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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 5, 1999
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)
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<S> <C>
DELAWARE 94-3000561
State or other jurisdiction of incorporation or I.R.S. Employer Identification Number
organization
1250 Reliance Way
Fremont, California 94539
Address of principal executive offices Zip Code
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(510) 490-3663
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) and 12(g) of the Act:
Title of Each Class Name of each Exchange on which Registered
N/A N/A
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [X]
As of May 30, 1999, the Registrant had 9,073,532 shares of Class A Common
Stock, 1,118,772 shares of Class B Common Stock and 1,008,170 shares of Class L
Common Stock outstanding.
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FORM 10-K
THERMA-WAVE, INC.
TABLE OF CONTENTS
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Part I
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Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17
Item 6. Selected Historical Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplemental Data 30
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure 30
Part III
Item 10. Executive Officers, Directors And Key Employees 32
Item 11. Compensation of Executive Officers 35
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 42
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 50
Schedule II - Valuation and Qualifying Accounts 73
Signatures 74
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PART I
ITEM 1. BUSINESS
Market data used throughout this Form 10-K were obtained from internal
surveys and from industry publications, including a report generated by
Dataquest. 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. We
have not independently verified such market data. This publication was not
commissioned by, or prepared at the request of, us or any of our affiliates.
Similarly, internal surveys, while believed to be reliable, have not been
verified by any independent source. Our belief as to our share of both the ion
implantation market generally and the non-destructive implantation market
specifically derives from internal estimates of the size of such market and
internal records as to our sales in such market. Our belief as to our share of
the thin film measurement market is derived from industry data as to the size of
such market and internal records as to our sales in such market.
Overview
We are a worldwide leader in the development, manufacture, marketing and
service of process control metrology systems used in the manufacture of
semiconductors. Process control metrology is used to monitor process parameters
in order to help enable semiconductor manufacturers to reduce the size of the
circuit patterns or features imprinted on the semiconductor, increase the size
of the raw silicon wafer from which semiconductors are manufactured, increase
their equipment productivity and improve the performance of the semiconductor
device. Our current product families, the Therma-Probe and Opti-Probe, use
proprietary and patented technology to provide precise, non-contact, non-
destructive measurement of two of the most critical and pervasive process steps
in semiconductor manufacturing:
. ion implantation--implanting ions, usually boron, phosphorus or arsenic,
into selected areas of the silicon wafer to alter its electrical
properties; and
. thin film deposition and removal--depositing and removing layers of
conductive or insulating films from the silicon wafer in order to give
the semiconductor the desired performance characteristics.
Industry Background
The demand for semiconductors has continually increased as the use of
semiconductors has expanded beyond personal computers and computer systems to a
wide array of additional applications, including telecommunications and data
communications systems, automotive systems, consumer electronics, medical
products and household appliances. Additionally, the Internet has stimulated the
need for more high performance semiconductor devices. As a result,
semiconductors have become more complex, requiring:
. decreases in feature line width, for example, from .25 microns to .18
microns;
. as many as 500 process steps; and
. an increase in the number of metal layers.
Additionally, the life cycle for these devices has compressed from four years in
the early 1990s to approximately two years today. The increase in device
complexity and reduction in product life cycles have led to a more costly and
complex manufacturing process. At the same time, semiconductor manufacturers
have continued to face significant price pressure due to competitive conditions
in the industry. These factors have led semiconductor manufacturers to intensify
efforts to improve fab productivity, including the
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increased use of process control metrology. Despite periodic downturns as a
result of the cyclicality of the semiconductor device industry, from 1992 to
1998, Dataquest reports that sales of process control metrology systems and
instruments have increased at a compound annual growth rate of 20.8% to
approximately $1.8 billion in 1998 and are expected to increase at a compound
annual growth rate of 22.9% to approximately $4.1 billion in 2002.
Process control metrology is used to monitor process parameters in order to
enable semiconductor manufacturers to reduce costs and improve device
performance. Historically, semiconductor manufacturers have achieved an
approximate 25% to 30% annual reduction in cost per chip function through
productivity improvements including reduced feature size, increased wafer size
and increased equipment productivity. Although increasing wafer size and yields
will continue to be sources of productivity gains by semiconductor
manufacturers, increasingly, we believe, gains will come from reduced feature
size and non-yield manufacturing productivity enhancements, including increased
equipment uptime, reduced manufacturing space requirements, reduced use of
wafers for testing purposes and lower tool maintenance costs. According to
Sematech, a consortium of integrated circuit manufacturers that provides
research, analysis and guidelines to equipment suppliers to the semiconductor
industry, as summarized in the following table, the greatest potential for
future productivity gains are expected to come primarily from gains in equipment
productivity and continuing reduction of feature sizes:
Key Drivers of Fab Productivity*
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Factor 1980 Present Future
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Reduced feature sizes................. 12-14% 12-14%
Increased wafer sizes................. 8% 4% less than 2%
Improved yields....................... 5% 2% less than 1%
Other gains in equipment productivity. 3% 7-10% more than 10-13%
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* Percentages reflect the annual reduction in the cost per chip
function.
Source: Sematech
The Therma-Wave Solution
We are a worldwide leader in the development, manufacture, marketing and
service of process control metrology systems used in the manufacture of
semiconductors. Our patented solutions help enable semiconductor manufacturers
to reduce feature size, increase wafer size, increase equipment productivity and
improve device performance by providing non-contact, non-destructive, enabling
technologies extendable over multiple process generations. We believe that our
technological capabilities, proven track record in process control metrology
systems and our Fab Productivity Enhancement(TM) initiatives will allow us to
continue to provide industry-leading fab productivity solutions for
semiconductor manufacturers.
Current Industry Leading Metrology Solutions
We have successfully developed Fab Productivity Enhancement(TM) metrology
solutions for two critical and pervasive process steps in semiconductor
manufacturing: ion implantation and thin film deposition and removal.
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Ion Implant Metrology
A key process step in the fabrication of semiconductor devices is the
implantation of ions, usually boron, phosphorous or arsenic, into selective
areas of the silicon wafer to alter its electrical properties. 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 time lag of several weeks between these implant steps and the first
electrical measurements that indicate whether the ion implantation process was
properly executed. Failure to identify improper ion implantation can be
extremely costly to a semiconductor manufacturer if the fabrication cycle is
permitted to continue. To test on a more timely basis whether the ion
implantation was properly executed, 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 test wafer monitoring, product wafer
monitoring using our Therma-Probe systems decreases manufacturing costs by
reducing the need for test wafers and shortening the cycle time between the
implant and monitoring steps. In addition, our systems detect implant processing
problems inherent in product wafers that are often missed when utilizing test
wafer monitoring alone.
Therma-Probe Product Family. Therma-Probe systems are the predominant non-
destructive process control metrology system used to measure the critical ion
implantation process in the fabrication of semiconductors. The Therma-Probe
systems employ proprietary thermal wave technology which uses highly focused but
low power laser beams to generate and detect thermal wave signals in the silicon
wafer. Proprietary software correlates the signals to the ion implant dose.
Unlike previous ion implant metrology systems, the Therma-Probe systems utilize
a totally non-contact, non-damaging technology and thus can be used to monitor
product wafers immediately after the ion implantation process. These features
have been integrated into an easy-to-use and reliable package with automated
wafer handling and statistical data processing. Since their introduction, we
believe the Therma-Probe systems have captured over 50% of the market for ion
implant measurement in general and over 95% of the market for non-destructive
ion implantation measurement of product wafers.
Thin Film Measurement
The majority of the 100 to 500 process steps required to fabricate
semiconductors on a 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 fabrication facilities. The most
widely used technologies to measure the thickness and properties of thin films
have historically been reflection spectrometry and ellipsometry. Reflection
spectrometers obtain an optical spectrum as a function of wavelength for light
reflected from the surface of a wafer. This spectrum is then analyzed with
appropriate algorithms to obtain film thickness and, in some cases, other
properties of the film. In ellipsometry, the change of polarization of the
reflected light is measured. The polarization change is analyzed with
appropriate algorithms to obtain film thickness, and, in some cases, other
properties of the film.
Increasingly, these systems have been unable to meet the process control
metrology demands of the semiconductor industry. For example, the industry is
rapidly moving toward measuring product wafers rather than test wafers, both
because of the inability to adequately control the manufacturing process using
test wafers alone, and the costs associated with the processing of non-
productive test wafers. Measurements on product wafers, however, must be
performed in small areas, and both spectrometers and ellipsometers generally
require fairly large measurement areas. Additionally, increasing demands for
improved precision and repeatability require the ability to measure thicknesses
that range from extremely thin films, which generally measure below 20
angstroms, to films that are hundreds of thousands times thicker. An angstrom is
equal to one hundred millionth of a centimeter. Reflection spectrometers are
most suitable for measuring
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thicker films, whereas ellipsometers are most suitable for measuring very thin
films. Thus, neither system alone is capable of accurate and reliable
measurements over the full range of film thicknesses. Further, the industry is
now using film stacks composed of several layers of different films and many
films whose optical properties are functions of the actual deposition
conditions. Generally, spectrometers and ellipsometers alone generate
insufficient data to simultaneously determine the thicknesses and properties of
these film stacks and new films with the precision that semiconductor
manufacturers require. Reflection spectrometers and most ellipsometers have very
limited capabilities for such simultaneous measurements of both thickness and
optical parameters.
Opti-Probe Product Family. Opti-Probe systems significantly improve upon
existing thin film metrology systems by successfully integrating up to five
distinct film measurement technologies, three of which are patented by Therma-
Wave. By combining the measured data from these multiple technologies and
correlating it by using our proprietary software, Opti-Probe systems provide
increased measurement capability, speed and productivity on both test and
product wafers. These techniques of combining optical measurement technologies
and correlating the results have also been patented by Therma-Wave. We believe
Opti-Probe systems have captured over 30% of the thin film measurement market.
New Initiatives to Further Fab Productivity Enhancement(TM)
We believe our process control metrology tools have already significantly
improved fab productivity. We believe our technological capabilities will enable
semiconductor manufacturers to address a broader range of issues that impact fab
productivity. We expect new product developments to come from combining separate
metrology systems into one tool, implementing in-situ systems to improve the
direct control of process equipment and to provide real-time measurement of
product wafers, and networking these systems together.
In light of the industry's drive to reduce costs and improve productivity,
we believe combination products will be of considerable benefit to semiconductor
manufacturers. We believe that combination metrology tools will significantly
reduce capital expenditure requirements, floorplan footprint, wafer handling and
tool maintenance costs. Additionally, semiconductor manufacturers use in-situ
systems to provide real-time measurement of product wafers and monitoring of
process equipment. Although this market is in its infancy, the industry's need
to improve process tool productivity through increased uptime and higher
equipment utilization is expected to bring rapid growth to this industry sector.
We believe we can leverage our core competencies of strong intellectual property
and technological expertise to develop a wide range of in-situ systems. In
addition, by linking together our metrology tools, both stand-alone and
combination, and in-situ monitoring systems, we believe we can offer a
significant competitive advantage by allowing manufacturers to address overall
fab productivity in addition to the productivity of individual tools.
We are also developing the Meta-Probe system, which is a thin film
metrology system specifically designed to measure the thickness and material
properties of opaque and metallic thin films. These materials are increasingly
being used by semiconductor manufacturers as the industry moves to 0.25 micron
and 0.18 micron feature sizes with an increase in the number and complexity of
the metal layers. In addition, the accelerated drive towards the use of copper
rather than aluminum layers produces a need for better metal metrology products.
We believe that existing metal film metrology systems are unable to perform the
required measurements with the required precision and repeatability.
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Products and Technology
Our Fab Productivity Enhancement(TM) solutions currently consist of two
major product families of in-line process control metrology systems. Our Therma-
Probe product family was introduced in 1985 as our initial product line, and our
Opti-Probe product family was introduced in 1992. Both product families feature
our 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 enables continuous product enhancement as new advances are made.
Therma-Probe Product Family
Our Therma-Probe systems are the predominant non-contact, non-contaminating
ion implant metrology systems capable of measuring ion implant dose and its
uniformity across the wafer with a high degree of precision and repeatability.
In addition, Therma-Probe systems have unparalleled sensitivity for the most
critical implants. By the end of March 1999, 389 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 ion
implant steps. In addition, all major manufacturers of ion implant equipment
utilize Therma-Probe systems to help develop and qualify their ion implanters.
We believe Therma-Probe systems have captured over 50% of the market for ion
implant measurement in general and over 95% of the market for non-destructive
measurement of ion implantation of product wafers. The selling prices for
Therma-Probe systems range normally from approximately $650,000 to $900,000.
We believe that our Therma-Probe systems offer technological advantages and
features that distinguish them from the ion implant metrology systems offered by
our competitors:
Proprietary Technology. To provide non-contact, non-contaminating ion
implant measurements on product wafers, our Therma-Probe systems employ
proprietary thermal wave technology, which uses highly focused but low power
laser beams to generate and detect thermal wave signals in the silicon wafer
that can be correlated to the ion 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 ours. We believe that these patents help to
maintain our competitive position.
Ease of Use and Reliability. We believe we have integrated our thermal
wave technology into easy-to-use and reliable process control metrology systems.
These systems are configured specifically for use by semiconductor device
manufacturers and feature automated wafer handling, automated data collection,
statistical data processing and data management.
Installed Base. Virtually all major semiconductor manufacturers use Therma-
Probe systems to monitor and control their ion implant processes. In addition,
virtually all major manufacturers of ion implant equipment utilize Therma-Probe
systems to help develop and qualify their implanters. Additionally, our
engineers have extensive experience in addressing many different types of ion
implant applications and provide valuable assistance to our customers, thereby
strengthening our relationships with them. We believe our significant installed
base of Therma-Probe systems acts as a barrier to entry for current and
potential competitors in the ion implant measurement market.
Continuous Improvement. We continue to develop, manufacture and market new
and improved Therma-Probe systems to enhance system capability and to lower the
cost of ownership to the customer. For example, we recently introduced the TP-
630, which possesses state of the art ion implant measurement technology for
wafer sizes up to 300 millimeters.
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The following table summarizes our improvements to the Therma-Probe product
family:
Year
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System Introduced Description of Innovation/Advancement
- ----------- ---------- -------------------------------------------------------
TP-200 1985 Introduced first non-destructive process control
metrology system to measure ion implantation.
TP-300 1987 Added cassette-to-cassette wafer handling and
automation software to the capability of the TP-200.
TP-400 1992 Significantly improved repeatability and added second
cassette station for tool calibration.
TP-500 1996 Built on the same platform as the OP-2600, added
pattern recognition and improved reliability and
throughput.
TP-630 1998 Expanded wafer measurement capability to 300
millimeters.
