered in the Exchange Offer.
Accordingly, no assurance can be given that an active public or other market
will develop for the New Notes or as to the liquidity of the trading market
for the New Notes. If a trading market does not develop or is not maintained,
holders of the New Notes may experience difficulty in reselling the New Notes
or may be unable to sell them at all. If a market for the New Notes develops,
any such market may be discontinued at any time. See "The Exchange Offer."
If a public trading market develops for the New Notes, future trading prices
of such securities will depend on many factors including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of the
Company, the New Notes may trade at a discount from their principal amount.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Old Notes, a properly completed and duly executed Letter of
20
<PAGE>
Transmittal or Agent's Message and all other required documents. Therefore,
holders of the Old Notes desiring to tender such Old Notes in exchange for New
Notes should allow sufficient time to ensure timely delivery. The Company is
under no duty to give notification of defects or irregularities with respect
to the tenders of Old Notes for exchange. Old Notes that are not tendered or
are tendered but not accepted will, following the consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof, and, upon consummation of the Exchange Offer, certain registration
rights under the Registration Agreement will terminate. In addition, any
holder of Old Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the New Notes may be deemed to have
received restricted securities, and if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a Prospectus
in connection with any resale of such New Notes. See "Plan of Distribution."
To the extent that Old Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Old Notes could
be adversely affected. See "The Exchange Offer."
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. The words "believe, "
"expect," "anticipate" and other similar expressions generally identify
forward-looking statements. Holders 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 Recapitalization, the Company entered into an Executive
Stock Agreement with each of the Management Investors (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. Assuming that the Management Investors would
otherwise have to pay cash to the Company to exercise such options, holders of
the Notes could be adversely effected in the event that the Management
Investors fail to repay such promissory notes in accordance with their terms.
See "Management--Stock Plans."
21
<PAGE>
THE RECAPITALIZATION
Bain Capital began discussions with the Company's existing stockholders
regarding a potential transaction in April 1996 and executed a letter of
intent regarding such a transaction in August 1996. The letter of intent,
among other things, outlined the general terms of the transaction and
established the Company's equity value for purposes of a transaction. In
pursuing the Recapitalization, Bain Capital considered, among other things,
the following investment considerations: (i) the favorable long-term trends
within the process control metrology market; (ii) the Company's dominant
position in the process control metrology segments; and (iii) the Company's
strong and experienced management team. Bain Capital believes that these
favorable investment considerations, together with increases in EBITDA
multiples for publicly-traded companies within the semiconductor capital
equipment industry since the execution of the letter of intent, make the
Company an attractive investment opportunity for participants in 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"). 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 (the "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,
par value $0.01 per share ("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 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 Notes in the Offering; (ii) received an equity
contribution of $20.0 million in cash from the Bain Capital Funds, Sutter Hill
and 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. The Company had cash and cash equivalents of
approximately $14.0 million at July 6, 1997.
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 is 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 transaction will be accounted for as a recapitalization, under which the
purchase and redemption of the shares of Old Common Stock will be accounted
for as an equity transaction. The historical financial reporting basis of the
assets and liabilities will be retained since purchase accounting is not
prescribed under Generally Accepted Accounting Principles.
The foregoing transactions are collectively referred to herein as the
"Recapitalization." The Class A Common, Class B Common and Class L Common are
sometimes referred to herein collectively as the "Common Stock." For a
description of the terms of each class of Common Stock, see "Principal
Stockholders."
22
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Agreement. The Company will not receive any
cash proceeds from the issuance of the New Notes offered hereby. In
consideration for issuing the New Notes contemplated in this Prospectus, the
Company will receive Old Notes in like principal amount, the form and terms of
which are the same as the form and terms of the New Notes (which replace the
Old Notes), except as described herein.
The gross proceeds of $115.0 million from the issuance of the Old Notes,
together with the Equity Contribution, were used to consummate the
Recapitalization and pay the related fees and expenses. See "The
Recapitalization."
The following table illustrates the sources and uses of funds for the
Recapitalization:
<TABLE>
<CAPTION>
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Notes............................................... $115.0
Equity Contribution(1).............................. 35.0
------
Total Sources..................................... $150.0
======
USES OF FUNDS:
Redemption of Old Common Stock...................... $96.9
Repayment of existing indebtedness(2)............... 27.1
Converted shares(3)................................. 15.0
Estimated fees and expenses(4)...................... 11.0
------
Total Uses........................................ $150.0
======
</TABLE>
- --------
(1) The Equity Contribution of $35.0 million was comprised of: (i) $20.0
million in cash from an investor group initially comprised of the Bain
Capital Funds, Sutter Hill and the Management Investors and (ii) equity
securities that had a value of $15.0 million owned by the Existing
Stockholders, which were converted into shares of Preferred Stock and
Common Stock in connection with the Recapitalization.
(2) The Company's existing indebtedness at April 6, 1997 consisted of: (i) an
aggregate of $23.1 million of unsecured borrowings under four separate
loan agreements, all of which bear interest at variable rates equal to the
federal funds rate plus 0.5% (approximately 6.3% as of April 6, 1997) and
(ii) approximately $4.0 million of unsecured borrowings under a renewable
note. The renewable note, guaranteed by Toray, is due on May 31, 1997 and
bears interest at 1.625%. See Note 3 to Notes to Consolidated Financial
Statements.
(3) Pursuant to the Recapitalization Agreement, the Existing Stockholders
converted all of their shares of Old Common Stock not otherwise redeemed
into shares of Preferred Stock and Common Stock. See "Principal
Stockholders."
(4) The fees and expenses consist of placement fees, commitment fees,
financial advisory fees and legal, accounting and other professional fees.
Bain Capital received compensation for their services in the
Recapitalization. See "Certain Relationships and Related Transactions--
Advisory Agreement."
23
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of the Company on a historical basis as of July 6, 1997. The
historical balance sheet as of July 6, 1997 already reflects the effect of the
Recapitalization. The Old Notes surrendered in exchange for the New Notes will
be retired and canceled and cannot be reissued. Accordingly, issuance of the
New Notes will not result in any increase or decrease in the indebtedness of
the Company. As such, no effect has been given to the Exchange Offer in this
capitalization table. 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
----------------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C>
Cash and cash equivalents......................... $ 14,017
========
Long-term debt:
Bank Credit Facility (1)........................ $ --
Senior Notes.................................... 115,000
Other long-term obligations..................... 2,320
--------
Total long-term debt 117,320
Mandatorily redeemable preferred stock............ 13,800
Shareholders' equity:
Class A Common.................................. 91
Class B Common.................................. 11
Class L Common.................................. 10
Additional paid-in capital...................... 20,177
Accumulated deficit............................. (88,340)
Notes receivable from shareholders.............. (254)
Accumulated foreign currency translation
adjustments.................................... (1,469)
--------
Total shareholders' equity (net capital
deficiency).................................. (69,774)
--------
Total capitalization.......................... $ 61,346
========
</TABLE>
- --------
(1) The Bank Credit Facility has a total of $30.0 million available on a
revolving basis, of which $7.8 million has been used to issue letters of
credit outstanding upon closing of the Recapitalization. See "Description
of Bank Credit Facility."
24
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The Unaudited Pro Forma Condensed Statement 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 the Recapitalization, as if it had occurred at
the beginning of each period. 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 Old Notes surrendered in
exchange for the New Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the New Notes will not result in any
increase or decrease in the indebtedness of the Company. As such, no effect
has been given to the Exchange Offer in the pro forma financial data included
herein. The Unaudited Pro Forma Condensed Statements of Income 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.
THERMA-WAVE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FISCAL YEAR ENDED APRIL 6, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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 12,319 (2) 13,940
Interest income............................. (346) (346)
Other (income) expense, net................. (14) (14)
-------- -------- --------
Income (loss) before provision for income
taxes...................................... 22,108 (13,319) 8,789
Provision for income taxes.................. 9,007 (5,426)(3) 3,581
-------- -------- --------
Net income.................................. $ 13,101 $ (7,893) $ 5,208
======== ======== ========
OTHER DATA:
EBITDA(4)................................... $ 27,113 $ (1,000)(1) $ 26,113
======== ======== ========
Ratio of earnings to fixed charges(5)....... 11.4x -- 1.6x
</TABLE>
See accompanying notes
25
<PAGE>
THERMA-WAVE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE-MONTH PERIOD ENDED JULY 7, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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 (loss)..................... 6,426 (250) 6,176
Interest expense............................ 432 3,075 (2) 3,507
Interest income............................. (45) (45)
Other (income) expense, net................. 26 26
-------- ------- --------
Income (loss) before provision for income
taxes...................................... 6,013 (3,325) 2,688
Provision for (benefit from) income taxes... 2,510 (1,330)(3) 1,180
-------- ------- --------
Net income (loss)........................... $ 3,503 $(1,995) $ 1,508
======== ======= ========
OTHER DATA:
EBITDA(4)................................... $ 7,475 $ (250)(1) $ 7,225
======== ======= ========
Ratio of earnings to fixed charges (5)...... 11.8x -- 1.7x
THREE-MONTH PERIOD ENDED JULY 6, 1997
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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.............................. -- -- --
Recapitalization and related expenses..... 2,888 -- 2,888
-------- ------- --------
Operating income (loss)..................... 2,540 (250) 2,290
Interest expense............................ 2,193 1,314 (2) 3,507
Interest income............................. (169) (169)
Other (income) expense, net................. 5 5
-------- ------- --------
Income (loss) before provision for income
taxes...................................... 511 (1,564) (1,053)
Provision for (benefit from) income taxes... 200 (612)(3) (412)
-------- ------- --------
Net income (loss)........................... $ 311 $ (952) $ (641)
======== ======= ========
OTHER DATA:
EBITDA(4)................................... $ 3,576 $ (250)(1) $ 3,326
======== ======= ========
Ratio of earnings to fixed changes (5)...... 1.2x -- N/A
</TABLE>
See accompanying notes
26
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
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) The increase to pro forma interest expense as a result of the
Recapitalization is summarized as follows:
<TABLE>
<CAPTION>
THREE-MONTH
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 3,075 3,075
Commitment fee on unused portion of 150 38 38
Bank Credit Facility at 0.50%...... ------- ------ ------
Cash interest expense............... 12,369 3,113 3,113
Amortization of debt issuance costs
($11.0 million over a 7 year
amortization period)............... 1,571 394 394
------- ------ ------
Interest expense from
Recapitalization debt requirements. 13,940 3,507 3,507
------- ------ ------
Net increase........................ $12,319 $3,075 $1,314
======= ====== ======
</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) "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) For purposes of computing this ratio, earnings consists of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and the estimated interest portion of rent expense. The Company's pro
forma earnings were insufficient to cover fixed charges by $1.1 million
for the three-month period ended July 6, 1997.
27
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
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
-------- ------- ------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
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 --
Recapitalization and
related expenses....... -- -- -- -- -- -- 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
======== ======= ======= ======= ======== ======== ========
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 (2).............. (7,936) (2,117) 12,496 17,185 27,113 7,475 3,576
Cash provided by (used
in) operating
activities............. (9,797) (6,006) 451 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 7,630 (1,278) (851) (532) 184
Capital expenditures.... 1,031 60 1,616 4,361 1,091 554 780
Ratio of earnings to
fixed charges (3)...... N/A N/A 4.4x 6.9x 11.4x 11.8x 1.2x
BALANCE SHEET DATA:
Working capital......... $(3,800) $(6,484) $17,240 $23,740 $38,720 $ 42,333
Total assets............ 22,368 23,039 45,081 53,056 68,620 82,340
Long-term debt.......... 23,692 24,171 24,838 25,556 25,273 115,000
Shareholders' equity
(net capital
deficiency)............ (18,191) (22,845) (379) 6,903 20,145 (69,774)
</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) "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.
(3) For purposes of computing this ratio, earnings consists of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and the estimated interest portion of rent expense. Earnings were
insufficient to cover fixed charges by $11.1 million and $4.7 million for
the Fiscal Years ended March 28, 1993 and March 27, 1994, respectively.
28
<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. Since its
introduction, 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 and
is installed in virtually every major semiconductor fabrication facility
worldwide. The Opti-Probe system, introduced in 1992, significantly improved
upon existing thin film metrology systems by successfully integrating
different measurement technologies into one system and utilizing 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.
From its inception in 1982 through March 1985, the Company invested
primarily in research and product development. In that time, the Company
introduced its first Therma-Probe system which was first shipped to customers
for beta-testing in Fiscal 1985 and first shipped commercially in Fiscal 1986.
The Company introduced its Opti-Probe system in Fiscal 1992. The Company's
subsequent growth is attributable to increased levels of capital expenditures
by the semiconductor industry, increased market penetration of the Opti-Probe
system and continued success of the Therma-Probe system. The semiconductor
industry experienced a downturn in 1996, during which industry revenues
declined by an estimated 9.4% (as reported by Dataquest). As a result, there
has been an overall decrease in the levels of capital expenditures during the
first half of 1997, which is expected to continue throughout the remainder of
1997. As a result of increased market penetration, 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.
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 purchased intangibles.
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.
29
<PAGE>
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 PERIOD
FISCAL YEAR ENDED (1) ENDED
--------------------------- -------------------
APRIL 2, MARCH 31, APRIL 6, JULY 7, JULY 6,
1995 1996 1997 1996 1997
-------- --------- -------- ------- -------
<S> <C> <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 --
Recapitalization and related
expenses...................... -- -- -- -- 10.3
----- ----- ----- ----- -----
Operating income (loss)........ 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%
===== ===== ===== ===== =====
</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.
THREE-MONTH PERIOD ENDED JULY 6, 1997 COMPARED TO THE 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 offset by 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
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.
30
<PAGE>
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. 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.
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-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 expenses
is attributed to the additional debt incurred as part of the Recapitalization.
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
31
<PAGE>
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 7.1%
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.
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.
32
<PAGE>
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.
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.
33
<PAGE>
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
ENDED
FISCAL YEAR ENDED MARCH 31, APRIL 5,
1996 FISCAL YEAR ENDED APRIL 6, 1997 1998
---------------------------------- ---------------------------------- -----------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
------- ------- ------- ------- ------- ------- ------- ------- -----------
(DOLLARS 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
Cash provided by (used
in) operating
activities............. 4,291 (329) (2,344) 4,249 1,990 1,007 4,604 4,261 (969)
Cash used in investing
activities............. (168) (513) (1,636) (2,648) (964) (188) (208) (216) (1,939)
Cash provided by (used
in) financing
activities............. (1,395) (65) 52 130 (532) 121 (193) (254) 184
Ratio of earnings to
fixed charges.......... 7.9 5.8 1.0 13.5 11.8 16.6 8.9 8.0 1.2
Backlog................. 18,111 22,163 32,627 56,883 46,953 35,024 35,535 41,787 42,105
</TABLE>
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 of Fiscal 1998. Fluctuations in
quarterly gross margins percentages during these quarters resulted primarily
from changes in average selling prices 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.
34
<PAGE>
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 $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 $0.5 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.
The Initial Offering enabled the Company to finance the Recapitalization. In
connection with the Recapitalization, the Company: (i) issued $115.0 million
in aggregate principal amount of the Notes; and (ii) received the Equity
Contribution of $35.0 million. See "The Recapitalization" and "Use of
Proceeds."
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 foreign
subsidiaries. The Bank Credit Facility matures on the fifth anniversary of the
Recapitalization. Subsequent to the Recapitalization, the Company used $7.8
million of the 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. See "Description of Bank
Credit Facility."
The Company's principal sources of funds following the Recapitalization are
anticipated to be cash flows from operating activities, borrowings under the
Bank Credit Facility and estimated cash on hand of $14.0 million at July 6,
1997. 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, including the payment of principal and
interest on the Notes, 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 capital equipment needs. 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."
35
<PAGE>
Foreign exchange rate fluctuations have historically not had a significant
impact on the Company's result of operations. Generally, sales to foreign
markets outside of Japan have been invoiced and paid in U. S. Dollars and
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.
36
<PAGE>
INDUSTRY OVERVIEW
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. Similarly, internal surveys, while
believed to be reliable, have not been verified by any independent source.
This publication was not commissioned by, or prepared at the request of, the
Company or any of its affiliates. 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.
SEMICONDUCTOR INDUSTRY
Semiconductors are the critical components used in an increasing number of
electronic products and systems. Continuous improvements in semiconductor
process and design technologies have led to smaller, more complex and more
reliable semiconductor devices at a lower cost per function. As device
performance has increased and size and cost have decreased, semiconductors
have expanded beyond their original primary applications in computer systems
to applications in telecommunications systems, automotive products, consumer
products and industrial automation and control systems. In addition, product
users and designers have demanded semiconductors with increased functionality,
higher levels of performance, greater reliability and shorter design cycle
times, all in smaller packages at lower costs. These improved capabilities
have resulted in increased semiconductor content as a percentage of the cost
of electronic products. According to a study published by Texas Instruments,
the value of semiconductors as a percentage of the cost of electrical devices
has increased from approximately 5% in the 1970s to approximately 16% in 1996.
The demand for electronic products has also expanded geographically with the
emergence of new markets, particularly in Asia, which has led to a
corresponding expansion in the demand for semiconductors. According to
Dataquest, since 1991 the global semiconductor market has expanded at a CAGR
of approximately 16.6% to approximately $138.6 billion in 1996.
