<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934
For the period ended October 4, 1998 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-29871
THERMA-WAVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3000561
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1250 Reliance Way
Fremont, California 94539
(Address of principal executive offices) (Zip Code)
(510) 490-3663
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares of the issuer's class of common stock, as of the
latest practical date:
Class Outstanding as of November 1, 1998
- -------------------------------------------------------------------------------
Class A Common stock, $.01 par value 9,073,532
Class B Common stock, $.01 par value 1,118,092
Class L Common stock, $.01 par value 1,008,170
<PAGE>
THERMA-WAVE, INC.
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 and March 31, 1998 3
Condensed Consolidated Statements of Operations
Three and six months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
Six months ended September 30, 1998 and 1997 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
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Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
--------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,086 $ 20,422
Accounts receivable, net 17,203 22,098
Inventories 21,011 21,292
Other current assets 8,112 7,938
--------- ---------
Total current assets 62,412 71,750
Property and equipment, net 5,250 6,241
Deferred financing costs, net 9,156 9,956
Other assets 1,775 1,815
--------- ---------
Total assets $ 78,593 $ 89,762
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $ 3,031 $ 4,019
Other current liabilities 25,364 24,383
--------- --------
Total current liabilities 28,395 28,402
Long term debt 115,000 115,000
Other liabilities 2,674 2,835
--------- --------
Total liabilities 146,069 146,237
Commitments and contingencies
Mandatorily redeemable preferred stock 14,929 14,515
Stockholders' equity (net capital deficiency)
Common stock--Class A 91 91
Common stock--Class B 11 13
Common stock--Class L 10 10
Additional paid-in capital 21,324 21,363
Notes receivable from stockholders (241) (288)
Accumulated deficit (101,938) (90,424)
Currency translation adjustment (1,662) (1,755)
--------- --------
Total stockholders' equity (net capital deficiency) (82,405) (70,990)
--------- --------
Total liabilities and stockholders' equity (net
capital deficiency) $ 78,593 $ 89,762
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue $ 15,196 $ 28,286 $ 30,442 $ 56,491
Cost of revenue 8,883 13,138 17,862 26,401
-------------- -------------- -------------- --------------
Gross margin 6,313 15,148 12,580 30,090
Operating expenses:
Research and development 3,924 5,086 8,522 9,574
Selling, general and administrative 4,500 6,749 9,133 11,775
Recapitalization and other
non-recurring expenses - 1,000 - 3,888
Expenses relating to operating
cost improvements 475 - 1,057 -
-------------- -------------- -------------- --------------
Total operating expenses 8,899 12,835 18,712 25,237
-------------- -------------- -------------- --------------
Operating income (loss) (2,586) 2,313 (6,132) 4,853
Other income (expense):
Interest expense (3,450) (3,588) (6,949) (5,781)
Interest income 171 171 377 340
Other, net 105 5 (56) -
-------------- -------------- -------------- --------------
(3,174) (3,412) (6,628) (5,441)
-------------- -------------- -------------- --------------
Loss before income taxes (5,760) (1,099) (12,760) (588)
Benefit for income taxes (750) (428) (1,660) (229)
-------------- -------------- -------------- --------------
Net loss (5,010) (671) (11,100) (359)
Accretion of preferred stock
dividend 208 208 414 324
-------------- -------------- -------------- --------------
Net loss available to common
stockholders $ (5,218) $ (879) $ (11,514) $ (683)
============== ============== ============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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THERMA-WAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
September 30,
--------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Operating activities:
Net loss $ (11,100) $ (359)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 2,206 1,663
Amortization of deferred financing costs 800 593
Non-cash recapitalization and related expenses - 3,888
Non-cash expenses relating to operating cost improvements 100 -
Changes in assets and liabilities:
Accounts receivable 4,895 (1,738)
Inventories (475) (3,815)
Other assets (121) (1,418)
Other liabilities (208) 5,034
------------------- -------------------
Net cash (used in) provided by operating activities (3,903) 3,848
Investing activities:
Purchases of property and equipment (277) (1,863)
Other (195) (1,012)
------------------- -------------------
Net cash used in investing activities (472) (2,875)
Financing activities:
Issuance of Senior Notes - 115,000
Repayment of notes payable - (26,934)
Redemption of common stock - (96,900)
Proceeds from issuance of common stock 7 20,169
Deferred financing costs - (11,212)
Other 32 (223)
Net cash provided by (used in) financing activities 39 (100)
------------------- -------------------
Net (decrease) increase in cash and cash equivalents (4,336) 873
------------------- -------------------
Cash and cash equivalents at beginning of period 20,422 16,741
------------------- -------------------
Cash and cash equivalents at end of period $ 16,086 $ 17,614
=================== ===================
Supplementary disclosures:
Cash paid for interest $ 6,236 $ 922
=================== ===================
Cash paid for taxes $ 273 $ 2,800
=================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and include the accounts of Therma-Wave, Inc. and its
wholly owned subsidiaries (collectively "Therma-Wave" or the "Company").