Opti-Probe Product Family
Our Opti-Probe systems were developed to address the limitations of
conventional thin film metrology systems. Opti-Probe systems combine the thin
film metrology capabilities of spectrometers, reflectometers and ellipsometers
into a single integrated system. We believe a combination of measurement
technologies is critical to perform advanced thin film processes. We are a
pioneer in providing products that possess combination film measurement
technologies. We believe we will continue to be the industry leader as the need
for combinations of technologies grows. By March 31, 1999, 642 Opti-Probe
systems have been installed in major semiconductor fabrication facilities
worldwide. By March 31, 1999, we believe Opti-Probe systems had captured over
30% of the thin film measurement market. The selling prices for Opti-Probe
systems range normally from approximately $450,000 to $900,000.
We believe our Opti-Probe systems offer technological advantages and
features that distinguish them from thin film metrology systems offered by our
competitors:
Proprietary Technology. Conventional spectrometers and ellipsometers are
unable to meet the current and future requirements of semiconductor fabrication
facilities. 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 determine thickness and
optical parameters on one or more films. Our Opti-Probe systems combine up to
five distinct measurement technologies, three of which we have patented.
Additionally, we hold patents on the use of many of the combinations of these
thin film measurement technologies. Because of the wealth of data that can be
obtained from these combined optical technologies, it is possible to determine
the thickness and optical parameters of one or more films simultaneously. In
addition, since our proprietary technologies employ a highly focused laser beam,
Opti-Probe systems can perform measurements with a spot size that is the
smallest in the industry. Although our competitors have now introduced systems
that contain both spectrometers and ellipsometers in one tool, we have patented
the technique of combining the measurement data from these technologies. We
believe our patented technologies, and the patented combinations thereof, result
in a superior product.
Ease of Use and Reliability. We believe our Opti-Probe systems are regarded
as easy-to-use and highly reliable. These systems are configured specifically
for semiconductor device manufacturers and feature automated wafer handling,
advanced image processing, automated data collection, statistical data
processing and data management.
Proprietary Software. We believe our proprietary software incorporated into
Opti-Probe systems is superior to that of the competition. 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, or 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. We have a staff of over fifty
experienced applications scientists and
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engineers stationed worldwide near all major customers that provides full
applications support to develop new recipes as device manufacturing processes
change.
Continuous Improvement. While we have achieved rapid market share growth in
the thin film metrology market with our current Opti-Probe systems, we continue
to develop, manufacture and market new and improved systems. We believe we
provide the semiconductor industry with thin film metrology systems that operate
with greater reliability in the deep ultra-violet region of the optical
spectrum. This is of paramount importance since device manufacturers are now
developing patterning technology utilizing optical radiation in this ultra-
violet region.
In 1998, we introduced the Opti-Probe 5000 series, which integrates up to
two additional measurement technologies into the Opti-Probe product family. As a
result, the Opti-Probe 5000 series has up to five independent, yet fully
integrated measurement technologies. We believe current competitive products
include no more than two independent measurement technologies. The two
additional technologies that have been integrated into the 5000 series are
spectroscopic ellipsometry and absolute laser ellipsometry, each of which has
expanded the Opti-Probe's measurement capabilities and improved measurement
integrity.
Spectroscopic ellipsometry has long been recognized as a powerful thin film
characterization technology. However, we believe that spectroscopic
ellipsometry, by itself, still suffers from slow measurement time and poor
measurement integrity. The poor measurement integrity arises from high
sensitivity to small process changes due to the difficulties in measuring
thickness and material parameters simultaneously with only wavelength dependent
technologies. The Opti-Probe 5000 series has been designed to overcome these
limitations by integrating spectroscopic ellipsometry with up to four other
independent measurement technologies to accelerate the ability to determine the
correct thin film solution. Furthermore, by integrating spectroscopic
ellipsometry, a wavelength dependent measurement, with our proprietary beam
profile reflectometry, or BPR(TM), an angle dependent measurement, we believe
the Opti-Probe 5000 series will overcome the excessive sensitivity to small
process changes.
The addition of absolute laser ellipsometry, or AE(TM), to Opti-Probe
systems enable stable, reference-free absolute measurements on ultra-thin films
with high precision and repeatability. Integrating absolute laser ellipsometry
with our proprietary beam profile ellipsometry, or BPE(TM), provides fast,
precise and small spot size film measurements. We believe the successful market
transition to the Opti-Probe 5000 series will further strengthen our
technological capabilities in the thin film measurement market. We sold our
first Opti-Probe 5000 series system in April 1998 and, as of March 31, 1999,
have sold 18 Opti-Probe 5000 series systems.
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The following table summarizes our improvements to the Opti-Probe product
family:
Year
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System Introduced Description of Innovation/Advancement
- ----------- ---------- -------------------------------------------------------
OP-1000 1992 Introduced a new patented optical technology, BPR(TM),
to measure thin film deposition and removal.
OP-2000 1993 Integrated BPR(TM) with a new patented optical
technology, BPE(TM), to enhance measurement
capabilities.
OP-2600 1994 Integrated BPR(TM), BPE(TM) and Spectrometry to further
enhance measurement capabilities.
OP-2600 DUV 1996 Integrated deep ultra-violet reflectance with the
existing system to expand measurement range.
OP-3260 1996 Increased throughput of Opti-Probe.
OP-3260 DUV 1996 Integrated OP-3260 system with deep ultra-violet
reflectance.
OP-5200 Series 1998 Integrated up to five measurement technologies
(BPR(TM), BPE(TM) and deep ultra-violet reflectance
with Spectroscopic Ellipsometry and AE(TM)).
OP-5300 Series 1998 Expanded OP-5200 series wafer measurement capability to
300 millimeters.
New Product Initiatives
We are currently pursuing several new Fab Productivity Enhancement(TM)
product initiatives. We are combining separate metrology systems into one tool.
In addition, we are developing in-situ systems to improve the direct control of
process equipment. Semiconductor manufacturers use in-situ metrology systems in
their process equipment to improve the direct control of process equipment and
to provide real-time measurement of product wafers. Although this market is in
its infancy, the industry's need to improve process tool productivity through
increased uptime and higher equipment utilization is expected to bring rapid
growth to this industry sector. We are also developing solutions to network
these systems. Additionally, we are developing the Meta-Probe system, a thin
film metrology system specifically designed to measure the thickness and
material properties of opaque and metallic films. These materials are
increasingly being used by semiconductor manufacturers as the industry moves to
0.25 micron and 0.18 micron feature sizes with an increase in the number and
complexity of the metal layers. In addition, the accelerated drive towards the
use of copper rather than aluminum layers produces a need for better metal
metrology products. The Meta-Probe system, as a non-contact, non-destructive
metrology system, will reduce the quantity of test wafers thereby decreasing the
cost of the semiconductor manufacturing process. Most existing metal film
metrology systems cannot perform tests on product wafers, and thus, we believe,
our Meta-Probe system will be even more cost effective for the next generation
300 millimeter wafer size.
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Customers
Therma-Wave sells its products to leading semiconductor and semiconductor
equipment manufacturers throughout the world. Certain of our top customers are
listed below:
Advanced Micro Devices, Inc. (AMD) Siemens AG
Chartered Semiconductor Ltd. STMicroelectronics N.V.
Intel Corporation Taiwan Semiconductor Manufacturing
Lucent Technologies Corp. (TSMC)
Samsung America, Inc. Toshiba Corporation
UMC Group
Sales to Intel and AMD represented approximately 23% and 18% of our net
revenues for fiscal 1999. Sales to Intel represented approximately 23% of our
net revenues for fiscal 1998. Sales to Intel and Samsung represented
approximately 13% and 10%, respectively, for fiscal 1997. Our top five customers
accounted for approximately 41%, 45% and 53% of our net revenues in fiscal 1997,
1998 and 1999.
Sales and Marketing
We maintain sales offices and regional sales representatives throughout the
world. In the United States, we maintain sales offices in California, Florida
and Texas. We also utilize manufacturers' sales representatives to cover those
regions of the United States with too few customers to support a direct sales
effort. In Asia, we maintain sales offices in Japan, Korea, Singapore and
Taiwan. The Japan, Singapore and Taiwan offices work with manufacturers' sales
representatives to sell our products to customers in Japan and Taiwan, while the
Korean office sells to customers directly. We also work with manufacturers'
sales representatives in Singapore, Malaysia, Thailand and China. In Europe, we
maintain a sales office in the United Kingdom and work with manufacturers' sales
representatives throughout the rest of Europe.
In addition, we provide 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 our employees in that territory. In the United States, we have
field service and applications engineers located in Arizona, California,
Florida, Massachusetts, New Mexico, Oregon and Texas. Certain customers, such as
Intel, contract dedicated site-specific field service and applications
engineers. In Asia, we provide customer support in Japan, Taiwan, Korea and
Singapore. In Europe, we maintain a customer support office in the United
Kingdom to support customers there and to assist the field service engineers of
our European manufacturers, sales representatives in the rest of Europe.
Applications personnel supporting continental Europe are located in France,
Germany and Italy.
We provide our customers with comprehensive support before, during and
after delivery of our systems. Prior to shipment, our support personnel
typically assist the customer in site preparation and inspection and typically
provide customers with training at our facilities or at the customer's location.
Our customer training programs include instructions in the maintenance of our
systems and in system hardware and software tools for optimizing the performance
of our systems. Our field support personnel work with the customers' employees
to install the system and demonstrate system readiness. In addition, we maintain
a group of highly skilled applications scientists to respond to customers'
process needs worldwide when a higher level of technical expertise is required.
We generally warrant our products for a period of up to 12 months from
system acceptance. 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.
Our field service engineers may also provide customers with repair and
maintenance services on a fee basis. Our applications engineers and scientists
are also available to work with the customers on recipe development.
Additionally, for a fee, we train customers to perform routine maintenance on
their purchased systems. We also provide a 24-hour telephone help-line.
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See Note 10 to Notes to Consolidated Financial Statements for a summary of
our operations in certain geographic areas.
Research and Development and Engineering
The process control metrology market is characterized by continuous
technological development and product innovations. We believe that continued and
timely development of new products and enhancements to existing products is
necessary to maintain our competitive position. Accordingly, we devote a
significant portion of our personnel and financial resources to engineering and
research and development programs. As of March 31, 1999, our research,
development and engineering staff was comprised of 69 persons. We seek to
maintain our close relationships with customers to make improvements in our
products which respond to customers' needs. For example, several of the
improvements relating to the Opti-Probe product family were developed in
cooperation with some of our major customers to address the need for more
capable thin film measurement systems.
Software development accounts for a significant portion of our research and
development efforts. We are currently transitioning all of our software
applications from DOS to the Microsoft NT operating system in order to better
serve our customers.
Our 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. We have research
and development and engineering staffs which work both on developing new
products and features and on responding to the particular needs of customers.
Engineering and research and development expenses were $15.1 million in
fiscal 1999, $19.1 million in fiscal 1998, and $13.1 million in fiscal 1997, or
23%, 17%, and 12% of net revenues for those periods, respectively. We expect
engineering and research and development expenditures will continue to represent
a substantial percentage of our revenues for the foreseeable future.
Manufacturing
Our manufacturing strategy is to produce high quality, cost effective
assemblies and systems. We currently perform the majority of our system assembly
activities in-house. In order to lower production costs in the future, we intend
to perform only those manufacturing activities that add significant value or
that require unique technology or specialized knowledge. As a result, we expect
to rely increasingly on subcontractors and turnkey suppliers to fabricate
components, build assemblies and perform other activities in a cost effective
manner.
Our principal manufacturing activities include assembly and test work, both
of which are conducted at our facility in Fremont, California. Assembly
activities include inspection, subassembly and final assembly. Test activities
include 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 our finished systems. These components and
subassemblies are obtained from a limited group of suppliers, and occasionally
from a single source supplier. While we use standard components and
subassemblies wherever possible, most mechanical parts, metal fabrications and
critical components are engineered and manufactured to our specifications. We
have 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 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 our dependence on these suppliers should
supply lines become interrupted. The partial or complete loss of such suppliers
could increase our manufacturing costs or delay product shipments while we
qualify new suppliers. Additionally, any such loss could require us to redesign
products, thereby having a material adverse effect on our
12
<PAGE>
business or customer relationships. Furthermore, a significant increase in the
price of one or more of these components could adversely affect our financial
condition or results of operations.
We schedule production based upon firm customer commitments and anticipated
orders. We have structured our production process and facility to be driven by
both orders and forecasts and have adopted a modular system architecture to
increase assembly efficiency and test flexibility. Cycle times for our products
are currently two to four months. We believe these cycle times will improve as
we continue to emphasize manufacturability in our new product designs.
We conduct the assembly of certain optical components and final testing of
our systems in clean-room environments. This procedure is intended to (1) reduce
the amount of particulates and other contaminants in the final assembled system;
and (2) test our products against our 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 our ongoing quality program, all systems
are monitored during the installation process.
Competition
The market for semiconductor capital equipment is highly competitive. We
face substantial competition from established companies in each of the markets
that we serve. Some of our competitors have greater financial, engineering,
manufacturing and marketing resources and broader product offerings than Therma-
Wave. Significant competitive factors in the market for metrology systems
include system performance, ease of use, reliability, cost of ownership to the
customer, technical support and customer relationships. We believe we compete
favorably on the basis of these factors in each of our served markets. We
compete with both larger and smaller United States and Japanese companies in the
markets we serve. European companies are generally not significant competitors
in markets we serve.
Our Therma-Probe systems compete primarily with other metrology systems
designed to measure ion implant dose, such as contact and destructive four-point
probe measurement systems, including those manufactured by KLA-Tencor
Corporation, Kokusai Electric Ltd. and Bio-Rad Semiconductor Systems. Our
Therma-Probe systems are the semiconductor industry's predominant non-contact,
non-destructive ion implant metrology systems for product wafers. Several years
ago, Jenoptik GmbH introduced a competitive product to our Therma-Probe systems,
which utilized thermal wave technology. In November 1997, we received a
favorable verdict for patent infringement by Jenoptik in the United States. As a
result of the settlement of this litigation, Jenoptik has agreed not to sell any
of such products in the United States and to pay us a royalty fee for systems
sold in Japan. To date, the sale of these products by Jenoptik has not had a
material impact on our market position. Our Opti-Probe systems primarily compete
with thin film metrology systems manufactured by KLA-Tencor, Rudolph
Technologies, Nanometrics and Dai Nippon Screen.
In recent years, there has been significant merger and acquisition activity
among our competitors and potential competitors. Acquisitions by our competitors
and potential competitors could allow them to expand their product offerings,
which could afford such competitors and potential competitors an advantage in
meeting customers' demands. The greater resources, including financial,
marketing and support resources, of competitors engaged in these acquisitions
could permit them to accelerate the development and commercialization of new
products and the marketing of existing products to their larger installed bases.
Accordingly, such business combinations and acquisitions could have a
detrimental impact on both our market share and the pricing of our products,
which could result in a material adverse effect on our business and results of
operations.
Patents and Proprietary Rights
We believe the success of our business depends as much on the technical
competence, creativity and marketing abilities of our employees as on the
protection derived from our patents and other proprietary
13
<PAGE>
rights. Nevertheless, our success will depend, at least in part, on our ability
to obtain and maintain patents and proprietary rights to protect our technology.