SEMICONDUCTOR INDUSTRY CAPITAL EXPENDITURES
To meet the increased demand for semiconductors, manufacturers have been
required to make capital expenditures to increase their existing capacity by
constructing new fabs and expanding their existing fabs. In addition,
manufacturers must continually construct and equip new fabs to replace
existing fabs and production equipment that are rendered obsolete as a result
of improvements in semiconductor performance characteristics and the
semiconductor manufacturing process. Due to the pace at which these
improvements occur, a new fab is generally able to produce state-of-the-art
semiconductors for only a relatively short period of time, typically less than
five years. As a result, the semiconductor industry is characterized by
relatively high levels of capital expenditures. For example, over the last 15
years, semiconductor manufacturers have made capital expenditures representing
approximately 23% of their annual revenues. As a result of the increased
demand for semiconductors and the capital intensive nature of semiconductor
manufacturing, capital expenditures by manufacturers have increased at a CAGR
of 27.2% from 1991 to 1996 (based on information reported in Dataquest).
The level of capital expenditures made by semiconductor manufacturers is
dependent upon the current and anticipated market demand for semiconductors
and products utilizing semiconductors. The semiconductor industry is cyclical
and has historically experienced periods of slower revenue growth or decline.
These periods have often resulted in decreases in the level of capital
expenditures made by the semiconductor manufacturers. Conversely, periods of
rapid revenue growth in the semiconductor industry have often been followed by
increases in the level of capital expenditures. There is typically a six to
twelve month lag between changes in the
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semiconductor industry and the related impact on the level of capital
expenditures. In most cases, the resulting changes in capital expenditures has
been more pronounced than the precipitating change in semiconductor industry
revenues. To illustrate these relationships, the following table sets forth
for the periods indicated: (i) worldwide semiconductor market revenues and
(ii) worldwide semiconductor capital expenditures:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- ------ ------ ------
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Semiconductor industry
revenues............... $59.2 $59.3 $64.5 $70.5 $87.5 $112.5 $153.1 $138.6
Percentage change...... 7.6% 0.2% 8.6% 9.3% 24.2% 28.5% 36.1% (9.4%)
Semiconductor industry
capital expenditures... $12.3 $13.2 $13.1 $11.6 $14.3 $22.1 $38.4 $43.7
Percentage change...... 26.5% 7.3% (0.6%) (11.8%) 23.6% 54.1% 73.9% 13.8%
</TABLE>
- --------
Source: Dataquest, January, 1997.
According to Dataquest, capital expenditures by the semiconductor industry
increased by approximately 13.8% in 1996. The semiconductor industry, however,
experienced a downturn in 1996, during which industry revenues declined by an
estimated 9.4% (as reported by Dataquest). As a result, there has been an
overall decrease in the level of capital expenditures during the first half of
1997, which is expected to continue throughout the remainder of 1997.
Dataquest forecasts that sales of semiconductor capital equipment will
decrease by approximately 18% in 1997. Nonetheless, the semiconductor capital
equipment market is expected to continue its long-term growth as a result of
the increase in demand for semiconductors.
PROCESS CONTROL METROLOGY MARKET
The Company operates in the expanding process control metrology systems
market of the semiconductor capital equipment industry. 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 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 22.4% to approximately
$1.4 billion in 1996. Within the process control metrology market, the Company
operates specifically in the ion implant and the thin film measurement
metrology segments. The Company estimates that sales of ion implant metrology
and thin film measurement systems for the semiconductor industry were
approximately $60 million and $209 million, respectively, in 1996. Demand for
process control metrology systems is driven primarily by: (i) capital
expenditures of semiconductors 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. The Company believes that increasing demand for
semiconductors in general, combined with the need for more comprehensive and
sophisticated process control of semiconductor manufacturing, will result in
increased demand for process control metrology systems.
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 16.6%. In
addition, Dataquest estimates that sales of semiconductors generated aggregate
revenues of approximately $138.6 billion in 1996, are projected to grow by
12.7% to approximately $156.2 billion in 1997 and to reach approximately $300
billion by the year 2000. This market expansion is due primarily to: (i) the
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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 Controls. 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 and reducing feature sizes, necessitating narrower
process tolerances which makes it more difficult to maintain acceptable
yields. These factors, together with the industry migration toward larger
wafer sizes, 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. 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
systems, which typically represent a small percentage of the total investment,
enable manufacturers to leverage these expensive facilities and improve their
return on investment.
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<PAGE>
BUSINESS
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 any 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. For Fiscal 1997 on a
pro forma basis giving effect to the Recapitalization, the Company generated
net revenues, EBITDA and net income of $109.5 million, $26.1 million and $5.2
million, respectively, and a pro forma ratio of earnings to fixed charges of
1.6. For the first quarter of Fiscal 1998 on a pro forma basis giving effect
to the Recapitalization, the Company generated net revenues, EBITDA and
incurred a net loss of $28.2 million, $3.3 million and $(0.6) million,
respectively. The Company's pro forma earnings were insufficient to cover
fixed charges by $1.1 million for the first quarter of Fiscal 1998. 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 95% of the market for nondestructive ion
implantation measurement of product wafers and is installed in virtually every
major semiconductor fab worldwide. The Opti-Probe system, introduced in 1992,
significantly improved upon existing thin film metrology systems by
successfully integrating different measurement technologies into one system
and utilizing new 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 virtually all major
semiconductor manufacturers, including Intel Corporation, Samsung
Semiconductor Inc., LG Semicon, Advanced Micro Devices, Inc., Siemens
Microelectronics, Lucent Technologies and NEC Semiconductor. The Company has
developed and consistently maintained strong customer relationships due to the
technological superiority of its products and strong customer support
capabilities. In its 15 year history, the Company believes it has never lost a
major customer. 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, are among the fastest
growing manufacturers in the semiconductor industry. The Company has a strong
presence in all major international markets and, as a result, derived
approximately 59.7% and 44.2% of its net revenues from international sales in
Fiscal 1997 and the first quarter of Fiscal 1998, respectively. 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 and
Shimadzu. Through the Recapitalization, Bain Capital, Sutter Hill and the
Management Investors collectively acquired securities representing
approximately 88% of the Company's outstanding voting power. As a result of
the Recapitalization, the Management Investors own approximately 22% of the
outstanding Common Stock, which represents 13% of the outstanding voting
power, and hold 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.
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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
invasive 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.
. 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 Corporation, the largest microprocessor
manufacturer worldwide; (ii) Samsung, the largest DRAM manufacturer; and
(iii) Lucent Technologies, one of the largest 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. In addition, no single customer accounted for more
than 13% and 22% of the Company's net revenues in Fiscal 1997 and the first
quarter of Fiscal 1998, respectively.
. STRONG CUSTOMER RELATIONSHIPS. The Company believes that it has developed
and consistently maintained excellent customer relationships. In its 15
year history, the Company believes that it has never lost a major customer.
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 model 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 been at the forefront of addressing the increasing
globalization of the semiconductor industry. 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
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<PAGE>
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.
. 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 own approximately 22% of
the outstanding Common Stock, which represents 13% of the outstanding
voting power, and hold 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 will include 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
increased demand for metrology systems. 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. In its 15 year history, the Company believes it
has never lost a major customer. 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 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, developed in
conjunction 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
believes that it has increased its market share in the thin film
measurement market by approximately 10 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 $209 million in
1996 and has grown at CAGR of 37.2% from 1991 to 1996.
. CONTINUE TO FOCUS ON TECHNOLOGICAL INNOVATION. The Company expects to
continue its emphasis on engineering and research and development in an
effort to anticipate and address technological advances in semiconductor
manufacturing. 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 founding, the
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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. The Company
intends to capitalize on its market leadership position, advanced
technologies and portfolio of 69 U.S. and foreign patents to further
broaden its existing high quality product lines. Management believes that
continued product innovation and investment in research and development
will help the Company increase its leadership position and overall
profitability.
. 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.
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
A key process step in the fabrication of semiconductors is the implantation
of ions into selective areas of the silicon wafer, which alters the electrical
properties of the silicon semiconductors. 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 implant 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 implant 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.
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 1996, more than 340 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
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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 metrology systems for the semiconductor industry were
approximately $60 million in 1996. From Fiscal 1992 through Fiscal 1997,
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 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, 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.
Opti-Probe System
The majority of the 100 to 300 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 spectrophotometry and ellipsometry. 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
test areas and spectrophotometers 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 (a hundred million times smaller than a centimeter) to films
that are hundreds of thousand times thicker. Reflection spectrophotometers 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 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
44
<PAGE>
properties. Reflection spectrophotometers and most ellipsometers have very
limited capabilities for simultaneous measurements of thickness and optical
parameters.
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
spectrophotometers and ellipsometers into a single integrated system and
utilizes two new proprietary measurement technologies to enhance their
capabilities. 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 10 percentage points over the previous year. The Company
expects that its Opti-Probe system will continue to increase market share as a
result of its technological superiority and the enhanced return on investment
to the customer. The Company estimates that sales of thin film measurement
systems for the semiconductor industry were approximately $209 million in
1996. From Fiscal 1992 through Fiscal 1997, 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 spectrophotometers 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 spectrophotometry and ellipsometry in one system,
the Company believes that its particular combination of technologies
results in a superior product.
Ease of Use and Reliability. Therma-Wave's 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,
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-2600DUV
model which extends the spectrophotometer 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.
45
<PAGE>
CUSTOMERS
Therma-Wave sells its products to leading semiconductor manufacturers
throughout the world, including Intel, Samsung, LG Semicon, Advanced Micro
Devices, Inc., Siemens Microelectronics, Lucent Technologies and NEC
Semiconductor. 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 Corporation and Hyundai Corporation represented
approximately 21%, 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 for a fee. The
Company also trains customer employees, for a fee, to perform routine service
and provides telephone consultation services.
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 sales offices in France
and 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 Corporation. 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.
46
<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 (loss) 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.
ENGINEERING; RESEARCH AND DEVELOPMENT
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 seeks to
maintain its close relationships with customers to make improvements in its
products which respond to customers' needs. For example, the model 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.
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.
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<PAGE>
The Company's research and developments efforts have resulted in the recent
introduction of (i) the Opti-Probe 5240, which combines six measurement
technologies into one system; (ii) the Meta-Probe Metal Metrology System,
which measures film thickness on multi- or single layer metal films; and (iii)
300 millimeter wafer capability for both the Opti-Probe and Therma-Probe
systems.
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.
COMPETITION
The market for semiconductor capital equipment is highly competitive. The
Company faces substantial competition from established companies in each of
the markets that is serves, some of which have greater
48
<PAGE>
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 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 Tencor Instruments, Rudolph Technologies,
Nanometrics and Dai Nippon Screen.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that the success of its business depends more on the
technical competence, creativity and marketing abilities of its employees,
rather than 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 9 additional foreign patents.
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 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 two trademark registrations 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
49
<PAGE>
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, and Taiwan.
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 competitor, 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.
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. The Patent
Court recently ruled 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 appeal both rulings. The Company's
aggregate sales to customers located in Germany were approximately $1.0
million and $8.0 million in Fiscal 1996 and Fiscal 1997, respectively. To date
the Company has not made any sales to customers in Germany in Fiscal 1998.
The German Patent Court's ruling 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 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 German Patent Court's ruling may not affect the U.S. District
Court's determination of whether Jenoptik is infringing the 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
or 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
50
<PAGE>
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. In 1996, the Company sold only approximately
twenty units of UV-equipped Opti-Probe devices and did not sell any such units
prior to 1996. However, because of Nanometrics' willingness to license its
patent and the relatively small number of Opti-Probe devices 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.
51
<PAGE>
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. .. 55 Director
David Dominik........... 40 Director
Adam W. Kirsch.......... 35 Director
</TABLE>
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.
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
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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 1973. 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 June 1993. Mr. Dominik also serves as a
director of 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 Duane Reade, Inc., Stage Stores, Inc., Brookstone, Inc.,
Dade International Inc. and Wesley Jessen VisionCare, Inc.
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.
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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 $243,000(2) -- $4,446(3)
Chairman, President and
Chief Executive Officer
Anthony W. Lin.......... 211,460 85,100(2) -- --
Executive Vice
President and Chief
Financial Officer
Jon L. Opsal............ 168,184 56,900(2) -- --
Vice President,
Research and
Development
W. Lee Smith............ 135,442 94,000(4) -- --
Vice President,
Strategic Marketing
David Willenborg........ 154,479 51,000 -- --
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) The Company expects to pay bonuses to Messrs. Rosencwaig, Lin, Opsal and
Willenborg in Fiscal 1998 since the Company met certain performance
targets in Fiscal 1997. To date, the amounts of such bonuses have not been
determined by the Board. The bonus amounts set forth in the table are
estimates based on the reported operating results of the Company, and
therefore, are subject to change.
(3) Reflects insurance premiums paid by the Company on behalf of Dr.
Rosencwaig.
(4) Reflects sales commissions earned by Mr. Smith during Fiscal 1997.
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.
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
54
<PAGE>
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,
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); 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 40% 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
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
55
<PAGE>
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 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 tranches 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.
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). See
"Certain Relationships and Related Transactions--Stock Repurchase Agreement."
56
<PAGE>
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.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
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 748,739 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 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.
The following table sets forth certain information regarding the beneficial
ownership of (i) each class of voting securities of the Company by each person
known to the Company to own more than 5% of any class of outstanding voting
securities of the Company and (ii) the equity securities of the Company by
each Director of the Company, each Named Executive Officer and all of the
Company's directors and executive officers as a group. 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 have been determined in accordance with the
applicable rules and regulations promulgated under the Exchange Act.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------------------------------------------------------------
CLASS A COMMON STOCK CLASS B COMMON STOCK CLASS L COMMON STOCK PREFERRED STOCK
-------------------- -------------------- ------------------------ ------------------
NUMBER NUMBER
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE OF PERCENTAGE OF PERCENTAGE
NAME AND ADDRESS SHARES OF CLASS SHARES OF CLASS SHARES OF CLASS SHARES OF CLASS
---------------- --------- ---------- --------- ---------- ----------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
Bain Capital Funds (1)...... 5,536,937 61.0% -- -- % 615,215 61.0% -- -- %
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Sutter Hill Ventures........ 1,642,382 18.1 -- -- 182,487 18.1 -- --
755 Page Mill Road
Palo Alto, California 94304
Toray Industries, Inc. (2).. 996,913 11.0 -- -- 45,363 4.5 588,653 78.6
8-1, Mihama 1-chome
Urayasu, Chiba 279, Japan
Shimadzu Corporation (3).... 271,112 3.0 -- -- 12,336 1.3 160,085 21.4
1, Nishinokyo-Kuwabaracho
Nakagyo-ku, Kyoto 604,
Japan
DIRECTORS AND EXECUTIVE
OFFICERS:
Allan Rosencwaig (4)........ 993,279 10.9 1,343,750 67.0 110,364 10.9 -- --
Anthony W. Lin (5).......... 40,588 * 255,312 17.0 4,510 * -- --
Jon L. Opsal (6)............ 23,427 * 255,312 17.0 2,603 * -- --
W. Lee Smith (7)............ 40,738 * 201,562 14.0 4,526 * -- --
David Willenborg(8)......... 128,299 1.4 201,562 14.0 14,255 1.4 -- --
G. Leonard Baker, Jr. (9)... 1,642,382 18.1 -- -- 182,487 18.1 -- --
David Dominik (10).......... 5,536,937 61.0 -- -- 615,215 61.0 -- --
Adam W. Kirsch (10)......... 5,536,937 61.0 -- -- 615,215 61.0 -- --
All Directors and executive
officers as a group (8
persons)................... 8,405,650 93.0 2,687,500 100.0 933,960 92.4 -- --
</TABLE>
- --------
*Less than one percent.
58
<PAGE>
(1) Includes shares of Class A Common and Class L Common held by Bain Capital
Fund V, L.P., ("Fund V"); Bain Capital Fund V-B, L.P. ("Fund V-B"); BCIP
Associates ("BCIP"); and BCIP Trust Associates, L.P. ("BCIP Trust" and
collectively with Fund V, Fund V-B and BCIP, have been defined herein as
the "Bain Capital Funds").
(2) 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.,
wholly owned subsidiary of Toray.
(3) 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.
(4) 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.
(5) 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.
(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; (ii)
127,656 shares of Class B Common that can be acquired upon the exercise
of outstanding options.
(7) 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.
(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) 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.
(10) 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.
59
<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
expects to loan such executive officers an aggregate of approximately
$1,100,000 to pay certain tax liabilities associated with the distribution
from Toray. Such loans will not bear interest and will 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 will be 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 service agreed upon by
the Company and Bain Capital. In exchange for such services, Bain Capital
received: (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
Pursuant to 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 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
60
<PAGE>
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.
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 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.
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
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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 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 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.