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the financial statements reflect
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the financial position at September 30, 1998, the
operating results for the three and six months ended September 30, 1998 and
1997 and the cash flows for the six months ended September 30, 1998 and
1997. These financial statements and notes should be read in conjunction
with the Company's audited financial statements and notes thereto for the
year ended March 31, 1998.
The results of operations for the interim periods are not necessarily
indicative of the results of operations that may be expected for any other
period or for the fiscal year, which ends on April 4, 1999.
The second fiscal quarters of 1999 and 1998 and the fiscal year 1998 ended
on October 4, 1998, October 5, 1997 and April 5, 1998, respectively. For
presentation purposes, the accompanying financial statements have been shown
as ending on the last day of the month.
In accordance with generally accepted accounting principles, earnings per
share information is not presented since the Company does not have publicly
held common stock.
2. Inventories
Inventories are summarized as follows (in thousands):
September 30, 1998 March 31, 1998
-------------------- --------------------
Purchased materials $ 10,042 $ 9,958
Systems in process 5,426 7,146
Finished systems 5,543 4,188
---------- ----------
$ 21,011 $ 21,292
========== ==========
6
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3. 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 $11.2 million related to the Recapitalization. In order to
finance the transactions effected 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
investment funds associated with Bain Capital, Inc. ("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.
Immediately after the Recapitalization, the outstanding equity securities of
the Company consisted of 9,073,532 shares of Class A Common; 1,334,875
shares of Class B Common; 1,008,170 shares of Class L Common; and 748,738
shares of Preferred Stock. The shares of Class A Common and Class L Common
each entitle the holder thereof to one vote per share on all matters to be
voted upon by the stockholders of the Company and are otherwise identical,
except that the shares of Class L Common are entitled to a preference over
the 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 on May 17, 2007, and is otherwise redeemable by the
Company at any time from time to time after 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.
4. Financing Arrangements
The $115.0 million of senior notes ("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
10.625% per annum and is payable semiannually in cash on each May 15 and
November 15, commencing on November 15, 1997, to registered holders at the
close of business on May 1 and November 1, respectively, immediately
preceding the
7
<PAGE>
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 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 initial purchasers of
the $115.0 million of Notes were granted certain exchange and registration
rights. Based upon the terms of such agreement, the Company issued new notes
with substantially identical terms as the old notes except that the new
notes are registered under the Securities Act and therefore do not bear
legends restricting their transfer.
In conjunction with the Recapitalization, the Company entered into the
Credit Agreement among Therma-Wave, Inc., various lending institutions, and
Bankers Trust Company, as Agent (the "Bank Credit Facility"), which provided
for a revolving credit facility of $30.0 million. During the quarter ended
June 30, 1998, the Company entered into the First Amendment to the Credit
Agreement among Therma-Wave, Inc., various lending institutions, and Bankers
Trust Company, as Agent (the "Amended Bank Credit Facility"), to have its
borrowing availability subject to a borrowing base formula, which provides a
maximum revolving credit facility of $30.0 million, and to make certain
necessary adjustments to the financial tests and covenants contained therein
in light of current market conditions. The Company may borrow amounts under
the Amended Bank Credit Facility to finance its working capital requirements
and other general corporate purposes. The Amended Bank Credit Facility
requires the Company to meet certain financial tests and contains covenants
customary for this type of financing. At September 30, 1998, there was $3.5
million of an outstanding letter of credit and unused borrowing capacity
under the Amended Bank Credit Facility of $21.9 million.