We have a policy of seeking patents where appropriate on inventions
concerning new products and improvements as part of our ongoing engineering and
research and development activities. We have acquired a number of patents
relating to our two key product families, the Opti-Probe and Therma-Probe
systems. As of March 31, 1999, we owned 26 U.S. patents with expiration dates
ranging from 2004 to 2017 and had filed applications for eleven additional U.S.
patents. In addition, we owned 25 foreign patents with expiration dates ranging
from 2004 to 2017 and had filed applications for eleven additional foreign
patents.
There can be no assurance that any of our pending patent applications will
be approved, that we will develop additional proprietary technology that is
patentable, that any patents owned by or issued to us will provide us 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 our patents. Any of the foregoing results could have a material
adverse effect on our business, financial condition or results of operations.
In addition to patent protection, we rely upon trade secret protection for
our confidential and proprietary information and technology. We routinely enter
into confidentiality agreements with our employees. However, there can be no
assurance that these agreements will not be breached, that we will have adequate
remedies for any breach or that our confidential and proprietary information and
technology will not be independently developed by, or become otherwise known, to
third parties.
As of March 31, 1999, we owned five registered trademarks in the U.S. and
one in Japan and had filed 11 trademark registration applications in the U.S.
and one in Japan.
Employees
As of March 31, 1999, we employed 338 persons, including 69 in engineering,
research and development, 83 in manufacturing, 138 in customer support, 21 in
sales and marketing and 27 in executive and administrative functions. Many of
our employees are highly trained and hold advanced post-graduate degrees in
science and engineering. None of our employees are represented by a labor union
or covered by a collective bargaining agreement. We consider our employee
relations to be good. We believe we have low employee turnover relative to our
industry and have been able to attract and retain a highly talented group of
managers, designers and engineers which enables us to continually improve our
products and customer support.
ITEM 2. PROPERTIES
Our executive offices and manufacturing, engineering, research and
development operations are located in a 102,000 square foot building in Fremont,
California with approximately 800 square feet of Class 100 clean rooms for
customer demonstrations and approximately 10,000 square feet of Class 1000 clean
rooms for manufacturing. This facility is occupied under a lease expiring in
2006 at an aggregate annual rental expense of approximately $1.0 million. We
have the option of extending this lease for another 15 years after 2006. We own
substantially all of the equipment used in our facilities. We believe that our
existing facilities and capital equipment are adequate to meet our current
requirements and that suitable additional or substitute space is readily
available if needed. Capital expenditures for fiscal 2000 are expected to be
approximately $1.2 million.
We also lease sales and customer support offices in California, Florida,
Texas, Japan, Korea, Taiwan and the United Kingdom.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On July 19, 1994, we filed a patent infringement suit against Jenoptik in
the United States District Court for the Northern District of California. We
alleged that the manufacture and sale by Jenoptik of its TWIN and TWIN SC
systems infringed six of our United States patents that are related to our
Therma-Probe ion implant metrology systems. Jenoptik denied infringement and
claimed that our patents were invalid and unenforceable.
On February 1, 1996, we filed a patent infringement suit against Jenoptik
in the Patent Court in Dusseldorf, Germany. We alleged that the manufacture and
sale by Jenoptik of its TWIN and TWIN SC systems infringed our German
counterpart to one of our United States patents being asserted against Jenoptik
in the United States lawsuit. This German counterpart patent was found to be
invalid by a patent court in Munich, Germany.
On November 26, 1997, we received a favorable jury verdict in our United
States patent infringement suit against Jenoptik. The jury found all six of our
patents valid and concluded that Jenoptik infringed all thirty-one claims at
issue from these patents. As a result of the settlement of this litigation,
Jenoptik has agreed not to sell any of such products in the United States and to
pay us a royalty fee for systems sold in Japan. To date, the sale of these
products by Jenoptik has not had a material impact on our market position. This
settlement resolved all outstanding legal claims and pending appeals relating to
these matters.
On June 5, 1998, at our request, the United States Patent Office initiated
an interference proceeding between Therma-Wave and Rudolph Technologies. The
subject matter of the interference relates to ellipsometer technology which
Rudolph employs in its commercial devices. We believe we developed and patented
this technology prior to Rudolph. The interference proceedings will determine
ownership of the technology. A successful outcome of the interference proceeding
may result in Rudolph being required to pay us licensing fees. Since we have not
commercialized this technology, an unsuccessful outcome in the interference
proceeding would not have a material adverse effect on us.
On September 3, 1998, we were named in a patent infringement suit filed by
KLA-Tencor. KLA-Tencor alleged that it patented an aspect of the thin film
thickness measuring technology that we use in our Opti-Probe product family.
KLA-Tencor is seeking damages and an injunction to stop the sale of the
equipment they allege uses this aspect. We believe none of our products infringe
any of the claims of KLA-Tencor's patent and that their infringement allegations
are unfounded. We intend to vigorously defend our position, and we expect to
prevail.
On January 14, 1999, we commenced an action against KLA-Tencor for patent
infringement with respect to one of our fundamental thin film technology
combination patents. The suit seeks damages for patent infringement and a
permanent injunction against any future activities undertaken by KLA-Tencor or
any third party working in conjunction with them, which infringe on our patent.
The suit was filed as a counterclaim in the infringement action initiated by
KLA-Tencor and also seeks a declaratory judgment that KLA-Tencor's patent, which
we were alleged of infringing, is invalid and not infringed by any of our
systems.
We are presently in discussions with Nanometrics regarding patent issues.
Specifically, we believe some of the thin film thickness measuring devices sold
by Nanometrics infringes upon one of our fundamental thin film technology
combination patents. Nanometrics has alleged that an aspect of the thin film
thickness measuring technology that we use in our Opti-Probe product family
infringes upon a patent which it owns. We believe that none of our products
infringe any of the claims of Nanometrics' patent and that its infringement
allegations are unfounded. We cannot predict the outcome of these discussions
but we believe they will not have a material adverse effect on our business,
financial condition or results of operations.
There can be no assurances, however, that we will prevail in any ongoing
patent litigation described above. We believe, however, the litigation described
above will not have a material adverse effect on our business, financial
condition or results of operations.
15
<PAGE>
We are 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 our business or financial condition.
Environmental Matters
Therma-Wave, like all manufacturing companies, is subject to various federal,
state and local environmental statutory requirements. We believe we are in
material compliance with existing applicable environmental laws and regulations
and possess all permits and licenses necessary to conduct our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
None.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data as of March 31, 1998 and
1999, and for the fiscal years ended March 31, 1997, 1998 and 1999 have been
derived from our audited consolidated financial statements and notes thereto,
which are included elsewhere in this Form 10-K. The selected historical
financial data as of March 31, 1995, 1996 and 1997 and for the fiscal years
ended March 31, 1995 and 1996 were derived from our audited consolidated
financial statements, which do not appear elsewhere in this Form 10-K. Our
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 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
Form 10-K.
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data (1):
Net revenues................................................... $55,675 $79,293 $109,493 $115,459 $ 66,207
Cost of revenues............................................... 25,024 35,027 49,795 55,683 36,827
------- ------- -------- -------- --------
Gross margin................................................... 30,651 44,266 59,698 59,776 29,380
Operating expenses:
Research and development...................................... 5,942 10,072 13,050 19,057 15,130
Selling, general and administrative........................... 13,299 18,704 22,004 24,589 17,870
Amortization of goodwill and purchased intangibles............ 1,912 1,912 1,275 -- --
Recapitalization and other non-recurring expenses............. -- -- -- 4,188 --
Expenses relating to operating cost improvements.............. -- -- -- -- 1,057
------- ------- -------- -------- --------
Total operating expenses..................................... 21,153 30,688 36,329 47,834 34,057
------- ------- -------- -------- --------
Operating income (loss)........................................ 9,498 13,578 23,369 11,942 (4,677)
Interest expense............................................... 1,998 1,722 1,621 12,930 14,060
Interest income................................................ (102) (247) (346) (753) (651)
Other (income) expense, net.................................... 115 138 (14) 194 (6)
------- ------- -------- -------- --------
Income (loss) before provision for income taxes................ 7,487 11,965 22,108 (429) (18,080)
Provision (benefit) for income taxes........................... -- 4,684 9,007 604 (2,350)
------- ------- -------- -------- --------
Net income (loss).............................................. $ 7,487 $ 7,281 $ 13,101 $ (1,033) $(15,730)
======= ======= ======== ======== ========
Net income (loss) attributable to common stockholders (2)...... $ 7,487 $ 7,281 $ 13,101 $ (1,771) $(16,562)
======= ======= ======== ======== ========
Other Financial Data:
EBITDA (excluding non-recurring charges) (3)................... $12,496 $17,185 $ 27,113 $ 19,723 $ 974
Cash provided by (used in) operating activities................ 1,876 5,867 11,860 8,113 745
Cash used in investing activities.............................. (2,048) (4,965) (1,575) (2,900) (1,389)
Cash provided by (used in) financing activities................ 5,701 (1,541) (1,234) (1,532) 467
Capital expenditures........................................... 1,616 4,361 1,091 2,900 862
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................... $ 8,329 $ 7,690 $16,741 $ 20,422 $ 20,245
Working capital.............................................. 17,240 23,740 38,720 43,348 31,394
Total assets................................................. 45,081 53,056 68,620 89,762 72,352
Long-term debt............................................... 23,100 23,100 23,100 115,000 115,000
Mandatorily redeemable convertible preferred stock (2)....... -- -- -- 14,515 15,347
Stockholders' equity (net capital deficiency)................ (379) 6,903 20,145 (70,990) (86,971)
</TABLE>
---------
(1) On May 16, 1997, we effected the recapitalization. We issued $115 million
in aggregate principal amount of 10 5/8% senior notes in connection with
the recapitalization.
(2) We issued shares of preferred stock as part of the recapitalization. The
fair value of the preferred stock at March 31, 1999 of $15,347 represents
the liquidation value plus accrued dividends. Dividends on the preferred
stock accrue at a rate of 6.0% per annum. The preferred stock has a
scheduled redemption date of May 17, 2004 and is otherwise redeemable by us
at any time at our sole discretion.
(3) "EBITDA" is defined herein as income before income taxes, plus
depreciation, amortization, interest expense, interest income and other
non-operating (income) expenses, net. ''EBITDA (excluding non-recurring
charges)'' in the fiscal year ended March 31, 1998 and 1999 does not
include $4,188 and $1,057 in recapitalization and other non-recurring
expenses, respectively. Including such non-recurring charges, EBITDA would
have been reduced to $15,537 and $(83) for fiscal 1998 and 1999,
respectively. We believe EBITDA and EBITDA (excluding non-recurring
charges) are widely accepted financial indicators of a company's historical
ability to service and/or incur indebtedness. However, EBITDA and EBITDA
(excluding non-recurring charges) 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 and EBITDA (excluding non-
recurring charges) as defined herein may not be comparable to similarly
titled measures reported by other companies.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
We are a worldwide leader in the development, manufacture, marketing and
service of process control metrology systems for use in the manufacture of
semiconductors. Process control metrology is used to monitor process parameters
in order to enable semiconductor manufacturers to reduce feature size, increase
wafer size, increase equipment productivity and improve device performance. Our
current process control metrology systems are principally used to measure ion
implantation and thin film deposition and removal. We have developed two product
families of process control metrology systems: Therma-Probe systems and Opti-
Probe systems.
Therma-Probe Product Family. Therma-Probe systems utilize our proprietary
thermal wave technology and are the predominant non-destructive process control
metrology systems used to measure the critical ion implantation process on
product wafers in the fabrication of semiconductors.
Opti-Probe Product Family. Opti-Probe systems significantly improve upon
existing thin film metrology systems by successfully integrating different
measurement technologies and utilizing our proprietary optical technologies.
We derive our revenues from system sales, sales of replacement and spare
parts, and service contracts. During the year ended March 31, 1999, we derived
approximately 78% of our revenues from system sales, 12% from sales of
replacement and spare parts, including associated labor, and 10% from service
contracts. In fiscal 1998, we derived approximately 89% of our revenues from
system sales, 6% from sales of replacement and spare parts, including associated
labor, and 5% from service contracts. Revenue from system sales, replacement 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. During fiscal 1998 and 1999, our two largest customers were U.S.
based companies. These companies contributed to system, replacement and spare
parts, and service contract revenues.
International sales accounted for approximately 52% and 69% of our total
revenues for fiscal 1998 and 1999, respectively. We anticipate that
international sales will continue to account for a significant portion of our
revenue in the foreseeable future. A substantial portion of our international
sales are denominated in U.S. dollars. As a result, changes in the values of
foreign currencies relative to the value of the U.S. dollar can render our
products comparatively more expensive. Although we have not been negatively
impacted in the past by foreign currency changes in Japan, Korea, Taiwan and
Europe, such conditions could negatively impact our international sales in
future periods.
We were acquired by Toray and Shimadzu in fiscal 1992. As a result, we
incurred substantial interest expense and amortization expense from goodwill and
purchased intangibles in periods prior to the recapitalization. In May 1997, we
effected the recapitalization. We incurred significant indebtedness in
connection with the recapitalization.
On June 22 and September 24, 1998, we announced and implemented an
operating cost improvement program aimed at bringing operating expenses in line
with our current operating environment. These efforts were in response to the
continued cutbacks in capital equipment investment by semiconductor
manufacturers. As a result of the implementation of this program, we recorded a
charge of $1.1 million in fiscal 1999, which consisted principally of severance
and other related charges.
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<PAGE>
Results of Operations
The following table summarizes our historical results of operations as a
percentage of net revenues for the periods indicated. The historical financial
data for fiscal 1997, 1998 and 1999 were derived from our audited consolidated
financial statements included elsewhere in this Form 10-K. 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 Form 10-K.
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Statement of Operations Data (1):
Net revenues ................................................ 100.0% 100.0% 100.0%
Cost of revenues ............................................ 45.5 48.2 55.6
----- ----- -----
Gross margin ................................................ 54.5 51.8 44.4
Operating expenses:
Research and development expenses ......................... 11.9 16.5 22.9
Selling, general and administrative expenses .............. 20.1 21.3 27.0
Amortization of goodwill and purchased intangibles ........ 1.2 -- --
Recapitalization and other non-recurring expenses ......... -- 3.6 --
Expenses relating to operating cost improvements .......... -- -- 1.6
----- ----- -----
Total operating expenses ............................... 33.2 41.4 51.5
----- ----- -----
Operating income (loss) ..................................... 21.3 10.4 (7.1)
Interest expense ............................................ 1.5 11.2 21.2
Interest income ............................................. (0.4) (0.6) (1.0)
Other expense, net .......................................... -- 0.2 --
----- ----- -----
Income (loss) before provision for income taxes ............. 20.2 (0.4) (27.3)
Provision (benefit) for income taxes ........................ 8.2 0.5 (3.5)
----- ----- -----
Net income (loss) ........................................... 12.0% (0.9%) (23.8%)
===== ===== =====
Other Financial Data:
EBITDA (excluding non-recurring charges) (2) ................ 24.8% 17.1% (1.5%)
Cash provided by operating activities ....................... 10.8% 7.0% 1.1%
Cash used in investing activities ........................... (1.4%) (2.5%) (2.1%)
Cash provided by (used in) financing activities ............. (1.1%) (1.3%) 0.7%
Capital expenditures ........................................ 1.0% 2.5% 1.3%
</TABLE>
---------
(1) On May 16, 1997, we effected the recapitalization. We issued $115 million
in aggregate principal amount of 10/5//8% senior notes in connection with
the recapitalization.