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 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
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Stockholders have jointly agreed to indemnify the Company and the Bain Capital
Funds 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 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 (2) 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 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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DESCRIPTION OF BANK CREDIT FACILITY
In connection with the Recapitalization, the Company entered into a new 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 the
fifth anniversary of the Closing Date. 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 1/2 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 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.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on May 16, 1997 to the
Initial Purchaser pursuant to the Purchase Agreement. The Initial Purchaser
subsequently resold the Old Notes to qualified institutional buyers in
reliance on Rule 144A under the Securities Act and a limited number of
institutional "accredited investors" as defined in Rule 501(a) (1), (2), (3)
or (7) under the Securities Act. As a condition to the Purchase Agreement, the
Company entered into the Registration Rights Agreement with the Initial
Purchaser pursuant to which the Company has agreed, for the benefit of the
holders of the Old Notes, at the Company's cost, to use its best efforts to
(i) file the Exchange Offer Registration Statement within 60 days after the
date of the original issue of the Old Notes with the Commission with respect
to the Exchange Offer for the Old Notes, (ii) use its best efforts to cause
the Exchange Offer Registration Statement to be declared effective under the
Securities Act within 120 days after the date of the original issuance of the
Old Notes and (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, commence the Exchange Offer and use its
best efforts to issue the New Notes in exchange for the Old Notes on or prior
to 45 days after the date the Exchange Offer Registration Statement being
declared effective. Upon the Exchange Offer Registration Statement being
declared effective, the Company will offer the New Notes in exchange for
surrender of the Old Notes. The Company will keep the Exchange Offer open for
not less than 30 days (or longer if required by applicable law) after the date
on which notice of the Exchange Offer is mailed to the holders of the Old
Notes. For each Old Note surrendered to the Company pursuant to the Exchange
Offer, the holder of such Old Note will receive a New Note having a principal
amount equal to that of the surrendered Old Note. Interest on each Old Note
will accrue from the last interest payment date on which interest was paid on
the Old Note, or if no interest has been paid on such Old Note, from the date
of its original issue to, but not including, the issuance date of the New
Notes. Interest on each New Note will accrue from the date of its original
issue.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Notes will, in general, be
freely tradeable after the Exchange Offer without further registration under
the Securities Act. However, any purchaser of Old Notes who is an "affiliate"
(as defined in the Securities Act) of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the New
Notes (i) will not be able to rely on the interpretation of the staff of the
Commission, (ii) will not be able to tender its Old Notes in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Old Notes, unless such sale or transfer is made pursuant to an exemption
from such requirements.
As contemplated by these no-action letters and the Registration Agreement,
each holder accepting the Exchange Offer is required to represent to the
Company in the Letter of Transmittal that (i) the New Notes are to be acquired
by the holder or the person receiving such New Notes, whether or not such
person is the holder, in the ordinary course of business, (ii) the holder or
any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging and does not intend to engage in distribution of the
New Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act, and (v)
the holder or any such other person acknowledges that if such holder or any
other person participates in the Exchange Offer for the purpose of
distributing the New Notes it must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale of
the New Notes and cannot rely on those no-action letters. Any holder that is
unable to make such representations to the Company will not be eligible to
participate in the Exchange Offer. As indicated above, each Participating
Broker-Dealer that receives a New Note for its own account in exchange for Old
Notes must acknowledge that it (i) acquired the Old Notes for its own account
as a result of market-making activities or other trading activities, (ii) has
not entered into any arrangement or understanding with the Company or any
"affiliate" of the Company (within the meaning of Rule 405 under the
Securities Act) to distribute the New Notes to be received in the Exchange
Offer and (iii) will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes. For a
description of the procedures for resales by Participating Broker-Dealers, see
"Plan of Distribution."
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If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the Commission, the Company is not permitted
to effect an Exchange Offer, (ii) the Exchange Offer is not consummated within
165 days of the Issue Date, (iii) in certain circumstances, certain holders of
unregistered New Notes so request or (iv) in the case of any holder that
participates in the Exchange Offer, such holder does not receive New Notes on
the date of the exchange that may be sold without restriction under state and
federal securities laws (other than due solely to the status of such holder as
an affiliate of the Company within the meaning of the Securities Act), then in
each case, the Company will (x) promptly deliver to the holders and the
Trustee written notice thereof and (y) at the Company's sole expense, (a) as
promptly as practicable, file a shelf registration statement covering resales
of the Notes (a "Shelf Registration Statement"), (b) use its reasonable best
efforts to cause such Shelf Registration Statement to be declared effective
under the Securities Act and (c) use its reasonable best efforts to keep
effective such Shelf Registration Statement until the earlier of two years
after the Issue Date and such time as all of the applicable Notes have been
sold thereunder. The Company will, in the event of the filing of a Shelf
Registration Statement, provide to each holder of the Old Notes copies of the
prospectus which is a part of such Shelf Registration Statement, notify each
such holder when such Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of
the Notes. A holder that sells its Notes pursuant to a Shelf Registration
Statement generally will be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act
in connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations).
If the Company fails to comply with the above provisions or if such
registration statements fails to become effective, then, as liquidated
damages, additional interest (the "Additional Interest") shall become payable
with respect to the Old Notes as follows:
(i) if (A) neither the Exchange Offer Registration Statement nor the
Shelf Registration Statement is filed with the Commission on or prior to
the applicable filing date or (B) notwithstanding that the Company has
consummated or will consummate an Exchange Offer, the Company is required
to file a Shelf Registration Statement and such Shelf Registration
Statement is not filed on or prior to the date required by the Registration
Rights Agreement, then commencing on the day after either such required
filing date, Additional Interest shall accrue on the principal amount of
the Old Notes at a rate of 0.25% per annum for the first 90 days
immediately following each such filing date, such Additional Interest rate
increasing by an additional 0.25% per annum at the beginning of each
subsequent 90-day period; or
(ii) if (A) neither the Exchange Offer Registration Statement nor a Shelf
Registration Statement is declared effective by the Commission on or prior
to 120 days after the applicable filing date or (B) notwithstanding that
the Company has consummated or will consummate an Exchange Offer, the
Company is required to file a Shelf Registration Statement and such Shelf
Registration Statement is not declared effective by the Commission on or
prior to the applicable Effectiveness Date (as defined in the Registration
Rights Agreement), then, commencing on the day after such date, Additional
Interest shall accrue on the principal amount of the Old Notes at a rate of
0.25% per annum for the first 90 days immediately following such date, such
Additional Interest rate increasing by an additional 0.25% per annum at the
beginning of each subsequent 90-day period; or
(iii) if (A) the Company has not exchanged New Notes for all Old Notes
validly tendered in accordance with the terms of the Exchange Offer on or
prior to the 45th day after the date on which the Exchange Offer
Registration Statement was first declared effective or (B) if applicable,
the Shelf Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the
second anniversary of the Issue Date (other than after such time as all Old
Notes have been disposed of thereunder), then Additional Interest shall
accrue on the principal amount of the Old Notes at a rate of 0.25% per
annum for the first 90 days commencing on (x) the 46th day after such
effective date, in the case of (A) above, or (y) the day such Shelf
Registration Statement ceases to be effective in the case of (B) above,
such Additional Interest rate increasing by an additional 0.25% per annum
at the beginning of each subsequent 90-day period;
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provided, however, that the Additional Interest rate on the Old Notes may not
exceed in the aggregate 1.0% per annum; and provided further, that (1) upon
the filing of the Exchange Offer Registration Statement or Shelf Registration
Statement (in the case of clause (i) above), (2) upon the effectiveness of the
Exchange Offer Registration Statement or Shelf Registration Statement (in the
case of (ii) above), or (3) upon the exchange of New Notes for all Old Notes
tendered (in the case of clause (iii)(A) above), or upon the effectiveness of
the Exchange Offer Registration Statement which had ceased to remain effective
in the case of clause (iii)(B) above, Additional Interest on the Old Notes as
a result of such clause (or the related subclause thereof), as the case may
be, shall cease to accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash, on the same original interest payment
dates as the Notes. The amount of Additional Interest will be determined by
multiplying the applicable Additional Interest rate by the principal amount of
the Notes multiplied by a fraction, the numerator of which is the number of
days such Additional Interest rate was applicable during such period
(determined on the basis of a 360-day year comprised of twelve 30-day months),
and the denominator of which is 360.
Holders of the Old Notes will be required to make certain representations to
the Company (as described in the Registration Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Old Notes included
in the Shelf Registration Statement and benefit from the provisions regarding
Additional Interest set forth above.
The summary herein of certain provisions of the Registration Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by, all the provisions of the Registration Agreement, a copy of which is filed
as an exhibit to the Exchange Offer Registration Statement of which this
Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of New Notes in exchange for each $1,000 principal amount of outstanding Old
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Old Notes pursuant to the Exchange Offer. However, Old Notes may be tendered
only in integral multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes bear a Series B designation and a
different CUSIP Number from the Old Notes, (ii) the New Notes will be issued
in a transaction that has been registered under the Securities Act and,
therefore, will not bear legends restricting the transfer thereof and (iii)
the holders of the New Notes will not be entitled to certain rights under the
Registration Rights Agreement, including the provisions providing for
liquidated damages in certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
terminated. The New Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $115,000,000 aggregate principal amount
of Old Notes were outstanding. The Company has fixed the close of business on
September 10, 1997 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
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Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware, or the Indenture in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the exchange fees and expenses.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
October 13, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders, including the holders who have previously tendered their
Old Notes, an announcement thereof, each prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date.
The Registration Agreement provides, among other things, that the Company
shall pay the holders of Old Notes Additional Interest if the Exchange Offer
is not completed within 45 days after the Exchange Offer Registration
Statement is declared effective by the Commission. As a result, it is unlikely
that the Company would extend the Exchange Offer beyond that time. The Company
currently has no plans to extend the Exchange Offer.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from their date of issuance. Holders of Old
Notes that are accepted for exchange will receive, in cash, accrued interest
thereon to, but not including, the date of issuance of the New Notes. Such
interest will be paid with the first interest payment on the New Notes on
November 15, 1997 to the persons who are registered holders of the New Notes
on November 1, 1997. Interest on the Old Notes accepted for exchange will
cease to accrue upon issuance of the New Notes.
Interest on the New Notes is payable semi-annually on each May 15 and
November 15, commencing on November 15, 1997.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal or transmit an Agent's
Message in connection with a book-entry transfer, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, or Agent's Message,
together with the Old Notes and any other required documents, to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. To be
tendered effectively, the Old Notes, Letter of
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Transmittal or an Agent's Message and other required documents must be
completed and received by the Exchange Agent at the address set forth below
under "Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date. Delivery of the Old Notes may be made by book-entry transfer
in accordance with the procedures described below. Confirmation of such book-
entry transfer must be received by the Exchange Agent prior to the Expiration
Date.
The term "Agent's Message" means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent forming a part of a
confirmation of a book-entry, which states that such book-entry transfer
facility has received an express acknowledgment from the participant in such
book-entry transfer facility tendering the Old Notes that such participant has
received and agrees: (i) to participate in the Automated Tender Option Program
("ATOP"); (ii) to be bound by the terms of the Letter of Transmittal; and
(iii) that the Company may enforce such agreement against such participant.
By executing the Letter of Transmittal or Agent's Message, each holder will
make to the Company the representations set forth above in the third paragraph
under the heading "--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal or Agent's Message.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL OR AGENT'S
MESSAGE AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL,
HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of the Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
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The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Old Notes at the Book-Entry Transfer Facility (as defined in the Letter of
Transmittal) for the purpose of facilitating the Exchange Offer, and subject
to the establishment thereof, any financial institution that is a participant
in the Book-Entry Transfer Facility's system may make book-entry delivery of
Old Notes by causing such Book-Entry Transfer Facility to transfer such Old
Notes into the Exchange Agent's account with respect to the Old Notes in
accordance with the Book-Entry Transfer Facility's procedures for such
transfer. Although delivery of the Old Notes may be effected through book-
entry transfer into the Exchange Agent's account at the Book- Entry Transfer
Facility, unless an Agent's Message is received by the Exchange Agent, in
compliance with ATOP, an appropriate Letter of Transmittal properly completed
and duly executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under such procedures. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right in its sole
discretion to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Old Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution,
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the Book-
Entry Transfer Facility), and all other documents required by the Letter of
Transmittal are received by the Exchange Agent upon five New York Stock
Exchange trading days after the Expiration Date.
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Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"); (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case
of Old Notes transferred by book-entry transfer, the name and number of the
account at the Book-Entry Transfer Facility to be credited); (iii) be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee with respect to the Old Notes register the transfer of such
Old Notes into the name of the person withdrawing the tender and (iv) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no New Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have
been tendered but which are not accepted for exchange will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company, Holdings or any of their
subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Old Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
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EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
IBJ Schroder Bank & Trust Company
Attention: Reorganization Department
One State Street
New York, New York 10004
Telephone: (212) 858-2103
Facsimile: (212) 858-2611
Delivery to an address other than as set forth above, or transmission of
instructions via a facsimile number other than the one set forth above, will
not constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a
person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, or (iv) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
RESALE OF THE NEW NOTES
With respect to resales of New Notes, based on interpretations by the staff
of the Commission set forth in no-action letters issued to third parties, the
Company believes that a holder or other person who receives the
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New Notes, whether or not such person is the holder (other than a person that
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who receives New Notes in exchange for Old Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes, will be allowed to resell
the New Notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the New Notes a prospectus
that satisfies the requirements of Section 10 of the Securities Act. However,
if any holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such holder
cannot rely on the position of the staff of the Commission enunciated in such
no-action letters or any similar interpretive letters, and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration
is otherwise available. Further, each Participating Broker-Dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes.
As contemplated by these no-action letters and the Registration Agreement,
each holder accepting the Exchange Offer is required to represent to the
Company in the Letter of Transmittal that (i) the New Notes are to be acquired
by the holder or the person receiving such New Notes, whether or not such
person is the holder, in the ordinary course of business, (ii) the holder or
any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging and does not intend to engage, in the distribution
of the New Notes, (iii) the holder or any such other person has no arrangement
or understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act, and (v)
the holder or any such other person acknowledges that if such holder or other
person participates in the Exchange Offer for the purpose of distributing the
New Notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes and cannot rely on those no-action letters. As indicated above, each
Participating Broker-Dealer that receives an New Senior Note for its own
account in exchange for Old Notes must acknowledge that it will deliver a
Prospectus in connection with any resale of such New Notes. For a description
of the procedures for such resales by Participating Broker-Dealers, see "Plan
of Distribution. "
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DESCRIPTION OF NOTES
The New Notes will be issued under the Indenture. The terms of the New Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "TIA") as in
effect on the date of the Indenture. The form and terms of the New Notes are
the same as the form and terms of the Old Notes (which they replace) except
that (i) the New Notes bear a Series B designation, (ii) the New Notes have
been issued in a transaction that has been registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof, and
(iii) the holders of New Notes will not be entitled to certain rights under
the Registration Agreement, including the provisions providing for liquidated
damages in certain circumstances relating to the timing of the Exchange Offer,
which rights will terminate when the Exchange Offer is consummated. The New
Notes are subject to all such terms, and holders of the New Notes are referred
to the Indenture and the TIA for a statement of them. The following is a
summary of the material terms and provisions of the New Notes. This summary
does not purport to be a complete description of the New Notes and is subject
to the detailed provisions of, and qualified in its entirety by reference to,
the New Notes and the Indenture (including the definitions contained therein),
copies of which are filed as exhibits to the Exchange Offer Registration
Statement of which this Prospectus is a part. Definitions relating to certain
capitalized terms are set forth under "--Certain Definitions" and throughout
this description. Capitalized terms that are used but not otherwise defined
herein have the meanings assigned to them in the Indenture and such
definitions are incorporated herein by reference. The Old Notes and the New
Notes are sometimes referred to herein collectively as the "Notes."
The Notes will be senior unsecured obligations of the Company, ranking pari
passu in right of payment with all other senior unsecured obligations of the
Company.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be
presented for registration or transfer and exchange at the offices of the
Registrar, which initially will be the Trustee's corporate trust office. The
Company may change any Paying Agent and Registrar without notice to holders of
the Notes (the "Holders"). The Company will pay principal (and premium, if
any) on the Notes at the Trustee's corporate office in New York, New York. At
the Company's option, interest may be paid at the Trustee's corporate trust
office or by check mailed to the registered address of Holders.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $115,000,000 and will
mature on May 15, 2004. Interest on the Notes will accrue at the rate of 10
5/8% per annum and will be payable semiannually in cash on each May 15 and
November 15 commencing on November 15, 1997, to the Persons who are registered
Holders at the close of business on May 1 and November 1, respectively,
immediately preceding the applicable interest payment date.
The Notes will not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
Optional Redemption. The Notes will be 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>
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Optional Redemption upon Equity Offerings. 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 shall decrease to 35% if an Initial Public Offering has
not been consummated on or prior to November 15, 1998 and any other Notes
previously redeemed pursuant to this provision shall be included in
determining such percentage) 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. In order to effect the foregoing redemption with the proceeds
of any Equity Offering, the Company shall make such redemption not more than
120 days after the consummation of any such Equity Offering; provided that in
the case of an Initial Public Offering, the Company shall first comply with
the provisions set forth below under "--Mandatory Redemption Following Initial
Public Offering."
Mandatory Redemption Following Initial Public Offering. If the Company
consummates an Initial Public Offering prior to May 15, 2000, the Company
shall apply the Net Cash Proceeds relating to such Initial Public Offering to
make an offer to purchase (the "IPO Proceeds Offering") on a date (the "IPO
Proceeds Offering Payment Date") not less than 30 nor more than 45 days
following the consummation of the Initial Public Offering (such consummation
date to be determined without regard to any over-allotment option granted by
the Company to underwriters) from all Holders on a pro rata basis that amount
of Notes equal to the Net Cash Proceeds 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; provided, however, that the
aggregate amount of Net Cash Proceeds required to be applied pursuant to this
provision shall be reduced dollar for dollar (i) to the extent such Net Cash
Proceeds are used to prepay indebtedness under the Bank Credit Agreement 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 as set forth under "--Optional Redemption Upon
Equity Offerings" above; and provided, further, that notwithstanding the
foregoing, the Company shall not be 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), less the
aggregate principal amount of Notes previously redeemed pursuant to the terms
set forth above under "--Optional Redemption Upon Equity Offerings."