5. Expenses Relating to Operating Cost Improvements
On June 22, 1998, the Company announced and implemented an operating cost
improvement program aimed at bringing operating expenses in line with the
Company's current operating environment. These efforts are in response to
the continued cutbacks in capital equipment investment by semiconductor
manufacturers. As a result of the implementation of this program, the
Company recorded a charge of $582,000 during the first quarter of fiscal
year 1999, of which $406,000 related to severance and related charges,
$76,000 of vacated leased facilities and $100,000 of certain excess
operating assets. During the second quarter, the Company recorded a charge
of $475,000, which related primarily to severance and related charges.
8
<PAGE>
6. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." The statement established standards for the reporting
and display of comprehensive income and its components. However, the
adoption of this statement had no impact on the Company's net income (loss)
or stockholders' equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, which have been consistently included in stockholders' equity
and excluded from net income (loss), to be included in comprehensive income
(loss). The primary difference between net income (loss) and comprehensive
income (loss) for the Company is due to currency translation adjustments.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
During the three months ended September 30, 1998 and 1997, comprehensive
loss amounted to approximately $4,916,000 and $1,049,000, respectively.
During the six months ended September 30, 1998 and 1997, comprehensive loss
amounted to approximately $11,007,000 and $512,000, respectively.
7. Recently Issued Accounting Statements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes new requirements for the annual reporting of information
regarding operating segments, products, services, geographic areas and major
customers. The Company will adopt SFAS No.131 effective March 31, 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supercedes and
amends a number of existing accounting standards. SFAS No. 133 requires that
all derivatives be recognized in the balance sheet at their fair market
value, and the corresponding derivative gains or losses be either reported
in the statement of operations or as a deferred item depending on the type
of hedge relationship that exists with respect to such derivative. The
Company currently does not hold any derivative instruments that will be
affected by the adoption of SFAS No. 133.
8. Commitments and Contingencies
On September 14, 1998, the Company was named in a patent infringement suit
by KLA-Tencor Corporation ("KLA-Tencor"). KLA-Tencor alleged that their
patented thin-film thickness measuring technology is being used in metrology
equipment sold by the Company. KLA-Tencor is seeking damages and an
injunction to stop the sale of equipment using its technology. The Company
believes that its products do not infringe any of the claims of KLA-Tencor's
patent and that their infringement allegations are unfounded. The Company
9
<PAGE>
intends to defend its position vigorously and expects to prevail in its
counterclaims against KLA-Tencor.
On October 26, 1998, the Company announced an action against KLA-Tencor for
patent infringement. The suit was filed as a counterclaim in the
infringement action initiated by KLA-Tencor. The suit seeks damages for
patent infringement and a permanent injunction against any future infringing
activity by KLA-Tencor, or by any third party working in conjunction with
KLA-Tencor. The counterclaim also seeks a declaratory judgment that KLA-
Tencor's patent, which the Company was alleged of infringing, is invalid and
not infringed by any of the Company's devices.
There can be no assurances, however, that the Company will prevail in any
patent litigation. The Company believes that the outcome of any resultant
litigation will not have a material adverse effect on the Company's
financial condition.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
When used in this discussion, the words "expects", "anticipates" and similar
expressions are intended to identify forward-looking statements. Such forward-
looking statements are subject to a number of risks and uncertainties that could
cause actual results to differ materially from the statements made. 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 the cyclical nature of 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.
General
The Company develops, manufactures, markets and services process control
metrology systems for use in the manufacture of semiconductors. The Company's
process control metrology systems are principally used to measure ion
implantation and thin film deposition and removal. The Company has developed
two major lines of process control metrology systems: (i) the Therma-Probe
system and (ii) the Opti-Probe system. The Therma-Probe system, introduced in
1985, utilizes the Company's proprietary thermal wave technology and is the
predominant nondestructive process control metrology system used to measure the
critical ion implantation process on product wafers in the fabrication of
semiconductors. The Opti-Probe system, introduced in 1992, significantly
improved upon existing thin film metrology systems by successfully integrating
different measurement technologies into one system and utilizing the Company's
proprietary optical technologies. According to Dataquest, a leading industry
analysis group, the Opti-Probe system captured the number one market share
position in 1997.
The Company's second quarters of fiscal years 1999 and 1998 ended on October 4,
1998 and October 5, 1997, respectively. For presentation purposes, any reference
herein to such periods refer to the periods ended September 30 of such fiscal
year.