(2) "EBITDA" is defined herein as income before taxes, plus depreciation,
amortization, interest expense, interest income and other (income)
expenses, net. "EBITDA (excluding non-recurring charges)" as a percent of
sales for the fiscal year ended March 31, 1998 and 1999 does not include
recapitalization and other non-recurring expenses. Including such non-
recurring charges, EBITDA as a percent of sales would have been 13.5% and
(0.1%) for fiscal 1998 and 1999, respectively.
Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998
Net Revenues. Net revenues for the fiscal year ended March 31, 1999 and
1998 were $66.2 million and $115.5 million, respectively. Compared to the
corresponding period of fiscal 1998, net revenues decreased $49.3 million or
42.7%. The decline in revenues is attributable to the current downturn in the
global semiconductor industry due primarily to excess dynamic random access
memory ("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 or delay both purchases of semiconductor manufacturing equipment and
construction of new fabrication facilities. As a result of these industry
factors, both the Therma-Probe and Opti-Probe products experienced lower unit
sales and average selling prices attributing to a decline in
20
<PAGE>
system sales from fiscal 1998 to 1999. The decline in system sales is primarily
attributable to decreased Opti-Probe sales as a result of these industry
factors. Therma-Probe sales decreased at a lesser rate as such systems sales
began decreasing during fiscal 1998 from the decrease in the number of new
semiconductor manufacturing facilities being constructed. Revenue from spare
parts and service contracts increased slightly as our customer base continued to
expand and require servicing.
Net revenues attributable to international sales for the fiscal years ended
March 31, 1998 and 1999 accounted for 52% and 69% of our total revenues for such
periods, respectively. Revenue from the U.S. decreased approximately 60% from
fiscal 1998 to 1999. This decrease was primarily caused by the slowdown in the
personal computer market and increased capital investments in European fab
facilities, thereby resulting in an increase in our European revenues. Revenue
from Asia decreased approximately 53% from fiscal 1998 to 1999 as a result of
the economic conditions in the Asia Pacific region. Our sales to customers in
Asian markets represented approximately 40% and 33% of total net revenues for
fiscal 1998 and 1999, respectively. No single customer in Asia accounted for
more than 10% of our total net revenues in fiscal 1998 or 1999.
Historically, we have experienced volatility from Asian markets. Over the
last 18 months, countries in the Asia Pacific region, including Japan, Korea and
Taiwan, have experienced weaknesses in their currency, banking and equity
markets. These weaknesses began to adversely affect our sales to semiconductor
device and capital equipment manufacturers located in these regions in the
fourth quarter of calendar 1997 and have continued to adversely affect them in
calendar 1999. Although we have recently received an increased level of orders
from customers in the Asia Pacific region, turbulence in the Asian markets could
adversely affect our sales at least through the end of calendar 1999.
Gross Margin. Gross margin decreased 50.8% from $59.8 million in fiscal
1998 to $29.4 million in fiscal 1999. As a percentage of net revenues, gross
margin decreased from 51.8% in fiscal 1998 to 44.4% in fiscal 1999. The decrease
in gross margin was primarily attributable to the decline in revenues. System
gross margins were reduced as a result of lower average selling prices and
relatively fixed manufacturing overhead costs. Replacement and spare parts and
service contract gross margins were reduced as a result of our expanded service
organization. The results of our operating cost improvement program did not
wholly offset the decline in revenues we experienced.
Research and Development ("R&D") Expenses. R&D expenses were $19.1 million
and $15.1 million for fiscal 1998 and 1999, respectively. Compared to the
corresponding period of fiscal 1998, R&D expenses decreased $4.0 million, or
20.6% for fiscal 1999. R&D expenses as a percentage of net revenues for fiscal
1999 increased to 22.9% from 16.5% for fiscal 1998. R&D expenses relating to the
new Opti-Probe 5000 series and 300 millimeter products have decreased from prior
periods as these projects near completion. Although we are currently in a
downturn, we believe that technical leadership is essential to our success and
expect to continue to commit significant resources to R&D projects. In the near
term, we expect our R&D expenses to increase in both absolute dollar terms and
as a percentage of our net revenues.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses were
$24.6 million and $17.9 million for fiscal 1998 and 1999, respectively. Compared
to the corresponding period of fiscal 1998, SG&A expenses decreased $6.7
million, or 27.3%. SG&A expenses as a percentage of net revenues increased to
27.0% in fiscal 1999 from 21.3% in fiscal 1998 primarily due to lower revenue
levels. The decrease in SG&A expenses was due primarily to the decrease in sales
commissions as a result of lower revenues and the decrease in headcount because
of the operating cost improvement program. During fiscal 1999, the decline in
overall revenues exceeded the benefits generated from the operating cost
improvement program.
Recapitalization and Other Non-Recurring Expenses. Recapitalization and
other non-recurring expenses were $4.2 million, which consisted mainly of non-
cash charges related to the arrangements for our executive officers in
connection with the recapitalization.
Expenses Relating to Operating Cost Improvements. On June 22 and September
24, 1998, we announced and implemented an operating cost improvement program
aimed at bringing operating expenses
21
<PAGE>
in line with our current operating environment. All terminated employees were
notified at the time the program was announced. Certain leased facilities and
fixed assets were consolidated. Total cash outlays for fiscal 1999 were
$832,000. Non-cash charges of $100,000 were primarily for asset write-offs. The
balance of $125,000 at March 31, 1999 primarily represents cash payments and
will be utilized in fiscal 2000.
Interest Expense. Interest expense for fiscal 1998 and 1999 were $12.9
million and $14.1 million, respectively. As a percentage of net revenues,
interest expense increased from 11.2% in fiscal 1998 to 21.2% in fiscal 1999.
The increased interest expense from the prior fiscal year is attributable to the
additional debt incurred as part of the recapitalization.
Provision for Income Taxes. For fiscal 1998 and 1999, we recorded a
provision for income taxes of $0.6 million and a benefit for income taxes of
$2.4 million, respectively. Our tax benefit for fiscal 1999 reflects a tax
benefit rate of 13% based upon our loss carryback potential.
Net Loss. Net loss for fiscal 1998 and 1999 were $1.0 million and $15.7
million, respectively, for the reasons described above.
Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997
Net Revenues. Net revenues for the fiscal year ended March 31, 1998
increased by $6.0 million, or 5.4%, to $115.5 million from $109.5 million for
the fiscal year ended March 31, 1997. This is primarily attributed to higher
Opti-Probe sales and increased service revenues, partially offset by a decrease
in Therma-Probe sales. Therma-Probe sales decreased as a result of the decrease
in the number of new semiconductor manufacturing facilities being constructed.
International sales, primarily export sales from the United States to foreign
countries, accounted for approximately 52.3% and 59.7% of our total revenues for
fiscal 1998 and 1997, respectively.
Gross Margin. Gross margin for the fiscal year ended March 31, 1998
increased by $0.1 million to $59.8 million from $59.7 million for the fiscal
year ended March 31, 1997. As a percentage of net revenues, gross margin for the
fiscal year ended March 31, 1998 decreased to 51.8% from 54.5% for the
comparable period ended March 31, 1997. This decrease is primarily attributable
to increased investment in our service organization. As our customer base
expanded, our service organization grew to support a rapid increase in the
number of systems in the field in order to maintain a high level of customer
service. This directly affected replacement and spare part, and service contract
gross margins. Gross margins in product sales remained relatively constant from
year to year.
Research and Development Expenses. R&D expenses were $19.1 million and
$13.1 million for the fiscal years ended March 31, 1998 and 1997, respectively.
Compared to fiscal year 1997, R&D expenses increased $6.0 million, or 46.0%. R&D
expenses as a percentage of net revenues for the fiscal year ended March 31,
1998 increased to 16.5% from 11.9% for the comparable period ended March 31,
1997. The increase in R&D expenses is due to the increased headcount and
increases in project expense related to new product development. We believe that
technical leadership is essential to our success and expect to continue to
commit significant resources to research and development projects.
Selling, General and Administrative Expenses. SG&A expenses were $24.6
million and $22.0 million and, as a percentage of net revenues, were 21.3% and
20.1% for the fiscal years ended March 31, 1998 and 1997, respectively. The
increase is a result of increased spending in marketing and related expenses for
new products, slightly offset by a decrease in sales commissions.
Amortization of Goodwill and Purchased Intangibles. Amortization of
goodwill and purchased intangibles decreased $1.3 million from the prior year as
such intangibles related to the acquisition of Therma-Wave by Toray and Shimadzu
in December 1991 were fully amortized in fiscal year 1997.
22
<PAGE>
Recapitalization and Other Non-Recurring Expenses. Recapitalization and other
non-recurring expenses for the year ended March 31, 1998 was $4.2 million. Such
charges were primarily non-cash charges related to the arrangements for our
executive officers in connection with the recapitalization.
Operating Income. Operating income for the fiscal year ended March 31, 1998
decreased by $11.5 million, or 48.9%, to $11.9 million from $23.4 million for
the fiscal year ended March 31, 1997. As a percentage of net revenues, operating
income for the fiscal year ended March 31, 1998 decreased to 10.4% from 21.3%
for the comparable period ended March 31, 1997.
Interest Expense. Interest expense for the fiscal year ended March 31, 1998
increased by $11.3 million to $12.9 million from $1.6 million for the year ended
March 31, 1997. As a percentage of net revenues, interest expense for the fiscal
year ended March 31, 1998 was 11.2% as compared to 1.5% for the year ended March
31, 1997. The increased interest expense is attributed to the additional debt
incurred as part of the recapitalization.
Provisions for Income Taxes. Income taxes for the fiscal year ended March 31,
1998 decreased by $8.4 million, or 93.3%, to $0.6 million from $9.0 million for
the year ended March 31, 1997. The effective tax rate increased to 140.8% from
40.7%, primarily due to the increase in the valuation allowance and other items,
offset by the benefit from our foreign sales corporation.
Net (Loss) Income. For the reasons stated above, earnings for the fiscal year
ended March 31, 1998 decreased to a net loss of $1.0 million from $13.1 million
of net income for the fiscal year ended March 31, 1997.
Quarterly Results of Operations
We have experienced, and expect to continue to experience, significant
fluctuations in our quarterly results. Our 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 our revenues in a particular
quarter. These factors include:
. product and customer mix,
. mix of domestic and international sales,
. specific economic conditions in the semiconductor and/or semiconductor
capital equipment industries,
. the timing of the receipt of orders from major customers,
. customer cancellations or postponement of shipments,
. specific feature requests by customers,
. production delays or manufacturing inefficiencies,
. exchange rate fluctuations,
. management decisions to commence or discontinue product lines,
. our ability to design, introduce and manufacture new products on a cost
effective and timely basis,
. the introduction of new products by us or our competitors,
23
<PAGE>
. the timing of research and development expenditures,
. acquisitions, strategic alliances and the future development of marketing
and service capabilities, and
. increased price competition.
The following table sets forth our unaudited operating results for our 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 the basic presentation thereof.
<TABLE>
<CAPTION>
Fiscal Year 1998 Fiscal Year 1999
-------------------------------------- ---------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Statement of Operations Data:
Net revenues....................... $28,205 $28,286 $29,664 $29,304 $15,246 $15,196 $17,161 $18,604
Gross margin....................... 14,942 15,148 15,091 14,595 6,267 6,313 8,204 8,596
Operating income (loss)............ 2,540 2,313 3,168 3,921 (3,546) (2,586) 608 847
Net income (loss).................. 311 (671) (186) (487) (6,090) (5,010) (2,281) (2,349)
Other Financial Data:
EBITDA (excluding non-recurring
Charges) (1)...................... $ 6,257 $ 4,149 $ 4,385 $ 4,936 $(1,876) $ (992) $ 1,823 $ 2,019
Cash provided by (used in):
Operating activities.............. (969) 4,817 (506) 4,771 (3,533) (370) (3,752) 8,400
Investing activities.............. (1,939) (936) (818) 793 (250) (222) (279) (638)
Financing activities.............. 184 (284) 404 (1,836) (30) 69 593 (165)
</TABLE>
- ----------------
(1) EBITDA (excluding non-recurring charges) in the first, second and third
quarters of fiscal 1998 does not include $2,888, $1,000 and $300,
respectively, in recapitalization and other non-recurring expenses.
Including such non-recurring charges, EBITDA for such periods would have
been reduced to $3,369, $3,149 and $4,085, respectively. EBITDA (excluding
non-recurring charges) in the first and second quarters of fiscal 1999 do
not include $582 and $475, respectively, in expenses relating to operating
cost improvements. Including such non-recurring charges, EBITDA for such
periods would have been reduced to $(2,458) and $(1,467), respectively.
Backlog
At March 31, 1999, our backlog was $16.0 million compared to $36.5 million
at March 31, 1998. Our 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 our customers and orders for spare parts
and billable service. Because of possible changes in product delivery schedules
and cancellation of product orders and because our sales will sometimes reflect
orders shipped in the same quarter that they are received, our backlog at any
particular date is not necessarily indicative of actual sales for any succeeding
period.
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital, consisting
primarily of accounts receivable, inventories, capital expenditures and debt
service. Since the recapitalization, we have funded our operating activities
principally from funds generated from operations.
24
<PAGE>
Cash flow provided by operating activities was $11.9 million, $8.1 million
and $0.7 million for the years ended March 31, 1997, 1998 and 1999,
respectively. The decrease in cash flow provided by operating activities from
fiscal 1997 to 1999 is mainly due to the increased R&D expenses and decreased
gross margins. This decrease was partially offset by a lower investment in
working capital and by the increase in non-cash recapitalization and other non-
recurring expenses.
Purchases of property and equipment were $1.1 million, $2.9 million and $0.9
million for the years ended March 31, 1997, 1998 and 1999, respectively. Capital
expenditures for fiscal 2000 are expected to be approximately $1.2 million.
In May 1997, we issued $115.0 million in aggregate principal amount of
senior notes that, together with a $20.1 million equity contribution, was used
to finance the recapitalization. In the recapitalization, we used $26.9 million
to repay outstanding borrowings, $96.9 million to redeem a portion of our common
stock, $11.0 million to pay related fees and expenses and $0.3 million for
general working capital purposes.
In conjunction with the recapitalization, we entered into a senior credit
facility with various lending institutions, and Bankers Trust Company, as agent.