SELECTION AND NOTICE
In case of a partial redemption, selection of the Notes or portions thereof
for redemption shall be made by the Trustee by lot, pro rata or in such manner
as it shall deem appropriate and fair and in such manner as complies with any
applicable legal requirements; provided, however, that if a partial redemption
is made with the proceeds of a Equity Offering, selection of the Notes or
portion thereof for redemption shall be made by the Trustee only on a pro rata
basis, unless such method is otherwise prohibited. Notes may be redeemed in
part in multiples of $1,000 principal amount only. Notice of redemption will
be sent, by first class mail, postage prepaid, at least 30 days and not more
than 60 days prior to the date fixed for redemption to each Holder whose Notes
are to be redeemed at the last address for such Holder then shown on the
registry books. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note. On and after any redemption date,
interest will cease to accrue on the Notes or part thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the redemption price pursuant to the Indenture.
CHANGE OF CONTROL
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 pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest thereon to the date of purchase.
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Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a
copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date
such notice is mailed, other than as may be required by law (the "Change of
Control Payment Date"). Holders electing to have a Note purchased pursuant to
a Change of Control Offer will be required to surrender the Note, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the third business day prior to the Change of Control
Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not
have available funds to meet its purchase obligations. However, there can be
no assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company
and its Restricted Subsidiaries to incur additional Indebtedness, to grant
liens on its property, to make Restricted Payments and to make Asset Sales may
also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or repurchase of
the Notes, and there can be no assurance that the Company or the acquiring
party will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage
any leveraged buyout of the Company or any of its Subsidiaries by the
management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of Notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Restricted Payments. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock, or (c) make any Restricted
Investment (each of the foregoing actions set forth in clauses (a), (b) and
(c) being referred to as a "Restricted Payment"), if at the time of such
Restricted Payment or immediately after giving effect thereto, (i) a Default
or an Event of Default shall have occurred and be continuing, (ii) the Company
is not able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant, or (iii) the aggregate amount of Restricted
Payments made subsequent to the Issue Date shall exceed the sum of: (w) 50% of
the cumulative Consolidated Net Income (or if cumulative Consolidated Net
Income shall be a loss,
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minus 100% of such loss) of the Company earned subsequent to the Issue Date
and on or prior to the date the Restricted Payment occurs (the "Reference
Date") (treating such period as a single accounting period); plus (x) 100% of
the aggregate net proceeds received by the Company (including the fair market
value of property other than cash) from any Person (other than a Subsidiary of
the Company) from the issuance and sale subsequent to the Issue Date and on or
prior to the Reference Date of Qualified Capital Stock of the Company
(including Capital Stock issued upon the conversion of convertible
Indebtedness or in exchange for outstanding Indebtedness); plus (y) without
duplication of any amounts included in clause (iii) (x) above, 100% of the
aggregate net proceeds (including the fair market value of property other than
cash) of any equity contribution received by the Company from a holder of the
Company's Capital Stock (excluding any net proceeds from an Equity Offering to
the extent used to redeem Notes in accordance with the optional redemption
provisions of the Notes) plus (z) 100% of the aggregate net proceeds
(including the fair market value of property other than cash) of any (i) sale
or other disposition of Restricted Investments made by the Company and its
Restricted Subsidiaries or (ii) dividend from, or the sale of the stock of, an
Unrestricted Subsidiary.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or the
consummation of any irrevocable redemption within 60 days after the date of
declaration of such dividend or notice of such redemption if the dividend or
payment of the redemption price, as the case may be, would have been permitted
on the date of declaration or notice; (2) if no Event of Default shall have
occurred and be continuing as a consequence thereof, the acquisition of any
shares of Capital Stock of the Company (the "Retired Capital Stock"), either
(A) solely in exchange for shares of Qualified Capital Stock of the Company
(the "Refunding Capital Stock"), or (B) if no Default or Event of Default
shall have occurred and be continuing, through the application of net proceeds
of a substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company; (3) if no
Default or Event of Default shall have occurred and be continuing or would
occur as a consequence thereof, the declaration and payment of dividends to
holders of any class or series of Designated Preferred Stock (other than
Disqualified Capital Stock) issued after the Issue Date (including, without
limitation, the declaration and payment of dividends on Refunding Capital
Stock in excess of the dividends declarable and payable thereon pursuant to
clause (2)); provided that, at the time of the issuance of such Designated
Preferred Stock, the Company, after giving effect to such issuance on a pro
forma basis, would have had a Consolidated Fixed Charge Coverage Ratio of at
least 2.0 to 1.0; (4) payments for the purpose of and in an amount equal to
the amount required to permit the Company to redeem or repurchase its common
equity or options in respect thereof, in each case in connection with the
repurchase provisions under employee stock option or stock purchase agreements
or other agreements to compensate management or other employees; provided that
such redemptions or repurchases pursuant to this clause (4) shall not exceed
$5.0 million (which amount shall be increased by the amount of any proceeds to
the Company from (x) sales of Capital Stock of the Company to management or
other employees subsequent to the Issue Date in excess of such amounts as
provided a basis for a Restricted Payment pursuant to clause (iii) in the
foregoing paragraph and (y) any "key-man" life insurance policies which are
used to make such redemptions or repurchases) in the aggregate; provided,
further, that the cancellation of Indebtedness owing to the Company from
management or other employees of the Company or any of its Restricted
Subsidiaries in connection with a repurchase of Capital Stock of the Company
will not be deemed to constitute a Restricted Payment under the Indenture; (5)
repurchases of Capital Stock deemed to occur upon the exercise of stock
options if such Capital Stock represents a portion of the exercise price
thereof; (6) so long as no Default or Event of Default shall have occurred and
be continuing, payments not to exceed $500,000 in the aggregate to enable the
Company to make payments to holders of its Capital Stock in lieu of issuance
of fractional shares of its Capital Stock; (7) payments made in connection
with the application of the net proceeds of the Recapitalization; and (8)
loans made in the ordinary course of business to management or other employees
to purchase common equity of the Company and to make tax payments associated
with the receipt of cash distributions in connection with the
Recapitalization. In determining the aggregate amount of Restricted Payments
made subsequent to the Issue Date in accordance with clause (iii) of the
immediately preceding paragraph, (a) amounts expended (to the extent such
expenditure is in the form of cash) pursuant to clauses (1), (2), (4) and (6)
shall be included in such calculation; provided such expenditures pursuant to
clause (4) shall not be included to the extent of cash proceeds received by
the Company from any "key-man" life insurance policies and (b) amounts
expended pursuant to clauses (3), (5), (7) and (8) shall be excluded from such
calculation.
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Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible
for payment of (collectively, "incur"), any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness if on
the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the
Company is greater than (a) 2.50 to 1.0, if the date of such incurrence is on
or prior to May 15, 1998 (subject to clause (c)(y) below), (b) 2.25 to 1.0, if
the date of such incurrence is after May 15, 1998 and on or prior to November
15, 1998 (subject to clause (c)(y) below), or (c) 2.00 to 1.00, if date of
such incurrence is after (x) November 15, 1998 or (y) an Initial Public
Offering has been consummated.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related
transactions (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service) with, or for the
benefit of, any of its Affiliates involving aggregate consideration in excess
of $1.0 million (an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate
Transactions on terms that are not materially less favorable than those that
might reasonably have been obtained in a comparable transaction at such time
on an arm's-length basis from a Person that is not an Affiliate; provided,
however, that for a transaction or series of related transactions with an
aggregate value of $2.5 million or more, at the Company's option (i) such
determination shall be made in good faith by a majority of the disinterested
members of the Board of the Directors of the Company or (ii) the Board of
Directors of the Company or any such Restricted Subsidiary party to such
Affiliate Transaction shall have received an opinion from a nationally
recognized investment banking firm that such Affiliate Transaction is on terms
not materially less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis
from a Person that is not an Affiliate; and provided, further, that for a
transaction or series of related transactions with an aggregate value of $5.0
million or more, the Board of Directors of the Company or any such Restricted
Subsidiary party to such Affiliate Transaction shall have received an opinion
from a nationally recognized investment banking firm that such Affiliate
Transaction is on terms not materially less favorable than those that might
reasonably have been obtained in a comparable transaction at such time on an
arm's-length basis from a Person that is not an Affiliate.
(b) The foregoing restrictions shall not apply to (i) reasonable fees and
compensation paid to and indemnity provided on behalf of officers, directors,
employees or consultants of the Company or any Subsidiary as determined in
good faith by the Company's Board of Directors or senior management; (ii)
transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries; provided such transactions are not otherwise prohibited by the
Indenture; (iii) transactions effected as part of a Qualified Securitization
Transaction; (iv) any agreement as in effect as of the Issue Date or any
amendment thereto or any transaction contemplated thereby (including pursuant
to any amendment thereto) or in any replacement agreement thereto so long as
any such amendment or replacement agreement is not more disadvantageous to the
Holders in any material respect than the original agreement as in effect on
the Issue Date; (v) Restricted Payments permitted by the Indenture; (vi) the
payment of customary annual management, consulting and advisory fees and
related expenses to the Principals and their Affiliates; (vii) payments by the
Company or any of its Restricted Subsidiaries to the Principals and their
Affiliates made pursuant to any financial advisory or financing agreement,
including, without limitation, in connection with acquisitions or divestitures
which are approved by the Board of Directors of the Company or such Restricted
Subsidiary in good faith; (viii) payments or loans to employees or consultants
which are approved by the Board of Directors of the Company in good faith;
(ix) the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the Issue
Date and any similar agreements which it may enter into thereafter; provided,
however, that the existence of, or the performance by the Company or any of
its Restricted Subsidiaries of obligations under, any future amendment
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to any such existing agreement or under any similar agreement entered into
after the Issue Date shall only be permitted by this clause (ix) to the extent
that the terms of any such amendment or new agreement are not otherwise
disadvantageous to the Holders of the Notes in any material respect; (x)
transactions permitted by, and complying with, the provisions of the covenant
described under "--Merger, Consolidation and Sale of Assets"; and (xi)
transactions with customers, clients, suppliers, joint venture partners or
purchasers or sellers of goods or services, in each case in the ordinary
course of business (including, without limitation, pursuant to joint venture
agreements) and otherwise in compliance with the terms of the Indenture which
are fair to the Company or its Restricted Subsidiaries, in the reasonable
determination of the Board of Directors of the Company or the senior
management thereof, or are on terms at least as favorable as might reasonably
have been obtained at such time from an unaffiliated party.
Limitation on Liens. The Company will not, and will not permit any of its
Restricted Subsidiaries to, create, incur, assume or suffer to exist any Liens
of any kind against or upon any of its property or assets, or any proceeds
therefrom, unless (i) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the Notes, the Notes
are secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens and (ii) in all other cases, the Notes are equally and
ratably secured, except for (A) Liens existing as of the Issue Date and any
extensions, renewals or replacements thereof, (B) Liens securing obligations
under the Bank Credit Agreement, (C) Liens securing the Notes, (D) Liens of
the Company or a Wholly Owned Restricted Subsidiary of the Company on assets
of any Subsidiary of the Company, (E) Liens securing Indebtedness which is
incurred to refinance Indebtedness which has been secured by a Lien permitted
under the Indenture and which has been incurred in accordance with the
provisions of the Indenture; provided, however, that such Liens (x) are no
less favorable to the Holders and are not more favorable to the lienholders
with respect to such Liens than the Liens in respect of the Indebtedness being
refinanced and (y) do not extend to or cover any property or assets of the
Company or any of its Restricted Subsidiaries not securing the Indebtedness so
refinanced, and (F) Permitted Liens.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or permit
to exist or become effective any consensual encumbrance or consensual
restriction on the ability of any Restricted Subsidiary to (a) pay dividends
or make any other distributions on or in respect of its Capital Stock, (b)
make loans or advances or to pay any Indebtedness or other obligation owed to
the Company or any other Restricted Subsidiary of the Company or (c) transfer
any of its property or assets to the Company or any other Restricted
Subsidiary of the Company, except for such encumbrances or restrictions
existing under or by reason of: (1) applicable law; (2) the Indenture; (3)
non-assignment provisions of any contract or any lease entered into in the
ordinary course of business; (4) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person or
the properties or assets of the Person so acquired; (5) agreements existing on
the Issue Date (including, without limitation, the Bank Credit Agreement); (6)
restrictions on the transfer of assets subject to any Lien permitted under the
Indenture imposed by the holder of such Lien; (7) restrictions imposed by any
agreement to sell assets or capital stock permitted under the Indenture to any
Person pending the closing of such sale; (8) any agreement or instrument
governing Capital Stock of any Person that is acquired; (9) Indebtedness or
other contractual requirements of a Securitization Entity in connection with a
Qualified Securitization Transaction; provided that such restrictions apply
only to such Securitization Entity; (10) any agreement or instrument governing
Indebtedness (whether or not outstanding) of foreign Restricted Subsidiaries
of the Company incurred in reliance on clauses (iii) and (xvi) of the
definition of Permitted Indebtedness; (11) other Indebtedness permitted to be
incurred subsequent to the Issue Date pursuant to the provisions of the
covenant described under "Limitation on Incurrence of Additional
Indebtedness;" provided that any such restrictions are ordinary and customary
with respect to the type of Indebtedness being incurred (under the relevant
circumstances); (12) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the ordinary course of
business; and (13) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or obligations
referred to in clauses (1) through (12) above; provided that such amendments,
modifications,
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restatements, renewals, increases, supplements, refundings, replacements or
refinancings are, in the good faith judgment of the Company's Board of
Directors, no more restrictive with respect to such dividend and other payment
restrictions than those contained in the dividend or other payment
restrictions prior to such amendment, modification, restatement, renewal,
increase, supplement, refunding, replacement or refinancing.
Limitation on Preferred Stock of Subsidiaries. The Company will not permit
any of its Restricted Subsidiaries to issue any Preferred Stock (other than to
the Company or to a Wholly Owned Restricted Subsidiary of the Company) or
permit any Person (other than the Company or a Wholly Owned Restricted
Subsidiary of the Company) to own any Preferred Stock of any Restricted
Subsidiary of the Company.
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or a series of related transactions, consolidate with or merge
with or into, or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its assets to, another Person or Persons or adopt
a plan of liquidation unless: (i) either (A) the Company shall be the survivor
of such merger or consolidation or (B) the surviving Person (the "Surviving
Entity") is a corporation, partnership, limited liability company or trust
organized and existing under the laws of the United States, any state thereof
or the District of Columbia and such Surviving Entity shall expressly assume
all the obligations of the Company under the Notes and the Indenture; (ii)
immediately after giving effect to such transaction (on a pro forma basis,
including any Indebtedness incurred or anticipated to be incurred in
connection with such transaction), the Company or the Surviving Entity, as the
case may be, (A) shall have a Consolidated Net Worth equal to or greater than
the Consolidated Net Worth of the Company immediately prior to such
transaction and (B) shall be able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant;
(iii) immediately before and immediately after giving effect to such
transaction (including any Indebtedness incurred or anticipated to be incurred
in connection with the transaction), no Default or Event of Default shall have
occurred and be continuing; and (iv) the Company or the Surviving Entity, as
the case may be, shall have delivered to the Trustee an officers' certificate,
stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required
in connection with such transaction, such supplemental indenture comply with
the applicable provisions of the Indenture and that all conditions precedent
in the Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties and assets of one or more Subsidiaries of
the Company, the Capital Stock of which constitutes all or substantially all
of the properties and assets of the Company, shall be deemed to be the
transfer of all or substantially all of the properties and assets of the
Company. Notwithstanding the foregoing clauses (ii) and (iii), (a) any
Restricted Subsidiary of the Company may consolidate with, merge into or
transfer all or part of its properties and assets to the Company and (b) the
Company may merge with an Affiliate incorporated solely for the purpose of
reincorporating the Company in another jurisdiction.
The Indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, the surviving entity shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture and the Notes with the same effect as if such surviving entity
had been named as such.
Limitation on Asset Sales. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is
received at the time of such disposition; (iii) upon the consummation of an
Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to
apply, the Net Cash Proceeds relating to such Asset Sale within 365 days of
receipt thereof either (A) to prepay Indebtedness under the Bank Credit
Agreement and effect a permanent reduction in the availability thereunder,
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(B) to reinvest in Productive Assets, or (C) a combination of prepayment (and
reduction), repurchase and investment permitted by the foregoing clause
(iii)(A) and (iii)(B). Pending the final application of any such Net Cash
Proceeds, the Company or such Restricted Subsidiary may temporarily reduce
Indebtedness under a revolving credit facility, if any, or otherwise invest
such Net Cash Proceeds in Cash Equivalents. On the 366th day after an Asset
Sale or such earlier date, if any, as the Board of Directors of the Company or
of such Restricted Subsidiary determines not to apply the Net Cash Proceeds
relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) or
(iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger
Date"), such aggregate amount of Net Cash Proceeds which have not been applied
on or before such Net Proceeds Offer Trigger Date as permitted in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net
Proceeds Offer Amount") shall be applied by the Company or such Restricted
Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date
(the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days
following the applicable Net Proceeds Offer Trigger Date, from all Holders on
a pro rata basis that amount of Notes equal to the Net Proceeds Offer Amount
at a price equal to 100% of the principal amount of the Notes to be purchased,
plus accrued and unpaid interest thereon, if any, to the date of purchase;
provided, however, that if at any time any non-cash consideration received by
the Company or any Restricted Subsidiary of the Company, as the case may be,
in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration), then such conversion or disposition shall be deemed
to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall
be applied in accordance with this covenant.