11
<PAGE>
Results of Operations
The following table summarizes Therma-Wave's unaudited historical results of
operations as a percentage of net revenues for the periods indicated. The
historical financial data for the three and six months ended September 30, 1998
and 1997 were derived from the Company's unaudited consolidated financial
statements which, in the opinion of the Company, reflect all adjustments
(consisting of normal recurring adjustments) necessary for the fair presentation
of the financial position and operating results for such periods.
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-------------------------------- ---------------------------------
Statement of Operations Data: 1998 1997 1998 1997
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 58.5 46.4 58.7 46.7
-------------- ------------- -------------- --------------
Gross margin 41.5 53.6 41.3 53.3
Operating expenses:
Research and development 25.8 18.0 28.0 17.0
Selling, general and administrative 29.6 23.9 30.0 20.8
Recapitalization and other -
non-recurring expenses - 3.5 6.9
Expenses relating to operating cost 3.5 -
improvements 3.1 -
-------------- ------------- -------------- --------------
Operating income (loss) (17.0) 8.2 (20.2) 8.6
Interest expense (22.7) (12.7) (22.8) (10.2)
Interest income 1.1 0.6 1.2 0.6
Other, net 0.7 - (0.2) -
-------------- ------------- -------------- --------------
Loss before income taxes (37.9) (3.9) (42.0) (1.0)
Benefit for income taxes (4.9) (1.5) (5.5) (0.4)
-------------- ------------- -------------- --------------
Net loss (33.0)% (2.4)% (36.5)% (0.6)%
============== ============= ============== ==============
</TABLE>
Net revenues for the three months ended September 30, 1998 and 1997 were $15.2
and $28.3 million, respectively. Net revenues for the six months ended
September 30, 1998 and 1997 were $30.4 and $56.5 million, respectively.
Compared to the corresponding period of fiscal 1998, net revenues decreased
$13.1 million or 46.3% for the three month period ended September 30, 1998, and
decreased $26.0 million or 46.1% for the six month period ended September 30,
1998. Gross margin percentages for the three months ended September 30, 1998 and
1997 were 41.5% and 53.6%, respectively. Gross margin percentages for the six
months ended September 30, 1998 and 1997 were 41.3% and 53.3%, respectively.
Compared to the corresponding period of fiscal 1998, the gross margin
percentages decreased by 12.1 and 12.0 percentage points for the three and six
month periods ended September 30, 1998, respectively. The declines in revenues
and gross margin are attributed to the current downturn in the global
semiconductor industry due primarily to excess DRAM capacity and a slowdown in
product demand as a result of lower than expected sales of high-end personal
computers and the economic conditions in the Asia Pacific
12
<PAGE>
region. This slowdown has caused the semiconductor industry to reduce both
purchases of semiconductor manufacturing equipment and construction of new
fabrication facilities.
Research and development expenses were $3.9 million and $5.1 million for the
three months ended September 30, 1998 and 1997, respectively, and $8.5 million
and $9.6 million for the six months ended September 30, 1998 and 1997,
respectively. Compared to the corresponding period of fiscal 1998, research and
development expenses decreased $1.2 million, or 22.8% for the three months ended
September 30, 1998. Compared to the corresponding period of fiscal 1998,
research and development expenses decreased $1.1 million, or 11.0% for the six
months ended September 30, 1998. Research and development expenses relating to
the new OP5000 and 300 millimeter products have decreased from prior periods as
the projects near completion. Although the Company is in a current downturn, 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 were $4.5 million and $6.7 million
for the three months ended September 30, 1998 and 1997, respectively and $9.1
million and $11.8 million for the six months ended September 30, 1998 and 1997,
respectively. Compared to the corresponding period of fiscal 1998, selling,
general and administrative expenses decreased $2.2 million, or 33.3% for the
three months ended September 30, 1998. Compared to the corresponding period of
fiscal 1998, selling, general and administrative expenses decreased $2.6
million, or 22.4% for the six months ended September 30, 1998. The decrease in
selling, general and administrative expenses is due primarily to the decrease in
sales commissions and the decrease in headcount as a result of the operating
cost improvement program described below.