The bank credit facility bears interest, at our option, at (1) the base rate
plus 1.75% or (2) the eurodollar rate plus 3.00%. Our borrowings under the bank
credit facility are secured by substantially all of our assets, a pledge of all
of the capital stock of any domestic subsidiaries and a pledge of 65% of the
capital stock of our first-tier foreign subsidiaries. The bank credit facility
matures on May 16, 2002.
During the quarter ended June 30, 1998, we amended the bank credit facility
to have our borrowing availability subject to a borrowing base formula, which
provides a maximum revolving credit facility of $30.0 million, and to adjust the
financial covenants requiring us to maintain minimum levels of EBITDA during
each six-month period ending on the last day of each fiscal quarter and minimum
levels of cumulative EBITDA from April 7, 1996 to the last day of each fiscal
quarter. The adjustments to the financial tests and covenants relate to periods
prior to March 31, 2000. For periods after that time, the financial tests and
covenants contained in the original agreement will apply. These amendments were
effected in light of the impact of the downturn in the semiconductor industry on
our operating results. Without these amendments to our bank credit facility, on
June 30, 1998, we would have violated the financial test relating to the
maintenance of minimum levels of EBITDA for the six-month period ending on such
date. We may borrow amounts under the amended bank credit facility to finance
our working capital requirements and other general corporate purposes. The
amended bank credit facility requires us to meet certain financial tests and
contains covenants customary for this type of financing. At March 31, 1999,
there was $3.5 million outstanding under a letter of credit and $17.0 million of
unused borrowing capacity under the amended bank credit facility.
Our principal sources of funds are anticipated to be cash on hand ($20.2
million as of March 31, 1999), cash flows from operating activities and, if
necessary, borrowings under the bank credit facility. In addition, we have
received a significant tax refund of $8.3 million during the first quarter of
fiscal 2000. We believe that these funds will provide us with sufficient
liquidity and capital resources for us to meet our current and future financial
obligations, as well as to provide funds for our working capital, capital
expenditures and other needs for at least the next 12 months and, assuming
continued improvement in the semiconductor industry, through the next 24 months.
No assurance can be given, however, that this will be the case. We may require
additional equity or debt financing to meet our working capital requirements or
to fund our 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 us.
Year 2000
Many computer systems used by us and our suppliers may not properly
recognize a date using "00" as the year 2000. This could result in
system/program failure or logic errors that could disrupt normal business
activities. We have established a formal project with a project office and
project team to address this issue and achieve year 2000 readiness.
25
<PAGE>
The project is focused on four key readiness areas:
. Internal Infrastructure Readiness, addressing internal hardware, software
and non-information technology systems;
. Supplier Readiness, addressing the preparedness of those suppliers
providing material incorporated into our products;
. Product Readiness, addressing product functionality; and
. Customer Readiness, addressing customer support and transactional activity.
For each readiness area, we are 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 and customers to raise awareness of the Year 2000 problem.
Internal Infrastructure Readiness Program. We are 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 September 30, 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, we are
testing and developing remediation plans for facilities and other operations.
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. We have identified and contacted key suppliers based on their
relative risks in these two areas. To date, we have received responses from more
than 95% of our key suppliers, most of which indicate that they are in the
process of developing and implementing remediation plans. Based on our
assessment of each supplier's progress to adequately address the Year 2000
issue, we have developed a supplier action list and contingency plans. We will
revisit key suppliers during the third calendar quarter of 1999 to ensure that
supplier commitments have been met. Alternate sources are being investigated for
those few vendors that we have identified as high risk, and such alternative
sources are expected to be in place by November 1, 1999. We have identified
certain key components of our products and will increase our inventory level of
these items during the fourth calendar quarter of this year. We anticipate all
of these items to be usable in our products, and therefore we do not expect such
additional inventory purchases to have a material adverse effect on our
financial condition.
Product Readiness Program. This program focuses on identifying and resolving
Year 2000 issues existing in our products. The program encompasses a number of
activities including testing, evaluation, engineering and manufacturing
implementation. Sematech is a consortium of integrated circuit manufacturers
that provides guidelines to equipment suppliers to the semiconductor industry.
We have adopted the Sematech guidelines known as Year 2000 readiness testing
scenarios as the baseline for our product testing. We believe that the use of
these scenarios should enable our products to meet standards that we believe are
generally accepted across the computer industry for Year 2000 readiness. The
testing, and subsequent remediation, of our products to meet the Sematech
guidelines has not had a material adverse impact on our operations. As of the
fourth calendar quarter of 1998, we believe that all of our products then in
production met the Sematech guidelines for Year 2000 readiness. Our customers
were notified of known risks and remediation plans in the third calendar quarter
of 1998. All customer equipment that is covered by warranty or contract will be
retrofitted by the third calendar quarter of 1999.
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
26
<PAGE>
of our customers to continue to conduct business with us. We are actively
working with our customers in this effort and anticipate completing this program
in the third calendar quarter of 1999.
In addition to the above programs, we have identified "worst case" scenarios
and developed appropriate contingency plans. The most reasonably likely worst
case scenario is a breakdown of general infrastructure, such as widespread power
failures. We have investigated most of our exposure in this area and do not
consider the foregoing a high risk. However, we have prepared for short-term
public service interruptions as part of our existing disaster recovery plan. The
plan consists of utilizing emergency power supplies, employing remote storage
facilities for copies of our vital records and using off-site backup computer
systems provided by an independent service supplier. To aid our customers,
emergency response teams are being formed within our organization to respond to
any unexpected product issues that may arise as a result of our or any third
party's failure to be Year 2000 compliant. We are selecting people for these
teams who were trained in troubleshooting all aspects of our products. We expect
these teams to be formed by November 1, 1999.
We estimate that total Year 2000 incremental costs will be approximately
$200,000. Through March 31, 1999, we have spent approximately $110,000 to
address the Year 2000 issue. We are continuing our 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 may not have yet been identified. Therefore, the potential
impact of these complications on our financial condition and results of
operations cannot be determined at this time. If computer systems used by us or
our suppliers, products provided to us by our suppliers, or the software
applications of hardware used in systems manufactured or sold by us, fail or
experience significant difficulties related to the Year 2000 issue, our results
of operations and financial condition could be materially adversely affected. We
could incur delays in producing and delivering products to our customers, which
could result in order cancellations and lost revenue and profits. We believe the
likelihood of losing revenue and profits from difficulties resulting from Year
2000 issues is low.
Inflation
The impact of inflation on our business has not been material for the fiscal
years ended March 31, 1997, 1998 and 1999.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued Statement on Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes a new model for accounting for derivatives
and hedging activities and supersedes 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. We currently do not hold any derivative instruments that will
be affected by the adoption of SFAS No. 133.
27
<PAGE>
RISK FACTORS
The forward-looking statements contained in this Form 10-K are based on our
predictions of future performance. As a result, you should not place undue
reliance on these forward-looking statements. This Form 10-K contains certain
forward-looking statements, including, without limitation, statements concerning
the conditions in the semiconductor and semiconductor capital equipment
industries, our operations, economic performance and financial condition,
including in particular statements relating to our business and growth strategy
and product development efforts. The words "believe," "expect," "anticipate,"
"intend" and other similar expressions generally identify forward-looking
statements. Potential investors are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates.
These forward-looking statements are based largely on our current expectations
and are subject to a number of risks and uncertainties, including, without
limitation, those identified under Exhibit 99.1 "Risk Factors" and elsewhere in
this Form 10-K and other risks and uncertainties indicated from time to time in
our filings with the SEC. 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 our business or growth strategy or an inability to execute
our strategy due to changes in our 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 Form 10-
K will in fact occur.
. We have had significant net losses and we anticipate losses to continue. We
have not reported net income since the first quarter of fiscal 1998. We
reported a net loss for fiscal 1999 of $15.7 million and for fiscal 1998 of
$1.0 million. Due to the current downturn in the semiconductor industry and
the related downturn in the semiconductor capital equipment industry, weak
economic conditions in the Asia Pacific region, including Japan, and other
factors, we expect to remain unprofitable at least through the end of
calendar 1999. We cannot predict how long we will continue to experience
significant net losses or when we will become profitable.
. Our performance is affected by the cyclicality of the semiconductor device
industry which may, from time to time, lead to decreased demand for our
products. The current downturn in the semiconductor industry has had a
material adverse effect on our recent operating results. Our business depends
upon the capital expenditures of semiconductor manufacturers, which, in turn,
depend upon the current and anticipated market demand for semiconductors and
products utilizing semiconductors. The semiconductor industry is cyclical and
has historically experienced periodic downturns, which have often resulted in
a decrease in the semiconductor industry's demand for capital equipment,
including process control metrology systems. There is typically a six to
twelve month lag between changes in the semiconductor industry and the
related impact on the level of capital expenditures. In most cases, the
resulting decrease in capital expenditures has been more pronounced than the
precipitating downturn in semiconductor industry revenues. The semiconductor
industry experienced downturns in 1998 and 1996, during which industry
revenues declined by an estimated 8.4% and 6.4%, respectively, as reported by
Dataquest. Dataquest forecasts that sales of semiconductor capital equipment
will decrease by approximately 1.7% in calendar 1999 as compared to calendar
1998.
. Our quarterly operating results have historically and may, in the future,
vary significantly. This may result in volatility in the market price for our
shares.
. Our largest customers have historically accounted for a significant portion
of our revenues. Accordingly, our business may be adversely affected by the
loss of, or reduced purchases by, one or more of our large customers.
. We operate in the highly competitive semiconductor capital equipment industry
and compete against larger companies.
28
<PAGE>
. Competitive conditions in our industry may require us to reduce our prices.
. We encounter difficulties in soliciting customers of our competitors because
of high switching costs in the markets in which we operate.
. Our business may be adversely impacted as a result of our substantial
leverage, which requires the use of a substantial portion of our excess cash
flow and may limit our access to additional capital.
. A breach of any of the restrictive covenants in our senior notes indenture or
our bank credit facility could result in a default under our senior note
indenture and/or our bank credit facility. If the bank accelerates all
amounts owing under the bank credit facility because of a default under the
bank credit facility and we are unable to pay such amounts, the bank has the
right to foreclose on our assets, including the capital stock pledged as
security under our bank credit facility.
. Our future growth depends on our ability to develop new and enhanced products
for the semiconductor industry. We cannot assure you that we will be
successful in our product development efforts or that our new products will
gain general market acceptance.
. Rapid technological changes in our industry will require us to continually
develop new and enhanced products.
. Our business could be adversely affected if we are unable to protect our
proprietary technology or if we infringe on the proprietary technology of
others.
. Protection of our intellectual property rights, or third parties seeking to
enforce their own intellectual property rights against us, may result in
litigation, the cost of which could be substantial. We are currently involved
in litigation regarding our thin-film thickness measuring technology.
. We will need to be able to attract and retain key personnel with knowledge of
instruments used in semiconductor manufacturing processes to help support our
future growth. Competition for such personnel in our industry is high.
. Our operations are characterized by the need for continued investment in
research and development and, as a result, our ability to reduce costs is
limited.
. We obtain some of the components and subassemblies included in our systems
from a single source or limited group of suppliers, the partial or complete
loss of which could have at least a temporary adverse effect on our
operations.
. We are subject to risks associated with manufacturing all of our products at
a single facility. Any prolonged disruption in the operations of that
facility could have a material adverse effect on our business.
. We rely upon manufacturers' sales representatives for a significant portion
of our sales. A disruption in our relationship with any sales representative
could have a material adverse effect on our business.
. Our net sales and results of operations can be adversely affected by the
instability of Asian economies, from which we derive a significant portion of
our revenues.
. We are subject to certain operational, financial, political and foreign
exchange risks due to our significant level of international sales.
. Our failure to identify and remediate all material Year 2000 risks could
significantly disrupt our business if we are forced to devote substantial
resources to Year 2000 remediation efforts, or if Year 2000 problems among
our suppliers or customers cause delays in shipping or receiving products.
29
<PAGE>
. One of our stockholders, Bain Capital, Inc., will continue to have
significant influence over our business, and could delay, deter or prevent a
change of control or other business combination.
. Certain provisions of our charter documents and Delaware law could discourage
potential acquisition proposals and could delay, deter or prevent a change in
control.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk
As of March 31, 1999, our cash included money market securities. Due to the
short duration of our investment portfolio, an immediate 10% change in interest
rates would not have a material effect on the fair market value of our
portfolio, therefore, we would not expect our operating results or cash flows to
be affected to any significant degree by the effect of a sudden change in market
interest rates on its securities portfolio.
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. The
interest rate changes affect the fair market value but do not impact earnings or
cash flows. The estimated fair value of our long-term debt at March 31, 1999 was
$69.2 million. The effect of an immediate 10% change in interest rates would not
have a material impact on our future operating results or cash flows. Fair
values were determined from quoted market prices.
Foreign Currency Exchange Risk
A substantial portion of our sales are denominated in U.S. dollars and as a
result, we have relatively little exposure to foreign currency exchange risk
with respect to sales made. We do not use forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. The effect of an immediate 10%
change in exchange rates would not have a material impact on our future
operating results or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Report of Independent Accountants, and consolidated financial
statements required by this Item are included on pages 53 to 71 of
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
On July 16, 1998, the Company reported on Form 8-K that the Company's
management dismissed Ernst & Young LLP as the Company's independent
accountants. Concurrent with such dismissal, the Company engaged
PricewaterhouseCoopers LLP as the Company's independent accountants.
The decision to dismiss Ernst & Young LLP as the Company's independent
accountants was approved by the Board of Directors.
The reports of Ernst & Young LLP on the Company's consolidated
financial statements for each of the two fiscal years in the period
ended March 31, 1998 did not contain an adverse opinion or
30
<PAGE>
a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with the audits of the Company's consolidated financial
statements for each of the two fiscal years ended March 31, 1998, there
were no disagreements between the Registrant and Ernst & Young LLP on any
matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of Ernst & Young LLP, would have caused them to make
reference to the matter in their reports.
There were no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)) during the two fiscal years ended March 31, 1998.
The Company requested that Ernst & Young LLP furnish a letter addressed to
the Securities and Exchange Commission stating whether Ernst & Young LLP
agrees with the above statements. A copy of that letter was attached as
Exhibit 16.1 to the Form 8-K.
31
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PART III
ITEM 10. EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Executive officers, directors and certain key employees of Therma-Wave are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------ ----- -----------------------------------------------------
<S> <C> <C>
Allan Rosencwaig............ 57 Chairman of the Board and Chief Executive Officer
Martin M. Schwartz.......... 54 President, Chief Operating Officer and Director
L. Ray Christie............. 55 Vice President, Chief Financial Officer and Secretary
David Mak................... 41 Vice President, Factory Operations
Jon L. Opsal................ 57 Vice President, Research and Development
Raymond Osofsky............. 48 Vice President, Engineering
W. Lee Smith................ 49 Vice President, Strategic Marketing
David Willenborg............ 48 Vice President, Marketing/Software Projects
G. Leonard Baker, Jr........ 56 Director
David Dominik............... 41 Director
Adam W. Kirsch.............. 37 Director
</TABLE>
Allan Rosencwaig co-founded Therma-Wave in January 1982 and has served as its
Chairman and Chief Executive Officer since that time. In addition, Dr.