Notwithstanding the foregoing, if a Net Proceeds Offer Amount is less than
$5.0 million, the application of the Net Cash Proceeds constituting such Net
Proceeds Offer Amount to a Net Proceeds Offer may be deferred until such time
as such Net Proceeds Offer Amount plus the aggregate amount of all Net
Proceeds Offer Amounts arising subsequent to the Net Proceeds Offer Trigger
Date relating to such initial Net Proceeds Offer Amount from all Asset Sales
by the Company and its Restricted Subsidiaries aggregates at least $5.0
million, at which time the Company or such Restricted Subsidiary shall apply
all Net Cash Proceeds constituting all Net Proceeds Offer Amounts that have
been so deferred to make a Net Proceeds Offer (the first date the aggregate of
all such deferred Net Proceeds Offer Amounts is equal to $5.0 million or more
shall be deemed to be a "Net Proceeds Offer Trigger Date").
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration for such Asset Sale constitutes any combination of Productive
Assets, cash or Cash Equivalents and (ii) such Asset Sale is for fair market
value (as determined in good faith by the Company's Board of Directors);
provided the portion of such consideration that constitutes cash and Cash
Equivalents received by the Company or any of its Restricted Subsidiaries in
connection with any Asset Sale permitted to be consummated under this
paragraph shall be deemed Net Cash Proceeds subject to the provisions of the
two immediately preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly
tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of
tendering Holders will be purchased on a pro rata basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 business
days or such longer period as may be required by law. To the extent that the
aggregate amount of Notes tendered pursuant to a Net Proceeds Offer is less
than the Net Proceeds Offer Amount, the Company may use any remaining Net
Proceeds Offer Amount for general corporate purposes. Upon completion of any
such Net Proceeds Offer, the Net Proceeds Offer Amount shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities
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laws or regulations conflict with the "Asset Sale" provisions of the
Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
"Asset Sale" provisions of the Indenture by virtue thereof.
Limitation of Guarantees by Subsidiaries. The Company will not permit any
Restricted Subsidiary, directly or indirectly, by way of the pledge of any
intercompany note or otherwise, to assume, guarantee or in any other manner
become liable with respect to any Indebtedness of the Company or any other
Subsidiary (other than (A) Indebtedness and other obligations under the Bank
Credit Agreement, (B) Permitted Indebtedness of a Restricted Subsidiary, (C)
Indebtedness under Currency Agreements in reliance on clause (vi) of the
definition of Permitted Indebtedness or (D) Interest Swap Obligations incurred
in reliance on clause (v) of the definition of Permitted Indebtedness),
unless, in any such case, such Restricted Subsidiary executes and delivers a
supplemental indenture to the Indenture providing a guarantee of payment of
the Notes by such Restricted Subsidiary (the "Guarantee").
Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary
of the Notes shall provide by its terms that it shall be automatically and
unconditionally released and discharged, without any further action required
on the part of the Trustee or any Holder, upon: (i) the unconditional release
of such Restricted Subsidiary from its liability in respect of the
Indebtedness in connection with which such Guarantee was executed and
delivered pursuant to the preceding paragraph; or (ii) any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of the Company of all of the Company's Capital Stock in, or all or
substantially all of the assets of, such Restricted Subsidiary; provided that
(a) such sale or disposition of such Capital Stock or assets is otherwise in
compliance with the terms of the Indenture and (b) such assumption, guarantee
or other liability of such Restricted Subsidiary has been released by the
holders of the other Indebtedness so guaranteed.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses a majority of whose revenues are not derived from the
same or reasonably similar, ancillary or related to, or a reasonable
extension, development or expansion of, the businesses in which the Company
and its Restricted Subsidiaries are engaged on the Issue Date.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due and
payable and the default continues for a period of 30 days; (ii) the failure to
pay the principal on any Notes when such principal becomes due and payable, at
maturity, upon redemption or otherwise (including the failure to make a
payment to purchase Notes tendered pursuant to a Change of Control Offer or a
Net Proceeds Offer); (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 after the Company receives written notice specifying
the default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the Notes;
(iv) the failure to pay at final stated maturity (giving effect to any
extensions thereof) the principal amount of any Indebtedness of the Company or
any Restricted Subsidiary (other than a Securitization Entity) of the Company
and such failure continues for a period of 20 days or more, or the
acceleration of the final stated maturity of any such Indebtedness (which
acceleration is not rescinded, annulled or otherwise cured within 20 days of
receipt by the Company or such Restricted Subsidiary of notice of any such
acceleration) 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, in
each case with respect to which the 20-day period described above has passed,
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 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.
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Upon the happening of any Event of Default specified in the Indenture, the
Trustee or the Holders of at least 25% in principal amount of outstanding
Notes may declare all of the unpaid principal of and accrued interest on all
the Notes to be due and payable by notice in writing to the Company and the
Trustee specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice"), and the same shall become
immediately due and payable. If an Event of Default with respect to bankruptcy
proceedings of the Company occurs and is continuing, then such amount shall
ipso facto become and be immediately due and payable without any declaration
or other act on the part of the Trustee or any holder of Notes.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the Notes as described in the preceding paragraph, the Holders
of a majority in principal amount of the Notes may rescind and cancel such
declaration and its consequences (i) if the rescission would not conflict with
any judgment or decree, (ii) if all existing Events of Default have been cured
or waived except nonpayment of principal or interest that has become due
solely because of the acceleration, (iii) to the extent the payment of such
interest is lawful, interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
The holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest
on any Notes.
LIMITATION ON SUITS BY HOLDERS
The Indenture provides that a Holder may not pursue any remedy with respect
to the Indenture or the Notes unless: (i) the Holder gives to the Trustee
written notice of a continuing Event of Default; (ii) Holders of at least 25%
in principal amount of the outstanding Notes make a written request to the
Trustee to pursue the remedy; (iii) such Holders offer to the Trustee
indemnity reasonably satisfactory to the Trustee against any loss, liability
or expense to be incurred in compliance with such request; (iv) the Trustee
does not comply with the request within 45 days after receipt of the request
and the offer of satisfactory indemnity; and (v) during such 45-day period the
Holders of a majority in principal amount of the outstanding Notes do not give
the Trustee a direction which, in the opinion of the Trustee, is inconsistent
with the request.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the
outstanding Notes, except for (i) the rights of holders of the Notes to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payments, (iii) the rights, powers, trust, duties and
immunities of the Trustee and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance: (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations
or a combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally
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recognized firm of independent public accountants, to pay the principal of,
premium, if any, and interest on the Notes on the stated date for payment
thereof or on the applicable redemption date, as the case may be; (ii) in the
case of Legal Defeasance (except in specified circumstances), the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default with respect to the Indenture resulting from the incurrence of
Indebtedness, all or a portion of which will be used to defease the Notes
concurrently with such incurrence); (v) such Legal Defeasance or Covenant
Defeasance shall not result in a breach or violation of, or constitute a
default under, the Indenture or any other material agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound; (vi) the Company shall have
delivered to the Trustee an officers' certificate stating that the deposit was
not made by the Company with the intent of preferring the Holders over any
other creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Company or others; (vii) the
Company shall have delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent provided for or
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with; (viii) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that (A) the trust funds will not be subject to any
rights of holders of Indebtedness of the Company other than the Notes and (B)
assuming no intervening bankruptcy or insolvency of the Company between the
date of deposit and the 91st day following the deposit and that no Holder is
an insider of the Company, after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; and (ix) certain other customary conditions precedent are
satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together
with irrevocable instructions from the Company directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as the case may
be; (ii) the Company has paid all other sums payable under the Indenture by
the Company; and (iii) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such
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change does not, in the opinion of the Trustee, adversely affect the rights of
any of the Holders in any material respect. In formulating its opinion on such
matters, the Trustee will be entitled to rely on such evidence as it deems
appropriate, including, without limitation, solely on an opinion of counsel.
Other modifications and amendments of the Indenture may be made with the
consent of the Holders of a majority in principal amount of the then
outstanding Notes issued under the Indenture, except that, without the consent
of each Holder affected thereby, no amendment may: (i) reduce the amount of
Notes whose Holders must consent to an amendment; (ii) reduce the rate of or
change or have the effect of changing the time for payment of interest,
including defaulted interest, on any Notes; (iii) reduce the principal of or
change or have the effect of changing the fixed maturity of any Notes, or
change the date on which any Notes may be subject to redemption or repurchase,
or reduce the redemption or repurchase price therefor; (iv) make any Notes
payable in money other than that stated in the Notes; (v) make any change in
provisions of the Indenture protecting the right of each Holder to receive
payment of principal of and interest on such Holder's Note on or after the due
date thereof or to bring suit to enforce such payment, or permitting holders
of a majority in principal amount of a class of Notes to waive Defaults or
Events of Default (other than Defaults or Events of Default with respect to
the payment of principal of or interest on the Notes); (vi) amend, change or
modify in any material respect the obligation of the Company to make and
consummate a Change of Control Offer in the event of a Change of Control or
make and consummate a Net Proceeds Offer with respect to any Asset Sale that
has been consummated or modify any of the provisions or definitions with
respect thereto after a Change of Control has occurred or the subject Asset
Sale has been consummated; or (vii) modify the ranking of the Notes to
adversely affect the Holders in any material respect.
ADDITIONAL INFORMATION
The Indenture provides that upon consummation of this Exchange Offer the
Company will deliver to the Trustee within 15 days after the filing of the
same with the Commission, copies of the quarterly and annual reports and of
the information, documents and other reports to be filed with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act (without regard to whether
the Company is subject to the requirements of such Section 13 or 15d of the
Exchange Act). The Indenture further provides that prior to consummation of
the Exchange Offer, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will provide the Trustee and Holders with such annual reports and such
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act within 15 days of when any such document would otherwise have
been required to be filed with the Commission. The Company will also comply
with the other provisions of TIA (S) 314(a).
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
of the Company or assumed in connection with the acquisition of assets from
such Person and not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
of the Company or such acquisition.
"Affiliate" means a Person who directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common control with,
the Company. The term "control" means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies
of a Person, whether through the ownership of voting securities, by contract
or otherwise. Notwithstanding the foregoing, no Person (other than the Company
or any Subsidiary of the Company) in whom a Securitization Entity makes an
Investment in connection with a Qualified Securitization Transaction shall be
deemed to be an Affiliate of the Company or any of its Subsidiaries solely by
reason of such Investment.
"all or substantially all" shall have the meaning given such phrase in the
Revised Model Business Corporation Act.
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"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person if, as a result of such
Investment, such Person shall become a Restricted Subsidiary of the Company or
any Restricted Subsidiary of the Company, or shall be merged with or into the
Company or any Restricted Subsidiary of the Company, or (b) the acquisition by
the Company or any Restricted Subsidiary of the Company of the assets of any
Person which constitute all or substantially all of the assets of such Person,
any division or line of business of such Person or any other properties or
assets of such Person other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary
course of business), assignment or other transfer for value by the Company or
any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company of (a) any Capital Stock of any Restricted
Subsidiary of the Company or (b) any other property or assets of the Company
or any Restricted Subsidiary of the Company other than in the ordinary course
of business; provided, however, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or its
Restricted Subsidiaries receive aggregate consideration of less than $500,000,
(ii) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted under "Merger,
Consolidation and Sale of Assets" or any disposition that constitutes a Change
of Control, (iii) the sale or discount, in each case without recourse, of
accounts receivable arising in the ordinary course of business, but only in
connection with the compromise or collection thereof, (iv) the factoring of
accounts receivable arising in the ordinary course of business pursuant to
arrangements customary in the region, (v) the licensing of intellectual
property, (vi) disposals or replacements of obsolete equipment in the ordinary
course of business, (vii) the sale, lease, conveyance, disposition or other
transfer by the Company or any Restricted Subsidiary of assets or property to
one or more Wholly Owned Restricted Subsidiaries in connection with
Investments permitted under the "Limitations on Restricted Payments" covenant,
(viii) sales of accounts receivable, equipment and related assets (including
contract rights) of the type specified in the definition of "Qualified
Securitization Transaction" to a Securitization Entity for the fair market
value thereof, including cash in an amount at least equal to 75% of the fair
market value thereof as determined in accordance with GAAP, and (ix) transfers
of accounts receivable, equipment and related assets (including contract
rights) of the type specified in the definition of "Qualified Securitization
Transaction" (or a fractional undivided interest therein) by a Securitization
Entity in a Qualified Securitization Transaction. For the purposes of clause
(viii), Purchase Money Notes shall be deemed to be cash.
"Bain Related Party" means Bain Capital and any Affiliate of Bain Capital.
"Bank Credit Agreement" means the Credit Agreement dated as of May 16, 1997,
among the Company, the lenders party thereto in their capacities as lenders
thereunder and Bankers Trust Company, as agent, together with the related
documents thereto (including, without limitation, any guarantee agreements and
security documents), in each case as such agreements may be amended (including
any amendment and restatement thereof), supplemented or otherwise modified
from time to time, including any agreement extending the maturity of,
refinancing, replacing or otherwise restructuring (including, without
limitation, increasing the amount of available borrowings thereunder or adding
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or any successor
or replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated) of corporate stock, including each class of common stock and
preferred stock of such Person, and (ii) with respect to any Person that is
not a corporation, any and all partnership or other equity interests of such
Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
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"Cash Equivalents" means: (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States,
in each case maturing within one year from the date of acquisition thereof;
(ii) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either S&P or Moody's; (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of
acquisition, having a rating of at least A-1 from S&P or at least P-1 from
Moody's; (iv) certificates of deposit or bankers' acceptances (or, with
respect to foreign banks, similar instruments) maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia,
Japan or any member of the European Economic Community or any U.S. branch of a
foreign bank having at the date of acquisition thereof combined capital and
surplus of not less than $200.0 million; (v) repurchase obligations with a
term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of 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 for purposes of Section
13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof
(whether or not otherwise in compliance with the provisions of the Indenture);
(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 one or both of the Principals 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.
"Company" means Therma-Wave, Inc., a Delaware corporation.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes
and foreign withholding taxes of such Person and its Restricted Subsidiaries
paid or accrued in accordance with GAAP for such period, (B) Consolidated
Interest Expense and (C) Consolidated Non-cash Charges.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges
of such Person for the Four Quarter Period. In addition to and without
limitation of the foregoing, for purposes of this definition, "Consolidated
EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving
effect on a pro forma basis for the period of such calculation to (i) the
incurrence of any Indebtedness or the issuance of any Designated Preferred
Stock of such Person or any of its Restricted Subsidiaries (and the
application of the proceeds thereof) giving rise to the need to make such
calculation and any incurrence or repayment of other Indebtedness or the
issuance or redemption of other Designated Preferred Stock (and the
application of the proceeds thereof) occurring during the Four Quarter Period
or at any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment or issuance
or redemption, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of
such Person or one of its Restricted Subsidiaries (including any Person who
becomes a Restricted Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for
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Acquired Indebtedness and also including any Consolidated EBITDA including any
pro forma expense and cost reductions, which are directly attributable and
factually supportable, applied to the assets which are the subject of the
Asset Acquisition or Asset Sale during the Four Quarter Period) occurring
during the Four Quarter Period or at any time subsequent to the last day of
the Four Quarter Period and on or prior to the Transaction Date, as if such
Asset Sale or Asset Acquisition (including the incurrence, assumption or
liability for any such Indebtedness or Acquired Indebtedness) occurred on the
first day of the Four Quarter Period. If such Person or any of its Restricted
Subsidiaries directly or indirectly guarantees Indebtedness of a third Person,
the preceding sentence shall give effect to the incurrence of such guaranteed
Indebtedness as if such Person or any Restricted Subsidiary of such Person had
directly incurred or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated
Fixed Charge Coverage Ratio," (1) interest on outstanding Indebtedness
determined on a fluctuating basis as of the Transaction Date and which will
continue to be so determined thereafter shall be deemed to have accrued at a
fixed rate per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date; (2) if interest on any Indebtedness actually
incurred on the Transaction Date may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the Four Quarter
Period; and (3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, shall be deemed to accrue at
the rate per annum resulting after giving effect to the operation of such
agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense
(before amortization or write-off of debt issuance costs) plus (ii) the amount
of all cash dividend payments on any series of Preferred Stock of such Person;
provided that with respect to any series of Designated Preferred Stock that
was not paid cash dividends during such period but that accrues dividends
according to its terms during any period prior to the maturity date of the
Notes, cash dividends shall be deemed to have been paid with respect to such
series of Designated Preferred Stock during such period for purposes of clause
(ii) of this definition.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication, (i) the aggregate of all cash and
non-cash interest expense with respect to all outstanding Indebtedness of such
Person and its Restricted Subsidiaries, including the net costs associated
with Interest Swap Obligations, for such period determined on a consolidated
basis in conformity with GAAP, and (ii) the interest component of Capitalized
Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such
Person and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided that there shall be excluded therefrom (a) gains and losses from
Asset Sales (without regard to the $500,000 limitation set forth in the
definition thereof) or abandonments or reserves relating thereto and the
related tax effects according to GAAP, (b) gains and losses due solely to
fluctuations in currency values and the related tax effects according to GAAP,
(c) items classified as extraordinary, unusual or nonrecurring gains and
losses (including, without limitation, restructuring costs), and the related
tax effects according to GAAP, (d) the net income (or loss) of any Person
acquired in a pooling of interests transaction accrued prior to the date it
becomes a Restricted Subsidiary of the Company or is merged or consolidated
with the Company or any Restricted Subsidiary of the Company, (e) the net
income of any Restricted Subsidiary of the Company to the extent that the
declaration of dividends or similar distributions by that Restricted
Subsidiary of the Company of that income is restricted by contract, operation
of law or otherwise, (f) the net loss of any Person, other than a Restricted
Subsidiary of the Company, (g) the net income of any Person, other than a
Restricted Subsidiary of the Company, except to the extent of cash dividends
or distributions paid to the Company or a Restricted Subsidiary of the Company
by such Person, (h) only for purposes of clause (iii) (w) of the first
paragraph of the
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"Limitation on Restricted Payments" covenant, any amounts included pursuant to
clause (iii) (z) of the first paragraph of such covenant, (i) non-cash
compensation charges, including any arising from stock options and (j) start-
up costs and duplicative costs incurred in connection with the transition
service and distribution agreements in effect on the Issue Date (as the same
may be amended from time to time).