On June 22, 1998, the Company announced and implemented an operating cost
improvement program aimed at bringing operating expenses in line with the
Company's current operating environment. These efforts are in response to the
continued cutbacks in capital equipment investment by semiconductor
manufacturers. As a result of the implementation of this program, the Company
recorded a charge of $582,000 during the first quarter of fiscal year 1999, of
which $406,000 related to severance and related charges, $76,000 of vacated
leased facilities and $100,000 of certain excess operating assets. During the
second quarter, the Company recorded a charge of $475,000, which related
primarily to severance and related charges.
Recapitalization and other non-recurring expenses for the three and six months
ended September 30, 1997 were $1.0 million and $3.9 million, respectively, of
non-cash charges related to the arrangements for the Company's executive
officers in connection with the Recapitalization.
Interest expense for the three months ended September 30, 1998 and 1997 were
$3.5 million and $3.6 million, respectively. Interest expense for the six months
ended September 30, 1998 and 1997 were $6.9 million and $5.8 million,
respectively. The increased interest expense from the prior fiscal year is
attributed to the additional debt incurred as part of the Recapitalization.
For the three months ended September 30, 1998 and 1997, the Company recorded a
benefit for income taxes of $750,000 and $428,000, respectively. For the six
months ended September 30,
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1998 and 1997, the Company recorded a benefit for income taxes of $1,660,000 and
$229,000, respectively. The Company's tax benefit for the periods ended
September 30, 1998 reflect the expected tax benefit rate of 13% for the fiscal
year based upon the Company's loss carryback potential.
Net loss for the three months ended September 30, 1998 and 1997 were $5,010,000
and $671,000, respectively. Net loss for the six months ended September 30,
1998 and 1997 was $11,100,000 and $359,000, respectively. The increased loss is
due to the factors described above.
Liquidity and Capital Resources
The Company's principal liquidity requirements are for working capital,
consisting primarily of accounts receivable, inventories, capital expenditures
and debt service. Historically, the Company has funded its operating activities
principally from working capital and working capital lines of credit.
Cash flow (used in) provided by operating activities was ($3.9) million and $3.8
million for the six months ended September 30, 1998 and 1997, respectively. The
decrease in cash flow from operating activities from the prior year period is
mainly due to the increase in the net loss for the reasons described above.
This decrease was partially offset by a lower investment in working capital and
by the prior year non-cash expenses.
Purchases of property and equipment were $0.3 million and $1.9 million for the
six months ended September 30, 1998 and 1997, respectively.
In May 1997, the Company issued $115.0 million in aggregate principal amount of
senior notes to finance the Recapitalization, including the repayment of notes
payable and redemption of common stock.
In conjunction with the Recapitalization, the Company entered into the Credit
Agreement among Therma-Wave, Inc., various lending institutions, and Bankers
Trust Company, as Agent (the "Bank Credit Facility"). The Bank Credit Facility
provides for borrowings of up to $30.0 million for working capital and other
general corporate purposes, and bears interest, at the Company's option, at (i)
the Base Rate (as defined in the Bank Credit Facility) plus 1.75% or (ii) the
Eurodollar Rate (as defined in the Bank Credit Facility) plus 3.00%. The
Company's borrowings under the Bank Credit Facility are secured by substantially
all of the Company's assets and a pledge of substantially all of the capital
stock of the Company's domestic subsidiaries and 65% of the capital stock of the
Company's first-tier foreign subsidiaries. The Bank Credit Facility matures on
May 16, 2002. During the quarter ended June 30, 1998, the Company entered into
the First Amendment to the Credit Agreement among Therma-Wave, Inc., various
lending institutions, and Bankers Trust Company, as Agent (the "Amended Bank
Credit Facility"), to have its borrowing availability subject to a borrowing
base formula, which provides a maximum revolving credit facility of $30.0
million, and to make certain necessary adjustments to the financial tests and
covenants contained therein in light of current market conditions. The
14
<PAGE>
Company may borrow amounts under the Amended Bank Credit Facility to finance its
working capital requirements and other general corporate purposes. The Amended
Bank Credit Facility requires the Company to meet certain financial tests and
contains covenants customary for this type of financing. At September 30, 1998,
there was $3.5 million of an outstanding letter of credit and unused borrowing
capacity under the Amended Bank Credit Facility of $21.9 million.