Rosencwaig served as President from January 1982 to April 1998 and from May 1994
to August 1998. Prior to founding Therma-Wave, 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.
Martin M. Schwartz joined Therma-Wave in August 1998 as its President, Chief
Operating Officer and Director. Mr. Schwartz served as a director, President and
Chief Executive Officer of Southwall Technologies Inc. from May 1994 to March
1998. From April 1988 to May 1994, he served as Vice President, Operations of
Southwall. From July 1974 to April 1988, Mr. Schwartz served in various
positions at Raychem Corporation, including Director of Operations. From 1967 to
1974, he served in various positions at Standard Oil of California. Mr. Schwartz
holds a Bachelor of Science in engineering
32
<PAGE>
and a Master of Science in chemical engineering from Cornell University and a
Masters of Business Administration degree in management and finance from
California State University, San Francisco.
L. Ray Christie joined Therma-Wave in August 1998 as its Vice President, Chief
Financial Officer and Secretary. From April 1996 to July 1998, Mr. Christie has
served as the Vice President, Chief Financial Officer and Secretary of
Southwall, and from February 1990 to November 1993, as controller for Southwall.
From November 1993 to March 1996, he served in various positions with a
subsidiary of California Microwave, Inc., including Vice President Finance and
Administration. From June 1981 to January 1990, he served as controller of the
Farinon Division of Harris Corporation. From May 1969 to June 1981, he served in
various positions of Potlatch Corporation, including controller of their
Packaging Division.
David Mak joined Therma-Wave in October 1992 and has served as its Vice
President, Factory Operations since November 1996. Mr. Mak has also served as
the Manufacturing Manager and Director of Manufacturing. Prior to joining
Therma-Wave, 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 Therma-Wave in September 1982 and has served as its Vice
President, Research and Development since June 1994. Mr. Opsal 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 Director of Research and Development. Prior
to joining Therma-Wave, Dr. Opsal was a physicist 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.
Ray Osofsky joined Therma-Wave in 1993 and has served as Vice President,
Engineering since November 1998. Mr. Osofsky has also served as the Director of
Engineering, Director of Opti-Probe Engineering and Opti-Probe Manager. From
1985 to 1993, Mr. Osofsky was employed by KLA Instruments Corp., most recently
as Director of Engineering. Mr. Osofsky holds a Bachelor of Science in
electrical engineering from the University of California at Davis and a Master
of Science in computer engineering from Santa Clara University.
W. Lee Smith joined Therma-Wave in March 1983 and has served as its Vice
President, Strategic Marketing since June 1995. Mr. Smith has also 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.
David Willenborg co-founded Therma-Wave with Dr. Rosencwaig in January 1982
and has served as its Vice President, Marketing/Software Projects since October
1998. Mr. Willenborg has also served as Director of Engineering, Vice President,
Engineering, Vice President, Technology and Vice President, Marketing. Prior to
founding Therma-Wave, 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 Therma-Wave since May 1997.
Mr. Baker has been a Managing Director of the General Partner of Sutter Hill
Ventures since 1974. Mr. Baker joined Sutter Hill Ventures in 1973, and, prior
to that time, was Manager of Product Planning for Europe, Africa and India at
Cummins Engine Company, where he also held various manufacturing positions. He
serves on the board of several companies primarily in the high-technology area.
33
<PAGE>
David Dominik has served as a Director of Therma-Wave since May 1997. 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, Inc. (''Bain
Capital'') since May 1993. Mr. Dominik also serves as a director of Oasis
Healthcare Inc., Dynamic Details, Incorporated, Integrated Circuit Systems,
Inc., OneSource Information Services, Inc. and several privately held companies.
Adam W. Kirsch has served as a Director of Therma-Wave since May 1997. Mr.
Kirsch has been a Managing Director of Bain Capital since May 1993 and a general
partner of Bain Venture Capital since 1990. Mr. Kirsch joined Bain Venture
Capital in 1985 as an associate and, prior to joining Bain Venture Capital, Mr.
Kirsch was a consultant at Bain & Company where he worked in mergers and
acquisitions. He serves on the board of several companies including Brookstone,
Inc., Dade Behring 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 our directors or executive officers.
Our executive officers are elected by, and serve at the discretion of, the board
of directors.
34
<PAGE>
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation for
fiscal 1999, 1998 and 1997 for our chief executive officer and our four other
most highly compensated executive officers at the end of our last fiscal year.
For ease of reference, we collectively refer to these executive officers
throughout this section as our "named executive officers."
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------- ------------
Other Annual Securities
Fiscal Compensation Underlying All Other
Name and Position Year Salary Bonus ($) ($) (1) Options # Compensation ($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allan Rosencwaig................. 1999 $429,236 $ -- -- -- $63,245(2)
Chairman and 1998 417,508 318,623(3) -- 671,875 54,679(2)
Chief Executive Officer 1997 332,846 243,989(4) -- -- 1,898(5)
Martin M. Schwartz (6)........... 1999 $161,042 -- -- 200,000 --
President and
Chief Operating Officer
Jon L. Opsal..................... 1999 $192,532 $ -- -- -- $ 1,262(7)
Vice President, 1998 186,482 68,247(3) -- 127,656 1,107(7)
Research and Development 1997 168,184 56,637(4) -- -- --
David Willenborg................. 1999 $164,592 $ -- -- -- $ 6,910(7)
Vice President, 1998 160,368 52,930(3) -- 100,781 6,063(7)
Marketing 1997 154,479 50,778(4) -- -- --
David Mak........................ 1999 $164,739 $ -- -- -- --
Vice President, 1998 154,830 58,767(3) -- 38,650 --
Factory Operations 1997 143,453 47,523(3) -- -- --
</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. Does not include amounts
received by the named executive officers during fiscal 1998 from our prior
owner. See "Certain Relationships and Related Transactions--Payments to
Executive Officers."
(2) Includes insurance premiums paid by us on behalf of Dr. Rosencwaig of $9,669
and $7,671 for fiscal 1998 and fiscal 1999, respectively. The balance
represents imputed interest on outstanding borrowings from Therma-Wave.
(3) Reflects bonuses paid to Messrs. Rosencwaig, Opsal, Willenborg and Mak in
fiscal 1998 as a result of Therma-Wave achieving certain performance targets
in fiscal 1998.
(4) Reflects bonuses paid to Messrs. Rosencwaig, Opsal, Willenborg and Mak in
fiscal 1997 as a result of Therma-Wave achieving certain performance targets
in fiscal 1997.
(5) Reflects insurance premiums paid by us on behalf of Dr. Rosencwaig.
(6) Mr. Schwartz joined Therma-Wave in August 1998.
(7) Reflects imputed interest on outstanding borrowings from Therma-Wave.
35
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information regarding stock options granted by
us to the named executive officers during our last fiscal year. Stock options
are generally granted at 100% of the fair value of Therma-Wave's common stock as
determined by the board of directors on the date of grant. In reaching the
determination of fair value at the time of each grant, the board of directors
considers a range of factors, including Therma-Wave's current financial
position, its recent revenues, results of operations and cash flows, its
assessment of Therma-Wave's competitive position in its markets and prospects
for the future, the status of Therma-Wave's product development and marketing
efforts, current valuations for comparable companies and the illiquidity of an
investment in Therma-Wave's common stock.
<TABLE>
<CAPTION>
Number of % of
Securities Total Potential Realizable
Underlying Options Market Value at Assumed
Options Granted in Exercise or Price on Annual Rate of Stock
Granted Fiscal Base Price Date of Expiration Price Appreciation for
Name (a) Year ($/Share) Grant (b) Date (c) Option Term (d)
- ------------------------------------------------------------------------------------------------------------------------
5%($) 10%($)
-------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Allan Rosencwaig........... -- -- -- -- -- -- --
Martin M. Schwartz (e)..... 200,000 62.5% $4.00 $4.00 8/3/08 $504,000 $1,275,000
Jon L. Opsal............... -- -- -- -- -- -- --
David Willenborg........... -- -- -- -- -- -- --
David Mak.................. -- -- -- -- -- -- --
</TABLE>
- ----------------
(a) All options listed in the table vest in five equal installments beginning on
the first anniversary of their grant date.
(b) Market price on the date of grant was determined by our board of directors
based upon a good faith estimate.
(c) Options will expire on the earlier of 90 days after the date of termination
of employment or the date indicated above.
(d) Amounts reflect certain assumed rates of appreciation set forth in the
executive compensation disclosure rules of the SEC. Actual gains, if any, on
stock option exercises depend on future performance of our stock and overall
market conditions. At an annual rate of appreciation of 5% per year for the
option term, the price of the Class B common stock would be approximately
$6.52 per share. At an annual rate of appreciation of 10% per year for the
option term, the price of the Class B common stock would be approximately
$10.37 per share.
(e) Mr. Schwartz joined Therma-Wave in August 1998.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table sets forth information for the named executives officers
concerning stock option exercises during our last fiscal year and options
outstanding at the end of the last fiscal year:
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options at
Options Fiscal Year End
at Fiscal Year End ($) (a)
------------------------------------------
Shares Value Unexercisable/ Unexercisable/
Acquired Realized ($) Exercisable Exercisable
Name on Exercise
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allan Rosencwaig........... -- -- 0/671,875 0/0
Martin M. Schwartz (b)..... -- -- 200,000/0 $600,000/0
Jon L. Opsal............... -- -- 0/127,656 0/0
David Willenborg........... -- -- 0/100,781 0/0
David Mak.................. -- -- 0/38,650 0/0
</TABLE>
- ----------------
(a) Based on an estimated fair market value of the Class B common stock at March
31, 1999.
(b) Mr. Schwartz joined Therma-Wave in August 1998.
36
<PAGE>
Compensation Committee Interlocks and Insider Participation
We currently do not have a compensation committee. The compensation
arrangements for each of our executive officers were established pursuant to the
terms of the respective employment agreements between us 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, except those agreements relating to Messrs. Schwartz and
Christie, which were negotiated with Therma-Wave and approved by the board of
directors. On a going forward basis, any changes in the compensation
arrangements of our executive officers will be determined by the board of
directors.
Committees of the Board of Directors
Our board of directors has one committee, the audit committee. The audit
committee makes recommendations to the board of directors regarding the
independent auditors to be nominated for election by the stockholders and
reviews the independence of such auditors, approves the scope of the annual
audit activities of the independent auditors, approves the audit fee payable to
the independent auditors and reviews such audit results with the independent
auditors. The audit committee is currently comprised of Messrs. Dominik and
Baker. PricewaterhouseCoopers LLP presently serves as our independent auditors.
Employment Agreements
In connection with the recapitalization, we entered into an employment
agreement with Dr. Allan Rosencwaig. 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. In August 1998, however, the board and Dr.
Rosencwaig agreed that Mr. Schwartz would be appointed to the position of
President. The employment period established under the employment agreement will
automatically terminate upon Dr. Rosencwaig's resignation, death or disability
or termination for good reason, or upon termination by us, with or without
cause. Under the employment agreement, Dr. Rosencwaig will receive:
. an annual base salary of at least $400,000, subject to annual review by the
board and certain annual increases beginning in 1998;
. an annual bonus based upon our achievement of certain operating targets and
the attainment of certain individual goals by Dr. Rosencwaig, each to be
determined by the board on an annual basis; and
. certain fringe benefits.
In addition, Dr. Rosencwaig is also entitled to receive a deferred payment in
the event we achieve certain operating results. See "Certain Relationships and
Related Transactions--Management Equity Purchases."
If the employment period is terminated by us without cause, by Dr. Rosencwaig
for good reason or as a result of his disability, Dr. Rosencwaig will be
entitled to receive his then current base salary, a bonus equal to 50% of his
base salary and fringe benefits for 30 months following such termination. This
30-month period is referred to herein as the "severance period." If the
employment period is terminated by us for cause or if Dr. Rosencwaig resigns
without good reason, Dr. Rosencwaig will be entitled to receive his then current
base salary through the date of termination. Under the employment agreement, Dr.
Rosencwaig has agreed not to:
. compete with us during the period in which he is employed by us;
37
<PAGE>
. disclose any confidential information during the period in which he is
employed by us and for five years thereafter;
. solicit any customer, supplier, licensee, licensor, franchisee or
other business relation of ours while he is employed by us, during the
severance period and for a period of 30 months thereafter; and
. solicit or hire any of our management employees for a period of 30
months following the date of termination.
In addition, Dr. Rosencwaig has agreed to disclose to us any and all
inventions, as defined in such employment agreement, relating to our business
conceived or learned by him during his employment and acknowledge that such
inventions will be our property.
We also entered into substantially similar employment agreements with
Messrs. Willenborg, Smith, Opsal and Lin at the time of the recapitalization and
with Messrs. Schwartz and Christie in August 1998. Mr. Lin's employment
agreement was terminated in July 1998 in connection with his voluntary
resignation. Each of the employment agreements provide that such executive will
serve with Therma-Wave in his current position for a period that will end on the
fifth anniversary of the consummation of the recapitalization or, in the case of
Messrs. Schwartz and Christie, August 2003; provided, however, that each
executive's 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 Therma-Wave, with or without cause (as defined
therein). Under their respective employment agreement, Messrs. Schwartz,
Christie, Willenborg, Smith and Opsal will receive:
. an annual base salary of at least the following, subject to review by
the board and our president or chief executive officer:
Name Annual Base Salary
---- ------------------
Martin M. Schwartz...... $ 265,000
L. Ray Christie......... $ 155,000
David Willenborg........ $ 168,480
W. Lee Smith............ $ 143,859
Jon L. Opsal............ $ 197,077
. an annual bonus based upon our achievement of certain operating
targets and the attainment of certain individual goals by such
executive, each to be determined by the board and our president or
chief executive officer on an annual basis; and
. certain fringe benefits.
In addition, each executive other than Messrs. Schwartz and Christie is
also entitled to receive a deferred payment in the event we achieve certain
operating results. See "Certain Relationships and Related Transactions--
Management Equity Purchases."
If the executive's employment is terminated by us without cause, by such
executive for good reason or as a result of his disability, the executive will
be entitled to receive his then current base salary, a bonus equal to 30% to
37.5% of base salary and fringe benefits for 15 months or, in the case of Mr.
Christie, 6 months following such termination and, in the case of Mr. Schwartz,
15 months if he is terminated after August 3, 2000 and 12 months if he is
terminated before such time. Such 6-month, 15-month and 12-month periods are
each referred to herein as an "executive severance period." If the executive's
employment is terminated by us for cause or if such executive resigns without
good reason, such executive will be entitled to receive his then current base
salary through the date of termination. Under these employment agreements, each
executive has agreed not to:
. compete with us during the period in which he is employed by us;
38
<PAGE>
. disclose any confidential information during the period in which he is
employed by us and for all times thereafter;
. solicit any customer, supplier, licensee, licensor, franchisee or
other business relation of ours while he is employed by us, during the
applicable executive severance period and for two years thereafter;
and
. solicit or hire any of our employees for a period of five years
following the date of termination.