"Consolidated Net Worth" means, with respect to any Person for any date of
determination, the sum of (i) stated capital with respect to Capital Stock of
such Person and additional paid-in capital, and (ii) retained earnings (or
minus accumulated deficit) of such Person and its Subsidiaries (or, in the
case of the Company, the Restricted Subsidiaries), less, to the extent
included in the foregoing, amounts attributable to Disqualified Capital Stock,
each item determined on a consolidated basis in accordance with GAAP.
"Consolidated Non-cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and its Restricted Subsidiaries reducing Consolidated Net
Income of such Person and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
charge constituting an extraordinary item or loss which requires an accrual of
or a reserve for cash charges for any future period).
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with, or whose election to such Board of Directors was
approved by, the affirmative vote of a majority of the Continuing Directors
who were members of such Board of Directors at the time of such nomination or
election or (iii) is any designee of the Principals or their Affiliates or was
nominated by the Principals or their Affiliates or any designees of the
Principals or their Affiliates on the Board of Directors.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of
Default.
"Designated Preferred Stock" means Preferred Stock that is so designated as
Designated Preferred Stock, pursuant to an officers' certificate executed by
the principal executive officer and the principal financial officer of the
Company, on the issuance date thereof, the cash proceeds of which are excluded
from the calculation set forth in clause (iii) of the first paragraph of the
"Limitation on Restricted Payments" covenant.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event (other than
an event which would constitute a Change of Control), matures (excluding any
maturity as the result of an optional redemption by the issuer thereof) or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof (except, in each case,
upon the occurrence of a Change of Control) on or prior to the final maturity
date of the Notes.
"Equity Offering" means the issuance and sale of Qualified Capital Stock of
the Company.
"fair market value" means, unless otherwise specified, with respect to any
asset or property, the price which could be negotiated in an arm's-length,
free market transaction, for cash, between a willing seller and a willing and
able buyer, neither of whom is under undue pressure or compulsion to complete
the transaction. Fair market value shall be determined by the Board of
Directors of the Company acting reasonably and in good faith and shall be
evidenced by a resolution of the Board of Directors of the Company delivered
to the Trustee.
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"GAAP" is defined to mean generally accepted accounting principles in the
United States of America as in effect as of the date of the Indenture,
including, without limitation, those set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as approved by a significant segment of the accounting profession. All
ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP applied on a consistent basis, except that
calculations made for purposes of determining compliance with the terms of the
covenants and with other provisions of the Indenture shall be made without
giving effect to (i) the deduction or amortization of any premiums, fees, and
expenses incurred in connection with the acquisition in 1991 and
Recapitalization and related financings or any other permitted incurrence of
Indebtedness or refinancing Indebtedness and (ii) except as otherwise
provided, the amortization of any amounts required or permitted by Accounting
Principles Board Opinion ("APB") 16 (including non-cash write-ups and non-cash
charges relating to inventory, fixed assets and in-process research and
development, in each case arising in connection with the Recapitalization, the
acquisition of the Company in 1991 or future acquisitions) and APB 17
(including non-cash charges relating to intangibles and goodwill arising in
connection with the Recapitalization and acquisition of the Company in 1991 or
future acquisitions).
"Indebtedness" means with respect to any Person, without duplication, (i)
all obligations of such Person for borrowed money, (ii) all obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all
obligations of such Person issued or assumed as the deferred purchase price of
property, all conditional sale obligations and all obligations under any title
retention agreement (but excluding trade accounts payable and warranty and
service obligations arising in the ordinary course of business), (v) all
obligations for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (vi) guarantees and other
contingent obligations in respect of Indebtedness referred to in clauses (i)
through (v) above and clause (viii) below, (vii) all obligations of any other
Person of the type referred to in clauses (i) through (vi) which are secured
by any lien on any property or asset of such Person, the amount of such
obligation being deemed to be the lesser of the fair market value of such
property or asset or the amount of the obligation so secured, (viii) all
obligations under currency swap agreements and interest swap agreements of
such Person and (ix) all Disqualified Capital Stock issued by such Person with
the amount of Indebtedness represented by such Disqualified Capital Stock
being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price, but excluding accrued
dividends, if any. For purposes hereof, (x) the "maximum fixed repurchase
price" of any Disqualified Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Capital Stock as if such Disqualified Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by,
the fair market value of such Disqualified Capital Stock, such fair market
value shall be determined reasonably and in good faith by the Board of
Directors of the issuer of such Disqualified Capital Stock and (y) any
transfer of accounts receivable, equipment or other assets (including contract
rights) which constitute a sale for purposes of GAAP and any related recourse
provisions under instrument sales programs entered into in the ordinary course
of business shall not constitute Indebtedness hereunder.
"Initial Public Offering" means the first underwritten public offering of
Qualified Capital Stock by the Company pursuant to a registration statement
filed with the Commission in accordance with the Securities Act for aggregate
net cash proceeds of at least $25.0 million.
"Interest Swap Obligations" means the obligations of any Person, pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated
by applying a fixed or a floating rate of interest on the same notional
amount.
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"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any Person. "Investment" shall exclude extensions of trade credit
by the Company and its Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Subsidiary, as
the case may be. For the purposes of the "Limitation on Restricted Payments"
covenant, (i) "Investment" shall include and be valued at the book value of
the net assets of any Restricted Subsidiary at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary and shall exclude the book
value of the net assets of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary and (ii) the
amount of any Investment shall be the original cost of such Investment plus
the cost of all additional Investments by the Company or any of its Restricted
Subsidiaries, without any adjustments for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment. If the
Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Common Stock of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
the Company no longer owns, directly or indirectly, 100% of the outstanding
Common Stock of such Restricted Subsidiary, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition equal to
the book value of the Common Stock of such Restricted Subsidiary not sold or
disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof and any agreement
to give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (i) with respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents received by the Company or any of its
Subsidiaries from such Asset Sale net of (a) out-of-pocket expenses and fees
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees and sales commissions), (b) taxes paid or payable
after taking into account any reduction in consolidated tax liability due to
available tax credits or deductions and any tax sharing arrangements, (c)
repayment of Indebtedness that is required to be repaid in connection with
such Asset Sale and (d) any portion of cash proceeds which the Company
determines in good faith should be reserved for post-closing adjustments, it
being understood and agreed that on the day that all such post-closing
adjustments have been determined, the amount (if any) by which the reserved
amount in respect of such Asset Sale exceeds the actual post-closing
adjustments payable by the Company or any of its Subsidiaries shall constitute
Net Cash Proceeds on such date and (ii) with respect to any Equity Offering
the cash proceeds received by the Company in connection with such Equity
Offering net of out-of-pocket expenses and fees relating to such Equity
Offering (including, but without limitation, legal, accounting and
underwriting discounts and commissions); provided that the Net Cash Proceeds
shall be determined without regard to an over-allotment option granted to the
Company by the underwriters except to the extent of proceeds received from
such over-allotment option upon the consummation of the initial sale of
Qualified Capital Stock of the Company pursuant to the Initial Public
Offering.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness,
without duplication.
"Permitted Indebtedness" means, without duplication, (i) the Notes, (ii)
Indebtedness incurred pursuant to the Bank Credit Agreement in an aggregate
principal amount at any time outstanding not to exceed $30.0 million less the
aggregate amount of Indebtedness of Securitization Entities in Qualified
Securitization Transactions (other than Qualified Securitization Transactions
involving equipment and related assets) less the aggregate
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amount then outstanding pursuant to clause (iii); less any required permanent
repayments (which are accompanied by a corresponding permanent commitment
reduction) thereunder; provided that the amount of Indebtedness permitted to
be incurred pursuant to the Bank Credit Agreement in accordance with this
clause (ii) shall be in addition to any Indebtedness permitted to be incurred
pursuant to the Bank Credit Agreement in reliance on, and in accordance with,
clauses (x), (xi) and (xvi) of this definition, (iii) Indebtedness of foreign
Restricted Subsidiaries of the Company in an aggregate principal amount not to
exceed $5.0 million at any one time outstanding; provided the aggregate amount
then outstanding under this clause (iii) when added to the aggregate amount
then outstanding under clause (ii) shall not exceed the aggregate amount
permitted under clause (ii), (iv) other Indebtedness of the Company and its
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon, (v) Interest Swap Obligations of the Company or
any of its Subsidiaries covering Indebtedness of the Company or any of its
Subsidiaries; provided that any Indebtedness to which any such Interest Swap
Obligations correspond is otherwise permitted to be incurred under the
Indenture; provided, further, that such Interest Swap Obligations are entered
into, in the judgment of the Company, to protect the Company from fluctuation
in interest rates on their respective outstanding Indebtedness, (vi)
Indebtedness under Currency Agreements, (vii) intercompany Indebtedness owed
by the Company to any Wholly Owned Restricted Subsidiary of the Company or by
any Restricted Subsidiary of the Company to the Company or any Wholly Owned
Restricted Subsidiary of the Company, (viii) Acquired Indebtedness to the
extent the Company could have incurred such Indebtedness in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant on the date
such Indebtedness became Acquired Indebtedness, (ix) guarantees by the Company
and its Wholly Owned Restricted Subsidiaries of each other's Indebtedness;
provided that such Indebtedness is permitted to be incurred under the
Indenture, including, with respect to guarantees by Wholly Owned Restricted
Subsidiaries of the Company, the "Limitation on Guarantees by Subsidiaries"
covenant, (x) Indebtedness (including Capitalized Lease Obligations) incurred
by the Company or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount outstanding not to exceed
5% of Total Assets at the time of any incurrence thereof (including any
Refinancing Indebtedness with respect thereto) (which amount may, but need
not, be incurred in whole or in part under the Bank Credit Agreement), (xi)
Indebtedness incurred by the Company or any of its Restricted Subsidiaries
constituting reimbursement obligations with respect to letters of credit
issued in the ordinary course of business, including, without limitation,
letters of credit in respect of workers' compensation claims or self-
insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims, (xii) Indebtedness arising
from agreements of the Company or a Restricted Subsidiary of the Company
providing for indemnification, adjustment of purchase price, earn out or other
similar obligations, in each case, incurred or assumed in connection with the
disposition of any business, assets or a Restricted Subsidiary of the Company,
other than guarantees of Indebtedness incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the purpose
of financing such acquisition; provided that the maximum assumable liability
in respect of all such Indebtedness shall at no time exceed the gross proceeds
actually received by the Company and its Restricted Subsidiaries in connection
with such disposition, (xiii) obligations in respect of performance and surety
bonds and completion guarantees provided by the Company or any Restricted
Subsidiary of the Company in the ordinary course of business, (xiv) any
refinancing, modification, replacement, renewal, restatement, refunding,
deferral, extension, substitution, supplement, reissuance or resale of
existing or future Indebtedness, including any additional Indebtedness
incurred to pay interest or premiums required by the instruments governing
such existing or future Indebtedness as in effect at the time of issuance
thereof ("Required Premiums") and fees in connection therewith ("Refinancing
Indebtedness"); provided that any such event shall not (1) result in an
increase in the aggregate principal amount of Permitted Indebtedness (except
to the extent such increase is a result of a simultaneous incurrence of
additional Indebtedness (A) to pay Required Premiums and related fees or (B)
otherwise permitted to be incurred under the Indenture) of the Company and its
Subsidiaries and (2) create Indebtedness with a Weighted Average Life to
Maturity at the time such Indebtedness is incurred that is less than the
Weighted Average Life to Maturity at such time of the Indebtedness being
refinanced, modified, replaced, renewed, restated, refunded, deferred,
extended, substituted, supplemented, reissued or resold (except that this
subclause (2) will not apply in the event the Indebtedness being refinanced,
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modified, replaced, renewed, restated, refunded, deferred, extended,
substituted, supplemented, reissued or resold was originally incurred in
reliance upon clauses (vii) or (xvi) of this definition), (xv) the incurrence
by a Securitization Entity of Indebtedness in a Qualified Securitization
Transaction that is not recourse to the Company or any Subsidiary of the
Company (except for Standard Securitization Undertakings) and (xvi) additional
Indebtedness of the Company and its Restricted Subsidiaries in an aggregate
principal amount not to exceed $10.0 million at any one time outstanding
(which amount may, but need not, be incurred in whole or in part under the
Bank Credit Agreement).
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Wholly Owned Restricted Subsidiary
of the Company (whether existing on the Issue Date or created thereafter) or
in any other Person (including by means of any transfer of cash or other
property) if as a result of such Investment such Person shall become a Wholly
Owned Restricted Subsidiary of the Company and Investments in the Company by
any Restricted Subsidiary of the Company, (ii) cash and Cash Equivalents,
(iii) Investments existing on the Issue Date, (iv) loans and advances to
management and other employees of the Company and its Restricted Subsidiaries
in the ordinary course of business in an aggregate principal amount not to
exceed $3.0 million at any one time outstanding, (v) accounts receivable
created or acquired in the ordinary course of business, (vi) Currency
Agreements and Interest Swap Obligations entered into in the ordinary course
of the Company's or its Restricted Subsidiaries' businesses and otherwise in
compliance with the Indenture, (vii) Investments in Unrestricted Subsidiaries
in an amount at any one time outstanding not to exceed $3.0 million,
(viii) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers, (ix) guarantees
(A) by the Company of Indebtedness otherwise permitted to be incurred by
Restricted Subsidiaries of the Company under the Indenture or (B) permitted by
the "Limitation on Guarantees by Subsidiaries" covenant, (x) additional
Investments having an aggregate fair market value, taken together with all
other Investments made pursuant to this clause (x) that are at that time
outstanding, not to exceed 5% of Total Assets at the time of such Investment
at any one time outstanding, (xi) any Investment by the Company or a Wholly
Owned Subsidiary of the Company in a Securitization Entity or any Investment
by a Securitization Entity in any other Person in connection with a Qualified
Securitization Transaction; provided that any Investment in a Securitization
Entity is in the form of a Purchase Money Note or an equity interest,
(xii) any transaction to the extent it constitutes an Investment that is
permitted by, and made in accordance with, clause (b) of the "Limitations on
Transactions with Affiliates" covenant (other than transactions described in
clause (v) of such clause (b)), (xiii) Investments the payment for which
consists exclusively of Qualified Capital Stock of the Company and (xiv)
Investments received by the Company or its Restricted Subsidiaries as
consideration for asset sales, including Asset Sales; provided in the case of
an Asset Sale, such Asset Sale is effected in compliance with the "Limitation
on Asset Sales" covenant.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims either
(a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
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(iv) judgment Liens not giving rise to an Event of Default;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation;
(vii) purchase money Liens to finance property or assets of the Company
or any Restricted Subsidiary of the Company acquired in the ordinary course
of business; provided, however, that (A) the related purchase money
Indebtedness shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets so acquired
and (B) the Lien securing such Indebtedness shall be created within 90 days
of such acquisition;
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment, or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Indebtedness of foreign Restricted Subsidiaries of
the Company incurred in reliance on clause (iii) of the definition of
Permitted Indebtedness;
(xiv) Liens securing Acquired Indebtedness incurred in reliance on clause
(viii) of the definition of Permitted Indebtedness;
(xv) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary with respect to obligations that do not in the
aggregate exceed $10.0 million at any one time outstanding;
(xvi) Liens on assets transferred to a Securitization Entity or on assets
of a Securitization Entity, in either case incurred in connection with a
Qualified Securitization Transaction;
(xvii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries;
(xviii) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xix) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of custom duties in connection with the
importation of goods; and
(xx) Liens existing on the Issue Date, together with any Liens securing
Indebtedness incurred in reliance on clause (xiv) of the definition of
Permitted Indebtedness in order to refinance the Indebtedness secured by
Liens existing on the Issue Date; provided that the Liens securing the
refinancing Indebtedness shall not extend to property other than that
pledged under the Liens securing the Indebtedness being refinanced.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
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"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Principals" means Bain Capital and Sutter Hill Ventures.
"Productive Assets" means properties or assets (including Capital Stock) of
a kind used or usable in the businesses of the Company and its Restricted
Subsidiaries permitted by the covenant entitled "Conduct of Business."
"Purchase Money Note" means a promissory note of a Securitization Entity
evidencing a line of credit, which may be irrevocable, from the Company or any
Subsidiary of the Company in connection with a Qualified Securitization
Transaction to a Securitization Entity, which note shall be repaid from cash
available to the Securitization Entity, other than amounts required to be
established as reserves pursuant to agreements, amounts paid to investors in
respect of interest, principal and other amounts owing to such investors and
amounts paid in connection with the purchase of newly generated receivables or
newly acquired equipment.
"Qualified Capital Stock" means any stock that is not Disqualified Capital
Stock.
"Qualified Securitization Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its
Subsidiaries pursuant to which the Company or any or its Subsidiaries may
sell, convey or otherwise transfer to (a) a Securitization Entity (in the case
of a transfer by the Company or any of its Subsidiaries) and (b) any other
Person (in the case of a transfer by a Securitization Entity), or may grant a
security interest in, any accounts receivable or equipment (whether now
existing or arising or acquired in the future) of the Company or any of its
Subsidiaries, and any assets related thereto including, without limitation,
all collateral securing such accounts receivable and equipment, all contracts
and contract rights and all guarantees or other obligations in respect of such
accounts receivable and equipment, proceeds of such accounts receivable and
equipment and other assets (including contract rights) which are customarily
transferred or in respect of which security interests are customarily granted
in connection with asset securitization transactions involving accounts
receivable and equipment.