The Company's principal sources of funds are cash on hand ($16.1 million as of
September 30, 1998) and borrowings available under the Amended Bank Credit
Facility. The Company believes that these funds will provide the Company with
sufficient liquidity and capital resources for the Company to meet its current
and future financial obligations, as well as to provide funds for the Company's
working capital needs, capital expenditures and other needs. No assurance can
be given, however, that this will be the case. Depending upon its
profitability, the Company may require additional equity or debt financing to
meet its working capital requirements or to fund its research and development
activities. There can be no assurance that additional financing will be
available when required or, if available, will be on terms satisfactory to the
Company. The Company's future operating performance and ability to service or
refinance the senior notes and to repay, extend or refinance the Amended 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.
Impact of Currency Exchange Rates
Foreign exchange rate fluctuations have historically not had a significant
impact on the Company's results of operations since the Company's export sales
are denominated in United States dollars. Due to the unpredictability of
currency exchange rates, there can be no assurance that the Company will not
experience negative currency translation adjustments in the future, nor can the
Company predict the effect of exchange rate fluctuations upon future operating
results.
Factors that May Affect Results
Current Slowdown and Volatility in the Semiconductor Equipment Industry
The Company's business depends and will depend in the future upon the capital
equipment expenditures of semiconductor manufacturers, which, in turn depend on
the current and anticipated market demand for integrated circuits and products
utilizing integrated circuits. In addition, the Company's business depends upon
the new construction of semiconductor fabrication facilities and, as to existing
fabrication facilities, enhancements to improve yields. The semiconductor
industry has been cyclical in nature and historically has experienced periodic
downturns. The semiconductor industry is presently experiencing a downturn due
primarily to excess DRAM capacity and a slowdown in product demand as a result
of lower than expected sales of high-end personal computers and the economic
conditions in the Asia Pacific region. This slowdown has caused the
semiconductor industry to reduce both purchases of semiconductor manufacturing
equipment and construction of new fabrication facilities. These conditions have
adversely affected the Company's results of operations for the first half of
Fiscal 1999, and bookings, revenues and operating results will continue to be
adversely affected as long
15
<PAGE>
as the current downturn in the semiconductor industry continues. Even during
periods of reduced revenues, in order to remain competitive, the Company will be
required to invest in research and development and to maintain extensive ongoing
worldwide customer service and support capability, which could adversely affect
its financial results.
Global Market Risks
Because a significant portion of the Company's revenue is from sales outside the
United States, the Company's results can be significantly affected by weak
economic conditions in the foreign markets in which the Company distributes its
products. Companies in the Asia Pacific region, including Japan, Korea and
Taiwan which accounts for a significant portion of the Company's business in
that region, have continued to experience weaknesses in their currency, banking
and equity markets. These weaknesses are currently affecting demand for the
Company's products. The Company expects these conditions will continue to
impact its results of operations for at least the next two quarters.
Year 2000
Many computer systems used by the Company and its suppliers may not properly
recognize a date using "00" as the Year 2000. This could result in
system/program failure or logic errors that would disrupt normal business
activities. The Company has established a formal project with a project office
and project team to address this issue and achieve Year 2000 (Y2K) readiness.
The project is focused on four key readiness areas: 1) Internal Infrastructure
Readiness, addressing internal hardware and software, and non-information
technology systems; 2) Supplier Readiness, addressing the preparedness of those
suppliers providing material incorporated into the Company's products; 3)
Product Readiness, addressing product functionality; and 4) Customer Readiness,
addressing customer support and transactional activity.
For each readiness area, the Company is systematically performing a global risk
assessment, conducting testing and remediation (renovation and implementation),
developing contingency plans to mitigate unknown risk, and communication with
employees, suppliers, customers and other third party business partners to raise
awareness of the Year 2000 problem.
Internal Infrastructure Readiness Program. The Company is conducting an
assessment of internal applications and computer hardware. Some software
applications have been made Year 2000 compliant, and resources have been
assigned to address other applications based on their criticality and the time
required to make them Year 2000 compliant. All software remediation is
scheduled to be completed no later than March 1999. The Year 2000 compliance
evaluation of hardware, including network fabric, telecommunications equipment,
workstations and other items is nearing completion.
In addition to applications and information technology hardware, the Company is
testing and developing remediation plans for facilities and other operations.