In addition, each executive has agreed to disclose to us any and all
inventions, as defined in such employment agreement, relating to our business
conceived or learned by him during his employment with us and acknowledge that
such inventions will be our property.
Compensation of Directors
Directors serving on the board of directors are currently not entitled to
receive any compensation for serving on the board. Directors are reimbursed for
their out-of-pocket expenses incurred in connection with such services.
Stock Plans
1997 Stock Purchase and Option Plan
In connection with the recapitalization, our board of directors adopted the
Therma-Wave, Inc. 1997 Stock Purchase and Option Plan, or the "1997 Stock Plan,"
which authorizes the granting of stock options and the sale of Class A common
stock or Class B common stock to current or future employees, directors,
consultants or advisors of Therma-Wave 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 board up to an aggregate of 3,000,000 shares of Class A common
stock and 3,000,000 shares of Class B common stock, 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. As of March 31, 1999, an aggregate of 1,118,092 shares of Class B common
stock, a portion of which is subject to repurchase, were outstanding, and
options to purchase an aggregate of 1,354,831 shares of Class B common stock
were outstanding, with exercise prices ranging from $4.00 to $15.89 per share,
under the 1997 Stock Plan.
1997 Employee Stock Purchase and Option Plan
On October 31, 1997, the Board of Directors approved the 1997 Employee
Stock Purchase and Option Plan, or the "1997 Employee Stock Plan," which
authorizes the granting of stock options and the sale of Class A common stock or
Class B common stock to current or future employees, directors, consultants or
advisors of Therma-Wave or its subsidiaries. The 1997 Employee Stock Plan
authorizes the granting of stock options up to an aggregate of 689,375 shares of
Class A common stock and 689,375 shares of Class B common stock, 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 376,255 shares of Class B common stock
were outstanding as of March 31, 1999 under the 1997 Employee Stock Plan. Such
options will vest and become exercisable in four equal installments beginning on
the first anniversary of the grant date and continuing thereafter on an annual
basis. Unvested options will terminate in the event that the optionee ceases to
be employed with Therma-Wave and vested but unexercised options will terminate
immediately if the optionee is terminated
39
<PAGE>
for cause or after 30 days, or such other period as may be specified in any
particular option agreement, if the optionee ceases to be employed by Therma-
Wave for any other reason. As of the date of this Form 10-K, most of our option
agreements provide that options will immediately terminate after 90 days if the
optionee ceases to be employed by Therma-Wave for any reason other than cause.
All of the options granted have an exercise price equal to the fair market value
of the Class B common stock on the date of grant.
1997 Special Employee Stock Purchase and Option Plan
On October 31, 1997, our board of directors approved the 1997 Special
Employee Stock Purchase and Option Plan, or the "1997 Special Employee Stock
Plan," which authorizes the granting of stock options and the sale of Class A
common stock or Class B common stock to current or future employees, directors,
consultants or advisors of Therma-Wave or its subsidiaries. The 1997 Special
Employee Stock Plan authorizes the granting of stock options up to an aggregate
of 53,125 shares of Class A common stock and 53,125 shares of Class B common
stock, 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 47,000 shares of Class B common stock
were outstanding as of March 31, 1999 under the 1997 Special Employee Stock
Plan. Such options will vest and become exercisable in four equal installments
beginning on the first anniversary of the grant date and continuing thereafter
on an annual basis. Unvested options will terminate in the event that the
optionee ceases to be employed by Therma-Wave and vested but unexercised options
will terminate immediately if the optionee is terminated for cause or after 30
days, or such other period as may be specified in any particular option
agreement, if the optionee ceases to be employed by Therma-Wave for any other
reason. As of the date of this Form 10-K, most of our option agreements provide
that options will immediately terminate after 90 days if the optionee ceases to
be employed by Therma-Wave for any reason other than cause. All of the options
granted have an exercise price equal to the fair market value of the Class B
common stock on the date of grant.
The 1997 Special Employee Stock Plan and the 1997 Employee Stock Plan are
referred to herein as the "1997 Plans."
40
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding our beneficial
ownership as of March 31, 1999 by:
. each person or entity known to us to own more than 5% of any class of
outstanding voting securities; and
. each of our directors, each named executive officer and all of our
directors and executive officers as a group.
To our knowledge, each of such stockholders has sole voting and investment power
as to the shares shown unless otherwise noted. Beneficial ownership of the
securities listed in the table has been determined in accordance with the
applicable rules and regulations promulgated under the Securities Exchange Act
of 1934.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-----------------------------------------------------------------------
Class A Common Stock Class B Common Stock Class L Common Stock
-----------------------------------------------------------------------
Number of Percentage Number of Percentage Number of Percentage
Name and Address Shares of Class Shares of Class Shares of Class
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Principal Stockholders:
Bain Capital Funds (1). ....................... 5,536,948 61.0% -- --% 615,217 61.0%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Sutter Hill Ventures (2) ...................... 1,642,382 18.1 -- -- 182,487 18.1
755 Page Mill Road
Palo Alto, California 94304
Toray Industries, Inc. (3) .................... 980,818 10.8 -- -- 44,630 4.4
8-1, Mihama 1-chome
Urayasu, Chiba 279, Japan
Shimadzu Corporation (4) ...................... 287,207 3.2 -- -- 13,069 1.3
1, Nishinokyo-Kuwabaracho
Nakagyo-ku, Kyoto 604, Japan
Directors and Executive Officers:
Allan Rosencwaig (5) .......................... 993,279 10.9 1,343,750 75.1 110,364 10.9
Martin M. Schwartz (6) ........................ -- -- -- -- -- --
Jon L. Opsal (7) .............................. 23,427 * 255,312 20.5 2,603 *
David Willenborg (8) .......................... 128,299 1.4 201,562 16.5 14,255 1.4
David Mak (9) ................................. -- -- 77,298 6.7 -- --
G. Leonard Baker, Jr. (10) .................... 1,642,382 18.1 -- -- 182,487 18.1
David Dominik (11) ............................ 1,629,806 18.0 -- -- 181,090 18.0
Adam W. Kirsch (11) ........................... 1,629,806 18.0 -- -- 181,090 18.0
All directors and executive officers as a group
(11 persons) ................................. 4,457,931 49.1 2,105,250 96.9 495,325 49.1
</TABLE>
___________
* Less than one percent.
(1) Includes: 1,084,115 shares of Class A common stock and 120,457 shares of
Class L common stock held by Bain Capital Fund V, L.P. ("Fund V");
2,823,028 shares of Class A common stock and 313,670 shares of Class L
common stock held by Bain Capital Fund V-B, L.P. ("Fund V-B"); 648,340
shares of Class A common stock and 49,155 shares of Class L common stock
held by BCIP Associates ("BCIP"); and 981,466 shares of Class A common
stock and 131,935 shares of Class L common stock held by BCIP Trust
Associates, L.P. ("BCIP Trust" and Fund V, Fund V-B and BCIP have been
defined herein as the "Bain Capital Funds"). Does not include shares
subject to the stockholders agreement or the voting agreement. See "Certain
Relationships and Related Transactions--Stockholders Agreement" and
"Certain Relationships and Related Transactions--Voting Agreement.
(2) Also includes shares held by certain affiliates and related parties of
Sutter Hill.
(3) The 980,818 shares of Class A common stock included in the table represent:
(i) 401,668 shares of Class A common stock; and (ii) 579,150 shares of
preferred stock, which are immediately convertible into an equal number of
shares of Class A common stock at the option of the holder thereof. A
portion of each class of the listed shares are held by Toray Industries
(America), Inc., a wholly owned subsidiary of Toray Industries, Inc.
41
<PAGE>
(4) The 287,207 shares of Class A common stock included in the table represent:
(i) 117,618 shares of Class A common stock; and (ii) 169,589 shares of
preferred stock, which are immediately convertible into an equal number of
shares of Class A common stock at the option of the holder thereof.
(5) The 1,343,750 shares of Class B common stock included in the table
represent: (i) 671,875 shares of Class B common stock, which are subject to
vesting; and (ii) 671,875 shares of Class B common stock that can be
acquired upon the exercise of outstanding options. The address of Dr.
Rosencwaig is c/o Therma-Wave, Inc., 1250 Reliance Way, Fremont, California
94539.
(6) Mr. Schwartz joined Therma-Wave in August 1998.
(7) The 255,312 shares of Class B common stock included in the table represent:
(i) 127,656 shares of Class B common stock, which are subject to vesting;
and (ii) 127,656 shares of Class B common stock that can be acquired upon
the exercise of outstanding options.
(8) The 201,562 shares of Class B common stock included in the table represent:
(i) 100,781 shares of Class B common stock, which are subject to vesting;
and (ii) 100,781 shares of Class B common stock that can be acquired upon
the exercise of outstanding options.
(9) The 77,298 shares of Class B common stock included in the table represent:
(i) 38,649 shares of Class B common stock, which are subject to vesting;
and (ii) 38,649 shares of Class B common stock that can be acquired upon
the exercise of outstanding options.
(10) Mr. Baker is a Managing Director of the General Partner of Sutter Hill. As
a result, the shares of Class A common stock and Class L common stock
acquired by Sutter Hill may be deemed to be beneficially owned by Mr.
Baker, who disclaims beneficial ownership of any such shares in which he
will not have a pecuniary interest. The address of Mr. Baker is c/o Sutter
Hill Ventures, 755 Page Mill Road, Palo Alto, California 94304.
(11) Messrs. Dominik and Kirsch are each 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Recapitalization Agreement
On December 18, 1996, the Bain Capital Funds and Toray Industries, Inc.,
Toray Industries (America), Inc. and Shimadzu Corporation and Therma-Wave
entered into a recapitalization agreement. Toray Industries (America) and
Shimadzu Corporation are collectively referred to herein as the "Existing
Stockholders." The recapitalization was effected on May 16, 1997. Pursuant to
the recapitalization agreement:
. we redeemed from the Existing Stockholders approximately 86.6% of
their existing shares of the common stock of Therma-Wave for
approximately $96.9 million in cash;
. the Bain Capital Funds and Sutter Hill purchased shares of our common
stock for an aggregate purchase price of $16.8 million in cash;
. the Existing Stockholders converted all of their shares of common
stock not otherwise redeemed for newly authorized and issued shares of
our preferred stock, Class L common stock and Class A common stock;
and
. the Bain Capital Funds and Sutter Hill converted all of their shares
of common stock for newly authorized and issued shares of Class L
common stock and Class A common stock.
As part of the recapitalization, we also repaid substantially all of our
outstanding borrowings under existing loan agreements and paid fees and expenses
related to the financing of the recapitalization. We used approximately $150.0
million to complete the recapitalization, including the payment of related fees
and expenses. In order to finance the recapitalization, we:
. issued $115.0 million in aggregate principal amount of 10/5//8% senior
notes due 2004;
. received an equity contribution of $20.0 million in cash from the Bain
Capital Funds, Sutter Hill and members of our senior management team,
including Dr. Allan Rosencwaig, Anthony W. Lin, W. Lee Smith, David
Willenborg and Jon L. Opsal; and
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<PAGE>
. converted equity securities received from the Existing Stockholders
having a value of $15.0 million for purposes of the recapitalization
into shares of preferred stock and common stock.
The Existing Stockholders have jointly agreed to indemnify Therma-Wave, the
Bain Capital Funds and Sutter Hill for any and all losses with respect to taxes
for all taxable periods prior to March 31, 1996 and any breach of the
representation relating to taxes in the recapitalization agreement, subject to
the limitations set forth in the recapitalization agreement. In addition, we
agreed to indemnify the Existing Stockholders against any and all losses arising
out of:
. any employee benefit plan of Therma-Wave;
. the severance of any employee of Therma-Wave or its subsidiaries on or
after the closing date; and
. subject to certain exceptions, violations of environmental laws.
In addition, the Existing Stockholders have agreed for a period of three
years after the closing date of the recapitalization not to compete with us in
the business of manufacturing, marketing or selling:
. measuring equipment used for material characterization, such as ion
implantation monitoring or measurements in metal films;
. thin film measurement equipment; or
. equipment that utilizes our intellectual property.
The Existing Stockholders have also agreed for a period of two years after
the closing date not to solicit the employment of our employees without the
prior written consent of the Bain Capital Funds.
Management Equity Purchases
Bain Capital's investment strategy includes providing senior management
with the opportunity to acquire a significant equity interest in its acquired
businesses. Bain Capital believes that significant equity ownership increases
management's commitment and better aligns the two parties' interests.
Accordingly, at the time of the recapitalization, each of our executive officers
was given the opportunity to participate in the recapitalization. To do so, each
was required to enter into an executive stock agreement with us. In general, the
terms of the stock agreements establish the relative rights and obligations
between Therma-Wave, the management investors and Bain Capital and the other
investors. Pursuant to these stock agreements, we:
. sold shares of Class L common stock and Class A common stock to the
executives at the same price per share as paid by the Bain Capital
Funds, which are referred to herein as the "Rollover Stock";
. sold shares of Class B common stock to the executives at the same
price per share as paid by the Bain Capital Funds, which are subject
to vesting over a five year period and are referred to herein as the
"Time Vesting Stock"; and
. granted options to the executives to acquire shares of Class B common
stock, 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,
respectively.
The following table summarizes the shares of capital stock purchased by,
and the number of options granted to, our executive officers under the stock
agreements:
43
<PAGE>
<TABLE>
<CAPTION>
No. of Shares Purchased
---------------------------------
Class A Class B Class L No. of
Common Common Common Aggregate Options
Name Stock Stock Stock Purchase Granted
Price
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allan Rosencwaig. 993,279 671,875 110,364 $2,497,608 671,875
Anthony W. Lin (1). 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) Mr. Lin purchased 25,531 shares of vested Class B common stock upon his
resignation from Therma-Wave. We repurchased the remainder of his unvested
shares and cancelled all of his outstanding options. As of March 31, 1999,
Mr. Lin also holds 40,588 and 4,510 shares of Class A common stock and
Class L common stock, respectively.
Substantially all of the purchase price for such shares was funded by cash
payments received by each executive officer from Toray in satisfaction of
Toray's obligations under a pre-existing equity incentive arrangement with such
executive officer. See "Certain Relationships and Related Transactions--
Payments to Executive Officers."
Set forth below is a summary of the material terms of the stock agreements:
Exercisability and Vesting. The options granted under the stock
agreements were immediately exercisable at the exercise prices listed above. The
shares of Class B common stock issuable upon the exercise of such options will
vest, regardless of whether the option has been exercised, on May 16, 2002
provided that the executive officer has been continuously employed by Therma-
Wave during such period. The shares of Class B common stock that are issuable
upon the exercise of the options are referred to herein as the "Option Shares."
In addition, some or all of such shares of Class B common stock are subject to
earlier vesting upon certain events, including all of such shares vesting
immediately on a sale of Therma-Wave.