"Related Party" means, with respect to Bain Capital, any Bain Related Party
and with respect to Sutter Hill Ventures, any Sutter Hill Ventures Related
Party.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Services, a division of The McGraw-
Hill Companies, Inc. and its successors.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether
owned by the Company or any Restricted Subsidiary at the Issue Date or later
acquired, which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom
funds have been or are to be advanced by such Person on the security of such
Property.
"Securitization Entity" means a Wholly Owned Subsidiary of the Company (or
another Person in which the Company or any Subsidiary of the Company makes an
Investment and to which the Company or any Subsidiary of the Company transfers
accounts receivable or equipment and related assets) which engages in no
activities other than in connection with the financing of accounts receivable
or equipment and which is designated by the Board of Directors of the Company
(as provided below) as a Securitization Entity (a) no portion of the
Indebtedness or any other Obligations (contingent or otherwise) of which (i)
is guaranteed by the Company or any Subsidiary of the Company (excluding
guarantees of Obligations (other than the principal of,
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and interest on, Indebtedness)) pursuant to Standard Securitization
Undertakings, (ii) is recourse to or obligates the Company or any Subsidiary
of the Company in any way other than pursuant to Standard Securitization
Undertakings or (iii) subjects any property or asset of the Company or any
Subsidiary of the Company, directly or indirectly, contingently or otherwise,
to the satisfaction thereof, other than pursuant to Standard Securitization
Undertakings, (b) with which neither the Company nor any Subsidiary of the
Company has any material contract, agreement, arrangement or understanding
other than on terms no less favorable to the Company or such Subsidiary than
those that might be obtained at the time from Persons that are not Affiliates
of the Company, other than fees payable in the ordinary course of business in
connection with servicing receivables of such entity, and (c) to which neither
the Company nor any Subsidiary of the Company has any obligation to maintain
or preserve such entity's financial condition or cause such entity to achieve
certain levels of operating results. Any such designation by the Board of
Directors of the Company shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the resolution of the Board of Directors of the
Company giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing conditions.
"Significant Subsidiary" means, as of any date of determination, for any
Person, each Subsidiary of such Person which (i) for the most recent fiscal
year of such Person (on or prior to December 31, 1996, the fiscal period
beginning on the Issue Date and ending on the most recently completed fiscal
quarter of such Person) accounted for more than 10% of consolidated revenues
or consolidated net income of such Person or (ii) as at the end of such fiscal
year (on or prior to December 31, 1996, the fiscal period beginning on the
Issue Date and ending on the most recently completed fiscal quarter of such
Person), was the owner of more than 10% of the consolidated assets of such
Person.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Subsidiary of the
Company which are reasonably customary in an accounts receivable or equipment
transaction.
"Subsidiary", with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Sutter Hill Ventures" means Sutter Hill Ventures, a California limited
partnership and certain other investors designated by Sutter Hill Ventures.
"Sutter Hill Ventures Related Party" means (a) any stockholder or partner of
Sutter Hill Ventures on the Issue Date or (b) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons beneficially holding an 80% or more controlling interest which
consist of Sutter Hill Ventures and/or such other Persons referred to in the
immediately preceding clause (a).
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as set forth on the Company's most recent
consolidated balance sheet.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, the Company or any other Subsidiary of the Company that is not a
Subsidiary of the Subsidiary to be so designated; provided that (x) the
Company certifies to the Trustee that such designation complies with the
"Limitation on Restricted Payments" covenant and (y) each Subsidiary to be so
designated and each of its Subsidiaries has not at the time of designation,
and does not thereafter, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable with respect to any Indebtedness pursuant
to which the lender has
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recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if (x) immediately after giving effect to
such designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant and
(y) immediately before and immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced
to the Trustee by promptly filing with the Trustee a copy of the resolution
giving effect to such designation and an officers' certificate certifying that
such designation complied with the foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities
(other than directors' qualifying shares or an immaterial amount of shares
required to be owned by other Persons pursuant to applicable law) are owned by
such Person or any Wholly Owned Restricted Subsidiary of such Person.
BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Notes (and the related
guarantees) initially will be represented by one or more permanent global
certificates in definitive, fully registered form (the "Global Notes"). The
Global Notes will be deposited on the date of the consummation of the Exchange
Offer with, or on behalf of, The Depository Trust Company, New York, New York
("DTC") and registered in the name of a nominee of DTC.
Notes (i) originally purchased by or transferred to "foreign purchasers" or
Accredited Investors who are not QIBs (in each case, as defined in "Transfer
Restrictions") or (ii) held by QIBs or institutional Accredited Investors who
are not QIBs who elect to take physical deliver of their certificates instead
of holding their interest through a Global Note (and which are thus ineligible
to trade through DTC) (collectively referred to herein as the "Non-Global
Purchasers") will be issued in registered form (the "Certificated Security").
Upon the transfer to a QIB or another institutional Accredited Investor who is
not a QIB of any Certificated Security initially issued to a Non-Global
Purchaser, such Certificated Security will, unless the transferee requests
otherwise or the Global Certificates have previously been exchanged in whole
for Certificated Securities, be exchanged for an interest in a Global Note.
The Global Notes. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount of Notes
of the individual beneficial interests represented by such Global Notes to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Notes will be shown on, and
the transfer of such ownership will be effected only through, records
maintained by DTC or its nominee (with respect to interests of participants)
and the records of participants (with respect to interests of persons other
than participants). Such accounts initially will be designated by or on behalf
of the Initial Purchasers and ownership of beneficial interests in the Global
Notes will be limited to persons who have accounts with DTC ("participants")
or persons who hold interests through participants. QIBs and institutional
Accredited Investors who are not QIBs may hold their interests in the Global
Note directly through DTC if they are participants in such system, or
indirectly through organizations which are participants in such system.
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So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Notes for all purposes
under the Indenture. No beneficial owner of an interest in any of the Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture with respect
to the Notes.
Payments of the principal of, premium (if any) and interest (including
Additional Interest) on the Global Notes will be made to DTC or its nominee,
as the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Additional Interest) in
respect of the Global Notes, will credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of the Global Notes as shown on the records of DTC or its
nominee. The Company also expects that payments by participants to owners of
beneficial interests in the Global Notes held through such participants will
be governed by standing instructions and customary practice, as is now the
case with securities held for the accounts of customers registered in the
names of nominees for such customers. Such payments will be the responsibility
of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical deliver of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in a Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if
there is an Event of Default under the Indenture, DTC will exchange the Global
Notes for Certificated Securities, which it will distribute to its
participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Notes and a successor depositary is
not appointed by the Company within 90 days, Certificated Securities will be
issued in exchange for the Global Notes.
98
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "Service") will not take a contrary
view, and no ruling from the Service has been or will be sought. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the statements and conditions set forth herein. Any such
changes or interpretations may or may not be retroactive and could affect the
tax consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below.
HOLDERS OF THE NEW NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING
THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING
AND DISPOSING OF THE OLD NOTES AND NEW NOTES AS WELL AS THE APPLICATION OF
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
As used herein, the term "United States Holder" means a holder of a New Note
that is, for United States federal income tax purposes, (a) a citizen or
resident of the United States, (b) a corporation, partnership or other entity
created under the laws of the United States or of any political subdivision
thereof or (c) an estate or trust the income of which is subject to United
States federal income taxation regardless of source. The term "Foreign Holder"
means a holder of a New Note that is not a United States Holder. The Old Notes
were issued without original issue discount.
THE EXCHANGE OFFER
The Company believes that the exchange of Old Notes for New Notes pursuant
to the Exchange Offer will not be treated as an "exchange" for federal income
tax purposes because the New Notes will not be considered to differ materially
in kind or extent from the Old Notes. Rather, the New Notes received by a
holder will be treated as a continuation of the Old Notes in the hands of such
holder. As a result, there will be no federal income tax consequences to
holders exchanging Old Notes for New Notes pursuant to the Exchange Offer.
UNITED STATES HOLDERS
Generally, interest paid on a New Note will be taxable to a United States
Holder as ordinary interest income in accordance with such holder's method of
accounting for United States federal income tax purposes. Upon the sale,
exchange, redemption, retirement or other disposition of a New Note, a holder
generally will recognize gain or loss equal to the difference between the
amount realized on the disposition and the holder's adjusted tax basis in the
New Note. Subject to the market discount rules discussed below, gain or loss
recognized by a holder on the disposition of a New Note will be long-term
capital gain or loss provided that the New Note was a capital asset in the
hands of the holder and had been held for more than one year.
Bond Premium
If a subsequent holder purchases a New Note at a cost that is greater than
its stated redemption price at maturity, the holder may elect to deduct the
excess amount (as an offset to interest income) as amortizable bond premium
(with a corresponding reduction in the holder's tax basis) over the remaining
term of the New Note. However, because the New Notes may be redeemed at the
option of the Company at a price in excess of their principal amount, a United
States Holder may be required to amortize any bond premium based on the
earlier call date and the call price payable at that time. The election would
apply to all taxable debt instruments held by the holder at any time during
the first taxable year to which the election applies and to any such debt
instruments which are later acquired by the holder. The election may not be
revoked without the consent of the IRS.
99
<PAGE>
Market Discount
If a subsequent holder purchases a New Note for an amount that is less than
the stated redemption price at maturity of such New Note, the amount of the
difference will be treated as market discount for U.S. federal income tax
purposes, unless such difference is less than a specified de minimis amount.
Under the market discount rules, a holder will be required to treat any
principal payment on, or any amount received on the sale, exchange, retirement
or other disposition of, and New Note as ordinary income to the extent of any
market discount which has not previously been included in income and is
treated as having accrued on such New Note by the time of such payment or
disposition. If a holder makes a gift of a New Note, accrued market discount,
if any, will be recognized as if such holder had sold such New Note for a
price equal to its fair market value. In addition, the holder may be required
to defer, until the maturity of the New Note or its earlier disposition in a
taxable transaction, the deduction of a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry such New Note.
A holder of a New Note acquired at a market discount may elect to include
market discount in income as interest as it accrues, in which case the
foregoing rules would not apply. This election would apply to all bonds with
market discount acquired by the electing holder on or after the first day of
the first taxable year to which the election applies. The election may be
revoked only with the consent of the IRS.
FOREIGN HOLDERS
Payments of principal, retirement premium, if any, interest received or
discount accrued by a Foreign Holder of a New Note who is not engaged in a
trade or business within the United States will not be subject to United
States federal income or withholding tax provided that, in the case of
interest, (a)(i) the Foreign Holder does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of the
Company entitled to vote, (ii) the Foreign Holder is not a controlled foreign
corporation for United States tax purposes that is related to the Company
through stock ownership, and (iii) such interest is not received by a bank on
an extension of credit made pursuant to a loan agreement entered into in the
ordinary course of business and (b) either (i) the beneficial owner of the New
Note, under penalties of perjury, provides the Company or its agent with its
name and address and certifies that it is not a United States Holder or (ii) a
securities clearing organization, bank, or other financial institution that
holds customers' securities in the ordinary course of its trade or business (a
"financial institution") certifies to the Company or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or another financial institution and furnishes the
payor a copy thereof. A Foreign Holder, however, may be subject to United
States federal income tax in the same manner as a United States Holder on its
net interest income if such interest is effectively connected with the conduct
of a United States trade or business of such holder. In addition, effectively
connected interest income received by a corporate Foreign Holder may, under
certain circumstances, be subject to an additional "branch profits tax" at a
30% rate (or, if applicable, a lower treaty rate).
Proposed Treasury Regulations would provide alternative methods for
satisfying the certification requirement described in clause (b) above. Such
Treasury Regulations are proposed to be effective for payments made after
December 31, 1997. There can be no assurance that the proposed Treasury
Regulations will be adopted or as to the provisions that they will include if
any when adopted in temporary or final form.
A Foreign Holder will not be subject to United States federal income or
withholding tax on any gain realized on the sale or exchange of a New Note,
unless (a) the gain is effectively connected, or treated as effectively
connected, with a United States trade or business of the Foreign, (b) in the
case of a Foreign Holder who is an individual, such Foreign Holder is present
in the United States for a period or periods aggregating 183 days or more
during the taxable year of the sale or exchange and either (i) the Foreign
Holder has a "tax home" (as defined in Code section 911(d)(3)), in the United
States or (ii) the gain is attributable to an office or other fixed place of
business maintained by the Foreign Holder in the United States, or (c) the
Foreign Holder is subject to tax pursuant to the provisions of the Code
applicable to certain United States expatriates.
100
<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING ON NEW NOTES
Certain noncorporate United States Holders generally will be subject to
information reporting and may be subject to backup withholding at a rate of
31% on payments of principal, premium, if any, and interest (including market
discount) on, and the proceeds of disposition of, a New Note. Backup
withholding will apply only if the United States Holder (a) fails to furnish
its Taxpayer Identification Number ("TIN"), which for an individual would be
the holder's Social Security number, (b) furnishes an incorrect TIN or (c) is
notified by the Internal Revenue Service that it is subject to backup
withholding for failure to report interest and dividend payments. Holders
should consult their own tax advisors regarding their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption if applicable.
Information reporting and backup withholding will not apply to payments of
principal, premium, if any, and interest made by the Company or a paying agent
to a Foreign Holder on a New Note if the certification described in clause (b)
of the first paragraph under "Foreign Holders" above is received, provided
that the payor does not have actual knowledge that the holder is a United
States person.
Payments of the proceeds from the sale by a Foreign Holder of a New Note
made to or through a foreign office of a broker will not be subject to
information reporting or backup withholding, except that if the broker is a
United States person, a controlled foreign corporation for United States
federal income tax purposes or a foreign person 50% or more of whose gross
income is effectively connected with a United States trade or business for a
specified three-year period, information reporting may apply to such payments.
Payments of the proceeds from the sale of a New Note to or through the United
States office of a broker is subject to information reporting and backup
withholding unless the holder or beneficial owner certifies as to its non-
United States status or otherwise establishes an exemption from information
reporting and backup withholding.
The amount of any backup withholding from a payment to a holder will be
allowed as a credit against such holder's United States federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the Internal Revenue Service.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any Participating Broker-
Dealer for use in connection with any such resale (provided that the Company
receives notice from any Participating Broker-Dealer of its status as a
Participating Broker-Dealer within 30 days after the Expiration Date). In
addition, until , 1997 (90 days after the commencement of the Exchange
Offer), all dealers effecting transactions in the New Notes, whether or not
participating in this distribution, may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the New Notes by
Participating Broker-Dealers. New Notes received by Participating Broker-
Dealers for their own accounts pursuant to the Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such New Notes. Any Participating Broker-Dealer that resells the New Notes
that were received by it for its own account pursuant to the Exchange Offer
and any broker or dealer that participates in a
101
<PAGE>
distribution of such New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of New Notes
and any commissions or concessions received by any such persons may be deemed
to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by
delivering a Prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly, upon request and in no event more than five business days after such
request, send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that has
provided the Company with notice of its status as a Participating Broker-
Dealer within 30 days of the Expiration Date.
102
<PAGE>
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, included in this Prospectus 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
Certain legal matters relating to the issuance of the New Notes 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.
103
<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
G-1
<PAGE>
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.
"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.
"spectrophotometer"................... 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.
G-2
<PAGE>
"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 39 to 89 in diameter. A
single 89 wafer could have hundreds of
semiconductor devices fabricated on
it.
G-3
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
THERMA-WAVE, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets as of April 6, 1997 and March 31, 1996....... F-3
Consolidated Statements of Income for the years ended April 6, 1997,
March 31, 1996 and April 2, 1995........................................ F-4
Consolidated Statements of Shareholders' Equity for the years ended April
6, 1997, March 31, 1996 and April 2, 1995............................... F-5
Consolidated Statements of Cash Flows for the years ended April 6, 1997,
March 31, 1996 and April 2, 1995........................................ F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
THERMA-WAVE, INC. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Consolidated Unaudited Balance Sheets as of July 6, 1997 and
April 6, 1997.......................................................... F-15
Condensed Consolidated Unaudited Statements of Income for the three-
month periods ended July 6, 1997 and July 7, 1996...................... F-16
Condensed Consolidated Unaudited Statements of Cash Flows for the three-
month periods ended
July 6, 1997 and July 7, 1996.......................................... F-17
Notes to Condensed Consolidated Unaudited Financial Statements.......... F-18
</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.