16
<PAGE>
Supplier Readiness Program. This program focuses on minimizing the risks
associated with suppliers in two areas: 1) a supplier's business capability to
continue providing products and services; and, 2) a supplier's product
integrity. The Company has identified and contacted key suppliers based on
their relative risks in these two areas. To date, the Company has received
responses, most of which indicate that the suppliers are in the process of
developing remediation plans, from the majority of its key suppliers. Based on
the Company's assessment of each supplier's progress to adequately address the
Year 2000 issue, the Company will develop a supplier action list and contingency
plans.
Product Readiness Program. This program focuses on identifying and resolving
Year 2000 issues existing in the Company's products. The program encompasses a
number of activities including testing, evaluation, engineering, and
manufacturing implementation. The Company has adopted the Sematech Year 2000
Readiness Testing Scenarios as the baseline for product testing. Customers are
being notified of known risk areas and proposed remediation plans. The Company
plans to make Year 2000 retrofits available to customers during the third
quarter of fiscal year 1999. A contingency team will be available to assist
customers experiencing difficulties with the Company's products.
Customer Readiness Program. This program is focused on customer support,
including the coordination of retrofit activity, and developing contingency
plans where appropriate, as well as the ability of the Company's customers to
continue to conduct business with the Company. This program is in the process
of being developed.
The Company estimates that total Year 2000 costs will not be material to the
Company, with the majority of costs to be incurred during the next five fiscal
quarters. The Company is continuing its assessments and developing alternatives
that will necessitate refinement of this estimate over time. There can be no
assurance, however, that there will not be a delay in, or increased costs
associated with, the programs described in this section.
Since the programs described in this section are ongoing, all potential Year
2000 complications have not yet been identified. Therefore, the potential
impact of these complications on the Company's financial condition and results
of operations cannot be determined at this time. If computer systems used by
the Company or its suppliers, product integrity of products provided to the
Company by suppliers, or the software applications or hardware used in systems
manufactured or sold by the Company, fail or experience significant difficulties
related to the Year 2000, the Company's results of operations and financial
condition could be materially affected.
17
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On September 14, 1998, the Company was named in a patent infringement suit by
KLA-Tencor Corporation ("KLA-Tencor"). KLA-Tencor alleged that KLA-Tencor
patented thin-film thickness measuring technology is being used in metrology
equipment sold by the Company. KLA-Tencor is seeking damages and an
injunction to stop the sale of equipment using its technology. The Company
believes that the Company's products do not infringe any of the claims of KLA-
Tencor's patent and that their infringement allegations are unfounded. The
Company intends to defend its position vigorously and expects to prevail in
its counterclaims against KLA-Tencor.
On October 26, 1998, the Company announced an action against KLA-Tencor for
patent infringement. The suit was filed as a counterclaim in the infringement
action initiated by KLA-Tencor described above. The suit seeks damages for
patent infringement and a permanent injunction against any future infringing
activity by KLA-Tencor, or by any third party working in conjunction with KLA-
Tencor. The counterclaim also seeks a declaratory judgment that KLA-Tencor's
patent, which the Company was alleged of infringing, is invalid and not
infringed by any of the Company's devices.
There can be no assurances, however, that the Company will prevail in any
patent litigation. The Company believes that the outcome of any resultant
litigation will not have a material adverse effect on the Company's financial
condition.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Restated Certificate of Incorporation of Therma-Wave, Inc. (1)
3.2 Amended and Restated By-Laws of Therma-Wave, Inc. (1)
10.1 First Amendment to the Credit Agreement among Therma-Wave, Inc.,
various lending institutions, and Bankers Trust
Company, as Agent (2)
27.1 Financial Data Schedule
_______
(1) Incorporated by reference to the same numbered exhibit to the
Company's Registration Statement on Form S-4 (Registration No. 333-
29871)
(2) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the period ended July 5, 1998
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on July 22, 1998 and an amendment
on Form 8-K/A on July 27, 1998 to record the change in certifying
accountants.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THERMA-WAVE, INC.
(Registrant)
/s/ L. RAY CHRISTIE
--------------------------------
L. RAY CHRISTIE
Chief Financial Officer
(as Registrant and as Principal Accounting Officer)
November 16, 1998
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMA-WAVE,
INC.'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> APR-04-1999
<PERIOD-START> APR-06-1998
<PERIOD-END> OCT-04-1998
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<RECEIVABLES> 17,203
<ALLOWANCES> 2,662
<INVENTORY> 21,011
<CURRENT-ASSETS> 62,412
<PP&E> 5,250
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14,929
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