Ernst & Young llp
San Jose, California
May 8, 1997, except for Note 8, as to which the date is May 16, 1997
F-2
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 6, MARCH 31,
1997 1996
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 16,741 $ 7,690
Accounts receivable, net of allowance for doubtful
accounts of 1,622 in 1997 and $284 in 1996 ............. 20,107 18,830
Receivable from parent................................... 1,425 1,425
Inventories:
Purchased materials.................................... 8,937 5,760
Systems in process..................................... 7,252 5,619
Finished systems....................................... 1,238 1,756
-------- --------
Total inventories........................................ 17,427 13,135
Deferred income taxes.................................... 5,556 3,201
Other current assets..................................... 383 339
-------- --------
Total current assets....................................... 61,639 44,620
Property and equipment:
Laboratory and test equipment............................ 3,721 3,667
Office furniture and equipment........................... 4,292 2,402
Machinery and equipment.................................. 1,521 1,421
Leasehold improvements................................... 2,237 2,921
-------- --------
11,771 10,411
Less accumulated depreciation and amortization........... 5,928 4,165
-------- --------
Net property and equipment................................. 5,843 6,246
Goodwill and purchased intangibles, net of accumulated
amortization of $8,286 at March 31, 1996.................. -- 1,275
Patents, net of accumulated amortization of $985 in 1997
and $912 in 1996.......................................... 481 496
Security deposits and other................................ 657 419
-------- --------
Total assets........................................... $ 68,620 $ 53,056
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term notes payable................................. $ 3,834 $ 5,019
Accounts payable......................................... 4,076 3,344
Accrued compensation and related expenses................ 2,922 3,344
Income taxes payable..................................... 1,507 904
Accrued warranty costs................................... 4,990 2,594
Other accrued liabilities................................ 4,427 4,174
Deferred service revenue................................. 1,075 1,333
Capital lease obligations due within one year............ 88 168
-------- --------
Total current liabilities.................................. 22,919 20,880
Notes payable.............................................. 23,100 23,100
Capital lease obligations due after one year............... 429 539
Deferred taxes............................................. 1,685 1,544
Deferred rent and other.................................... 342 90
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...................................... (38,927) (52,028)
Notes receivable from shareholders....................... -- (524)
Accumulated foreign currency translation adjustments..... (1,438) (1,055)
-------- --------
Total shareholders' equity................................. 20,145 6,903
-------- --------
Total liabilities and shareholders' equity............. $ 68,620 $ 53,056
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
APRIL
APRIL 6, MARCH 31, 2,
1997 1996 1995
-------- --------- -------
<S> <C> <C> <C>
Net revenues....................................... $109,493 $79,293 $55,675
Cost of revenues................................... 49,795 35,027 25,024
-------- ------- -------
Gross margin....................................... 59,698 44,266 30,651
Operating expenses:
Research and development......................... 13,050 10,072 5,942
Selling, general and administrative.............. 22,004 18,704 13,299
Amortization of goodwill and purchased
intangibles..................................... 1,275 1,912 1,912
-------- ------- -------
Total operating expenses........................... 36,329 30,688 21,153
-------- ------- -------
Operating income................................... 23,369 13,578 9,498
Other income (expense):
Interest expense................................. (1,621) (1,722) (1,998)
Interest income.................................. 346 247 102
Other income and expense......................... 14 (138) (115)
-------- ------- -------
(1,261) (1,613) (2,011)
-------- ------- -------
Income before provision for income taxes........... 22,108 11,965 7,487
Provision for income taxes......................... 9,007 4,684 --
-------- ------- -------
Net income......................................... $ 13,101 $ 7,281 $ 7,487
======== ======= =======
</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 6, MARCH 31, APRIL 2,
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 13,101 $ 7,281 $ 7,487
Adjustments to reconcile net income to net cash
provided by activities:
Depreciation and amortization................. 3,744 3,607 2,998
Deferred income taxes......................... (2,214) (453) (1,204)
Changes in assets and liabilities:
Accounts receivable......................... (1,277) (1,381) (12,228)
Inventories................................. (5,006) (5,061) (1,953)
Other current assets........................ (44) (142) 132
Accounts payable............................ 732 (545) 1,135
Accrued compensation and related expenses... (422) (587) 2,419
Income taxes payable........................ 603 688 756
Other accrued liabilities................... 2,649 2,220 1,991
Deferred service revenue.................... (258) 333 349
Deferred rent and other..................... 252 (93) (6)
-------- ------- --------
Net cash provided by operating activities....... 11,860 5,867 1,876
INVESTING ACTIVITIES
Purchases of property and equipment............. (1,091) (4,361) (1,616)
Increase in other assets........................ (484) (604) (432)
-------- ------- --------
Net cash used in investing activities........... (1,575) (4,965) (2,048)
FINANCING ACTIVITIES
Receivable from parent.......................... -- -- (1,425)
Proceeds from notes payable..................... 250 -- 2,800
Repayments on notes payable..................... (1,435) (1,231) (10,557)
Principal payments under capital lease
obligations.................................... (190) (311) (96)
Tax benefit from exercise of stock options...... -- 264 420
Issuance of common stock........................ -- -- 15,063
Proceeds from notes receivable from
shareholders................................... 524 -- --
-------- ------- --------
Net cash (used in) provided by financing
activities..................................... (851) (1,278) 6,205
Effect of exchange rate changes on cash......... (383) (263) (504)
-------- ------- --------
Net (decrease) increase in cash and cash
equivalents.................................... 9,051 (639) 5,529
Cash and cash equivalents at beginning of
period......................................... 7,690 8,329 2,800
-------- ------- --------
Cash and cash equivalents at end of period...... $ 16,741 $ 7,690 $ 8,329
======== ======= ========
Supplementary disclosures:
Cash paid for interest........................ $ 2,059 $ 2,228 $ 2,012
======== ======= ========
Cash paid for income taxes.................... $ 10,661 $ 5,039 $ 102
======== ======= ========
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 system 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
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
APRIL 6, MARCH 31, APRIL 2,
CUSTOMER 1997 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C>
A............................................. 13% 17% 17%
B............................................. 10% 15% 18%
</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 28%,
13% and 10% of total accounts receivable at April 6, 1997. Accounts receivable
from three customers accounted for approximately 16%, 15% and 13% of total
accounts receivable at March 31, 1996.
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 $74,000,
$(217,000) and $(11,000) for the years ended April 6, 1997, March 31, 1996 and
April 2, 1995, 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.
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 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.
F-8
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
APRIL 6, MARCH 31,
1997 1996
-------- ---------
<S> <C> <C>
Due from (due to) Toray and Shimadzu:
Accounts receivables.................................... $ 18 $ 84
Receivable from parent.................................. 1,425 1,425
Accrued expenses........................................ (25) --
------ ------
$1,418 $1,509
====== ======
</TABLE>
Transactions with Toray and Shimadzu are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
APRIL 6, MARCH 31, APRIL 2,
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Sales............................................ $590 $ -- $42
Purchases of inventories, at cost................ 94 -- 3
</TABLE>
The Company incurred expenses of approximately $559,000, $739,000 and
$426,000 for the fiscal years ended April 6, 1997, March 31, 1996 and April 2,
1995, 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%.
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.
F-9
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $1,050,000 and $999,000 and related accumulated amortization of
$547,000 and $413,000 at April 6, 1997 and March 31, 1996.
Rent expense was approximately $1,524,000, $897,000 and $606,000 for the
fiscal years ended April 6, 1997, March 31, 1996 and April 2, 1995,
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
The Company is involved in various 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.
F-10
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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 6, MARCH 31, APRIL 2,
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Provision at statutory rate.................. 35.0% 35.0% 34.0%
State taxes, net of federal benefit.......... 3.6 3.8 1.7
Amortization of goodwill and purchased
intangibles................................. 2.0 5.6 8.7
Foreign losses not benefitted................ -- -- 4.9
Utilization of net operating loss and credit
carryforwards............................... (3.2) (5.4) (29.8)
Other changes in valuation allowances........ -- (4.8) (23.6)
Other........................................ 3.3 4.9 4.1
---- ---- -----
40.7% 39.1% 0.0%
==== ==== =====
</TABLE>
F-11
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
APRIL 6, MARCH 31,
1997 1996
-------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued costs and expenses......................... $ 4,359 $ 2,956
State taxes........................................ 534 248
Other.............................................. 663 209
Net operating loss................................. 491 1,205
------- -------
Total gross deferred tax assets.................... 6,047 4,618
Less valuation allowance........................... (491) (1,205)
------- -------
Net deferred tax assets............................ $ 5,556 $ 3,413
======= =======
Deferred tax liabilities:
Deferred revenue on foreign sales.................. $(1,424) $(1,571)
Other.............................................. (261) (185)
------- -------
Net deferred tax liabilities....................... $(1,685) $(1,756)
======= =======
</TABLE>
The net changes in the total valuation allowance for fiscal 1997 and fiscal
1996 were $(714,000) and $(1,218,000), respectively, and relate primarily to
changes in certain foreign net operating losses.
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 $540,000, $499,000 and $285,000 in fiscal 1997, 1996 and 1995,
respectively.
F-12
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 (loss) from operations.... $ 9,488 $ (655) $ 665 $ 9,498
======== ======= ======= ========
Identifiable assets.............. $ 45,252 $ 9,006 $(9,177) $ 45,081
======== ======= ======= ========
</TABLE>
Export sales, representing sales from the United States to customers in
foreign countries primarily in Asia and Europe, was approximately $54,390,000,
$34,503,000 and $24,531,000 of total United States revenue for the fiscal
years ended April 6, 1997, March 31, 1996 and April 2, 1995.
8. SUBSEQUENT EVENT
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.
F-13
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-14
<PAGE>
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 6, APRIL 6,
ASSETS 1997 1997
------ -------- --------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents........................ $ 14,017 $ 16,741
Accounts receivable, net......................... 23,996 20,107
Receivable from parent........................... -- 1,425
Inventories...................................... 19,019 17,427
Other assets..................................... 6,295 5,939
-------- --------
Total current assets........................... 63,327 61,639
Property and equipment, net........................ 6,157 5,843
Deferred financing costs, net...................... 10,880 --
Other assets, net.................................. 1,976 1,138
-------- --------
Total assets................................... $ 82,340 $ 68,620
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
------------------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Short-term debt.................................. $ -- $ 3,834
Other current liabilities........................ 20,994 19,085
-------- --------
Total current liabilities...................... 20,994 22,919
Long-term debt..................................... 115,000 23,100
Other liabilities.................................. 2,320 2,456
Mandatorily redeemable preferred stock............. 13,800 --
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....................... 20,177 60,465
Accumulated deficit.............................. (88,340) (38,927)
Other............................................ (1,723) (1,418)
-------- --------
Total Shareholders' equity (net capital
deficiency)................................... (69,774) 20,145
-------- --------
$ 82,340 $ 68,620
======== ========
</TABLE>
See accompanying notes.
F-15
<PAGE>
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
----------------
JULY 6, JULY 7,
1997 1996
------- -------
<S> <C> <C>
Net revenue................................................... $28,205 $28,715
Cost of revenue............................................... 13,263 12,893
------- -------
Gross margin.................................................. 14,942 15,822
Operating expenses:
Research and development.................................... 4,488 3,025
Selling, general and administrative......................... 5,026 5,893
Amortization of goodwill and purchased intangibles.......... -- 478
Recapitalization and related expenses....................... 2,888 --
------- -------
Total operating expenses.................................. 12,402 9,396
------- -------
Operating income.............................................. 2,540 6,426
Other income (expense):
Interest expense............................................ (2,193) (432)
Interest income............................................. 169 45
Other....................................................... (5) (26)
------- -------
(2,029) (413)
------- -------
Income before provision for income taxes...................... 511 6,013
Provision for income taxes.................................... 200 2,510
------- -------
Net income.................................................... $ 311 $ 3,503
======= =======
</TABLE>
See accompanying notes.
F-16
<PAGE>
THERMA-WAVE
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
JULY 6, JULY 7,
1997 1996
--------- ---------
<S> <C> <C>
Operating Activities:
Net income.............................................. $ 311 $ 3,503
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 1,036 1,049
Noncash recapitalization and related expenses, net of
tax.................................................. 1,762 --
Changes in assets and liabilities:
Accounts receivable................................... (3,889) (2,847)
Inventories........................................... (1,841) (3,614)
Other current assets.................................. (356) (157)
Other current liabilities............................. 2,008 4,056
--------- --------
Net cash provided by (used in) operating activities. (969) 1,990
Investing Activities:
Purchase of property and equipment, net................. (780) (554)
Other................................................... (1,159) (410)
--------- --------
Net cash used in investing activities............... (1,939) (964)
Financing Activities:
Issuance of Senior Notes................................ 115,000 --
Repayment of notes payable.............................. (26,934) (1,047)
Redemption of common stock.............................. (96,900) --
Proceeds from issuance of common stock.................. 18,728
Deferred financing costs................................ (11,077) --
Other................................................... 1,367 515
--------- --------
Net cash provided (used in) by financing activities. 184 (532)
--------- --------
Net increase (decrease) in cash and cash equivalents...... (2,724) 494
Cash and cash equivalents at beginning of period.......... 16,741 7,690
--------- --------
Cash and cash equivalents at end of period................ $ 14,017 $ 8,184
========= ========
Supplementary disclosures:
Cash paid for interest.................................. $ 238 $ 185
========= ========
Cash paid for income taxes.............................. $ 165 $ 502
========= ========
Noncash financing activity:
Common stock issued for notes receivable from
shareholders........................................... $ 254 $ --
========= ========
</TABLE>
See accompanying notes.
F-17
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(IN THOUSANDS)
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.
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 748,739 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
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
F-18
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $115.0 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 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>
JULY 6, APRIL
1997 6, 1997
------- -------
<S> <C> <C>
Purchased Materials....................................... $10,700 $8,937
Systems in Process........................................ 6,137 7,252
Finished Systems.......................................... 2,182 1,238
------- -------
$19,019 $17,427
======= =======
</TABLE>
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CONTAINED
HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH
IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICI-
TATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITA-
TION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM 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
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... i
Prospectus Summary........................................................ 1
Risk Factors ............................................................. 14
The Recapitalization...................................................... 22
Use of Proceeds .......................................................... 23
Capitalization............................................................ 24
Unaudited Pro Forma Financial Data........................................ 25
Selected Historical Financial Data........................................ 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Industry Overview......................................................... 37
Business.................................................................. 40
Management................................................................ 52
Principal Stockholders.................................................... 58
Certain Relationships and Related Transactions............................ 60
Description of Bank Credit Facility....................................... 64
The Exchange Offer........................................................ 65
Description of Notes...................................................... 74
Book Entry; Delivery and Form............................................. 97
Certain Federal Income Tax Consequences................................... 99
Plan of Distribution...................................................... 101
Experts................................................................... 103
Legal Matters............................................................. 103
Glossary.................................................................. G-1
Index to Financial Statements............................................. F-1
</TABLE>
----------------
UNTIL DECEMBER 10, 1997 (90 DAYS AFTER THE COMMENCEMENT OF THE EXCHANGE OF-
FER), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PRO-
SPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-------------
PROSPECTUS
-------------
$115,000,000
THERMA-WAVE, INC.
OFFER TO EXCHANGE ITS SERIES B 10 5/8% SENIOR NOTES DUE 2004 FOR ANY AND ALL OF
ITS OUTSTANDING
10 5/8% SENIOR NOTES DUE 2004
SEPTEMBER 10, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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.
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 21.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*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.+
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*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.
*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.
*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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*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.
*12.1 Statement Regarding Computation of Earnings to Fixed Charges and Pro
Forma Earnings to Fixed Charges.
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).
*25.1 Statement of Eligibility of Trustee on Form T-1.
*27.1 Financial Data Schedule.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Tender Instructions.
</TABLE>
- --------
* Previously filed.
+ 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 22. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
II-3
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bonafide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering; and
(4) The undersigned registrants hereby undertake as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(5) The registrants undertake that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment 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.
(6) 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.
(7) 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.
(8) The undersigned registrants hereby undertake to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(9) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THERMA-WAVE, INC.
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO REGISTRATION STATEMENT ON FORM S-4 TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF FREMONT, STATE OF CALIFORNIA, ON SEPTEMBER 9, 1997.
Therma-Wave, Inc.
/s/ Allan Rosencwaig
By: _________________________________
Allan Rosencwaig
Chief Executive Officer
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO REGISTRATION STATEMENT HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATES
/s/ Allan Rosencwaig Chairman of the
- ------------------------------------- Board, President, September 9,
ALLAN ROSENCWAIG and Chief Executive 1997
Officer (Principal
Executive Officer)
* Executive Vice
- ------------------------------------- President, Chief September 9,
ANTHONY W. LIN Financial Officer, 1997
and Director
(Principal
Financial Officer)
* Vice President,
- ------------------------------------- Finance and September 9,
CHARLOTTE HOLLAND Administration 1997
(Principal
Accounting Officer)
* Director
- ------------------------------------- September 9,
G. LEONARD BAKER, JR. 1997
* Director
- ------------------------------------- September 9,
DAVID DOMINIK 1997
* Director
- ------------------------------------- September 9,
ADAM W. KIRSCH 1997
*The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 3 to Registration Statement pursuant to the Power of Attorney
executed by the above-named officers and directors of the Company and
previously filed with the Commission.
/s/ Allan Rosencwaig
By: _________________________________
Allan Rosencwaig, Attorney in Fact
II-5
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Therma-Wave, Inc.
We have audited the consolidated financial statements of Therma-Wave, Inc.
as of April 6, 1997 and March 31, 1996 and for each of the three years in the
period ended April 6, 1997, and have issued our report thereon dated May 8,
1997, except for Note 8, as to which the date is May 16, 1997 (included
elsewhere in this Registration Statement). Our audits also included the
financial statement schedules listed in Item 21(b) of this Registration
Statement. These schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Ernst & Young LLP
San Jose, California
May 16, 1997
S-1
<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 OF
DESCRIPTION OF PERIOD AND EXPENSE DESCRIBE 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>
S-2
<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 Note 8, as to which the
date is May 16, 1997, included in the Prospectus of Therma-Wave, Inc. that is
made part of the Registration Statement (Form S-4) and Prospectus of Therma-
Wave, Inc. for the offer to exchange its Series B senior notes due 2004 for
any and all of its outstanding senior notes due 2004.
Ernst & Young LLP
San Jose, California
September 9, 1997