Exercise Price and Form of Payment. The aggregate exercise price for all
the options granted to these executives under the stock agreements is
approximately $16.6 million. To date, none of the options granted under the
stock agreements have been exercised. Under the stock agreements, each executive
officer is entitled to pay the exercise price for his options through the
issuance of a promissory note to us. Under the terms of their respective
employment agreements, each of the executive officers is entitled to receive a
deferred payment in an amount that is sufficient to repay the outstanding
principal of such promissory note if our cumulative earnings before interest,
taxes, depreciation and amortization from May 16, 1997 through May 16, 2002 is
equal to or greater than $177 million. In the event an executive officer elects
to pay the exercise price for his options with a promissory note, the promissory
note will be full recourse and the executive's obligation will not be in any way
altered if we do not achieve the operating results referred to in the preceding
sentence. The promissory note will be repayable upon the earliest of:
. the consummation of a sale of Therma-Wave;
. 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 such executive officers;
. the termination of the executive officer's employment with Therma-
Wave;
. the tenth anniversary of its date; or
. the date such executive officer violates the non-competition provision
of his employment agreement.
44
<PAGE>
The promissory note will bear interest at the lesser of:
. the applicable federal rate at such time or
. the highest rate permitted by applicable law, and will be payable at
such time as the principal under the note is due.
The executive officer will be required to immediately repay the promissory note
to the extent of any net proceeds received from:
. any cash dividends on the Option Shares;
. any proceeds from the transfer of the Option Shares; and
. any deferred payments under such executive officer's employment
agreement.
Repurchase Option. The stock agreements grant us the right to repurchase
the shares of common stock held by the executive officer, including shares
received upon the exercise of options, in the event that the executive officer
ceases to be employed by us. The Bain Capital Funds are granted a similar right
under the stock agreements in the event that we do not elect to exercise our
option with respect to all of such executive's shares. The repurchase option
terminates upon the earlier of a sale of Therma-Wave or May 16, 2002. This
repurchase option is designed to help us to retain our executive officers by
conditioning their equity participation on their continued employment.
Other Provisions. The stock agreements also:
. restrict the transfer of the executive officers' securities, subject
to limited exceptions;
. grant each executive officer the right to participate on a pro rata
basis in any sale or other transfer made by the Bain Capital Funds of
their shares of common stock to an unaffiliated third party; and
. require each executive officer to consent to a sale of Therma-Wave
approved by holders representing a majority of the shares of common
stock held by the Bain Capital Funds.
The transfer restrictions referenced above terminate upon the earlier of a
sale of Therma-Wave or May 16, 2002.
Loans to Executive Officers
In connection with the recapitalization, we made loans in an aggregate
principal amount of $297,931.55 to certain of our executive officers 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 Therma-Wave or earlier under other similar circumstances.
In addition, we made loans in May 1997 to such executive officers to pay
certain tax liabilities associated with the distribution they received from
Toray. Such loans do not bear interest and mature upon the consummation of an
"approved sale" of Therma-Wave, which is defined in the stock agreements to
include a sale of all or substantially all of our assets determined on a
consolidated basis or a sale of all of our capital stock to an 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
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<PAGE>
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 any cash dividends or distributions on the Rollover Stock or any
proceeds from the transfer of the Rollover Stock. The loans are secured by a
pledge of the Rollover Stock.
The following table sets forth the amount of each of these loans to the
following executive officers:
Amount of Loan
------------------------
Name Stock Loan Tax Loan
---- ----------- -----------
Allan Rosencwaig............ $151,172 $874,000
Anthony W. Lin.............. $ 28,723 $ 35,663
Jon L. Opsal................ $ 28,723 $ 20,583
W. Lee Smith................ $ 22,676 $ 35,790
David Willenborg............ $ 22,676 $112,723
All of the foregoing loans were outstanding as of March 31, 1999, except
the loans to Mr. Lin, which were repaid in August 1998 in connection with his
resignation.
Advisory Agreement
In connection with the recapitalization, we entered into an Advisory
Agreement with Bain Capital, pursuant to which Bain Capital agreed to provide:
. general executive and management services;
. identification, support, negotiation and analysis of acquisitions and
dispositions;
. support, negotiation and analysis of financial alternatives;
. finance, marketing and human resource functions; and
. other services agreed upon by Therma-Wave and Bain Capital.
In exchange for such services, Bain Capital receives:
. an annual management fee of $1.0 million, plus reasonable out-of-
pocket expenses (payable quarterly); and
. a transaction fee in connection with the consummation of each
additional acquisition by us 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. We paid fees to Bain Capital under the Advisory Agreement of
$750,000 in fiscal 1998 and $1.0 million in fiscal 1999. The Advisory Agreement
has an initial term of ten years, subject to automatic one-year extensions
unless we or Bain Capital provides written notice of termination.
Stockholders Agreement
In connection with the recapitalization, Therma-Wave, the Bain Capital
Funds, Sutter Hill and the Existing Stockholders entered into a stockholders
agreement. Bain Capital Funds and their designees that execute a counterpart to
the stockholders agreement, including Randolph Street Partners, are referred to
herein as the "Bain Group." The stockholders agreement:
46
<PAGE>
. 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 five designees of the Bain Capital Funds to be
elected to the board of directors;
. grants Therma-Wave and the Bain Group a right of first refusal on any
proposed transfer of shares held by the Existing Stockholders;
. grants the Existing Stockholders and Sutter Hill certain participation
rights in connection with certain transfers made by the Bain Group;
and
. requires the Existing Stockholders and Sutter Hill to consent to a
sale of Therma-Wave to an independent third party if such sale is
approved by holders representing a majority of the shares held by the
Bain Group.
In addition, we agreed not to issue, sell or otherwise transfer for
consideration to any member of the Bain Group or Sutter Hill or any affiliates
thereof at any time prior to a registered initial public offering, any shares of
common stock, or securities convertible into or otherwise exercisable or
exchangeable for common stock or securities containing any profit participation
features or options, unless each of the Existing Stockholders is given the
opportunity to subscribe for and purchase their pro rata portion of such
additional shares at the same price and on the same terms.
All of the foregoing provisions of the Stockholders Agreement will
terminate upon the consummation of an initial public offering registered under
the Securities Act.
Interests of Certain Experts
Randolph Street Partners purchased 84,906 shares of Class A common stock
and 9,434 shares of Class L common stock 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
Therma-Wave and Bain Capital from time to time and expects to continue to do so
in the foreseeable future.
Payments to Executive Officers
In connection with the recapitalization, our executive officers received
the following amounts of cash from Toray in satisfaction of Toray's obligations
under a pre-existing equity incentive arrangement with such executive officers:
Name Cash
---- ----------
Allan Rosencwaig...... $2,339,718
Anthony W. Lin........ 95,612
Jon L. Opsal.......... 55,183
W. Lee Smith.......... 95,952
David Willenborg...... 302,207
Voting Agreement
In connection with the recapitalization, Therma-Wave, the Bain Group,
Sutter Hill and certain key employees of Therma-Wave, including our named
executive officers, entered into a voting agreement pursuant to which each party
thereto agreed to vote his or its voting securities and to take all necessary or
desirable actions to cause the size of the board to be set at five directors and
to cause three designees of the
47
<PAGE>
Bain Group and Dr. Rosencwaig, as long as he is employed by Therma-Wave, and
another management employee of Therma-Wave designated by Dr. Rosencwaig to be
elected to the board of directors. The voting agreement terminates by its terms
upon the completion of an initial public offering and sale of common stock
pursuant to an effective registration statement under the Securities Act.
Option Agreements Among Investors
At the time of the recapitalization, the Bain Group, Sutter Hill, Antares
International Partners, Inc. entered into an option agreement with each of our
executive officers that participated in the recapitalization. Bain Group, Sutter
Hill and Antares International Partners are referred to herein as the
"Investors." Pursuant to these option agreements, the Investors granted these
executive officers options to purchase an aggregate of 2,669,750 shares of the
Investors' Class A common stock at an exercise price equal to $0.235 per share.
Such options become exercisable upon:
. any sale by the Investors of all or a portion of the shares of Class A
common stock or Class L common stock issued to the Investors pursuant
to the recapitalization, and
. the fifth anniversary of the date of the option agreement.
The number of options exercisable upon an Investor sale described in the
first bullet point or on the fifth anniversary of the option agreements is
dependent upon the fair market value of the Investors' investment in shares of
Class A common stock or Class L common stock issued pursuant to the
recapitalization and the shares of common stock issued to such executive
officers in the recapitalization. No options are exercisable until the fair
market value of such shares is equal to or greater than $500 million.
Development License Agreement
In 1992, we entered into a development license agreement with Toray and
Shimadzu. The purpose of the development license agreement was to allow the
parties to share patents and technology related to:
. the entire field of thermal wave technology;
. the field of laser technology related to thin film metrology;
. the field of optical processing; and
. any other fields designated by a research and development committee to
be formed by the parties, which are collectively referred to herein as
the "Field of Research."
Under the development license agreement:
. we granted to each of Toray and Shimadzu a royalty-free, non-exclusive
license to use our patents and technology related to the Field of
Research for the purpose of conducting research and new product
development activities in Japan; and
. Toray and Shimadzu granted to Therma-Wave 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 requires the parties to take certain steps to
coordinate their research and development activities. All enhancements,
modifications and improvements to certain of our products existing at the time
the agreement was entered into will be owned by us, regardless of which party
creates
48
<PAGE>
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, we will have to pay a development fee or
royalty to those parties. New developments will be jointly owned by the party or
parties who created the new development and the party or parties whose patents
or technology were used in such new development. The commercialization,
marketing and other use of each new development will be governed by the terms of
a separate agreement to be entered into by the relevant parties on a case-by-
case basis. To date, only one new development agreement has been entered into
between the parties, which relates to certain film measurement equipment for a
non-semiconductor application.
49
<PAGE>
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. The following documents are filed as part of the Report on Form
10-K:
1. Financial Statements. The following consolidated financial
statements of Therma-Wave, Inc. are included in Item 8:
Report of Independent Accountants
Consolidated Balance Sheets as of March 31, 1998 and
1999
Consolidated Statements of Operations for the years
ended March 31, 1997, 1998, and 1999
Consolidated Statements of Mandatorily Redeemable
Convertible Preferred Stock and Stockholders'
Equity (Net Capital Deficiency) for the years
ended March 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years
ended March 31, 1997, 1998, and 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. The following consolidated
financial statement schedules of Therma-Wave, Inc. are
included in Item 14(d):
Report of Independent Accountants on Financial
Statement Schedule
Schedule II Valuation and Qualifying Accounts
Schedules other than those listed above have been
omitted since they are either not required, are
not applicable, or the required information is
shown in the financial statements or related
notes.
3. Exhibits. The following exhibits are filed as part of, or
incorporated by reference into, this report:
b. Reports on Form 8-K.
None.
Exhibit
- -------
No. Description
---- -----------
*2.1 Recapitalization Agreement, dated as of December 18, 1996, by and among
Bain Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP
Associates, BCIP Trust Associates, L.P., Toray Industries, Inc., Toray
Industries (America), Inc. and Shimadzu Corporation as amended by
Amendment No. 1 and Supplement to Recapitalization Agreement, dated May
16, 1997, by and among Therma-Wave, Inc., Toray Industries, Inc., Toray
Industries (America), Inc., Shimadzu Corporation and Bain Capital Fund
V, L.P., Bain Capital Fund V-B, L.P., BCIP Trust Associates and BCIP
Trust Associates, L.P.
*3.1 Restated Certificate of Incorporation of Therma-Wave.
*3.2 Amended and Restated By-Laws of Therma-Wave.
*4.1 Purchase Agreement, dated as of May 16, 1997, by and among Therma-Wave
and BT Securities Corporation.
*4.2 Indenture, dated as of May 15, 1997, by and among Therma-Wave and IBJ
Schroder Bank & Trust Company, as trustee.
50
<PAGE>
Exhibit
- -------
No. Description
---- -----------
*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.
*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, 1995, 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.
*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 Stock Repurchase Agreement, dated as of January 26, 1996, between Toray
Industries, Inc. and the key employees of Therma-Wave named therein.
*10.23 Key Employee Stock Agreement, dated as of October 30, 1991 and amended
as of December 16, 1994, by and among Toray Industries, Inc., TS
Subsidiary Corp., Therma-Wave, Inc. and the key employees named
therein.
*10.25 First Amendment to Credit Agreement, dated as of June 30, 1998, between
Therma-Wave and Bankers Trust Company, as agent, incorporated by
reference to Exhibit 10.1 of Therma-Wave's Quarterly Report on Form 10-
Q for the quarter ended July 5, 1998.
51
<PAGE>
Exhibit
- -------
No. Description
---- -----------
10.26 Employment Agreement, dated as of August 3, 1998, by and between
Therma-Wave and Martin M. Schwartz.
10.27 Employment Agreement, dated as of August 10, 1998, by and between
Therma-Wave and L. Ray Christie.
*21.1 Subsidiaries of Therma-Wave.
23.1 Report of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
99.1 Risk Factors
- ----------------
* Incorporated herein by reference to the same numbered exhibit to Therma-Wave's
Registration Statement on Form S-1 (Registration No. 333-76019).
52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
Therma-Wave, Inc.
In our opinion, the accompanying consolidated balance sheet as of March 31,
1999 and the related consolidated statements of operations, of mandatorily
redeemable convertible preferred stock and stockholders' equity (net capital
deficiency) and of cash flows present fairly, in all material respects, the
financial position of Therma-Wave, Inc. and its subsidiaries at March 31, 1999,
and the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. The financial statements of the Company as of March 31, 1998 and for the
two years then ended were audited by other independent accountants whose report
dated May 1, 1998 expressed an unqualified opinion on these statements.
PricewaterhouseCoopers LLP
San Jose, California
April 27, 1999
53
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31,
---------------------
1998 1999
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................................... $ 20,422 $ 20,245
Accounts receivable, net of allowance for doubtful accounts of $3,016 and $1,911 at March 31, 1998
and 1999, respectively............................................................................. 22,098 12,180
Inventory........................................................................................... 21,292 15,369
Deferred income taxes............................................................................... 7,693 2,254
Other current assets................................................................................ 245 7,505
-------- ---------
Total current assets.............................................................................. 71,750 57,553
Property and equipment, net......................................................................... 6,241 4,513
Deferred financing costs, net....................................................................... 9,956 8,349
Other assets........................................................................................ 1,815 1,937
-------- ---------
Total assets...................................................................................... $ 89,762 $ 72,352
======== =========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.................................................................................... $ 4,019 $ 4,034
Accrued liabilities................................................................................. 22,198 20,495
Deferred revenue.................................................................................... 2,111 1,556
Capital lease obligations, current portion.......................................................... 74 74
-------- ---------
Total current liabilities......................................................................... 28,402 26,159
Long term debt....................................................................................... 115,000 115,000
Capital lease obligations, long-term portion......................................................... 315 201
Deferred income taxes................................................................................ 1,716 2,254
Deferred rent and other.............................................................................. 804 362
Commitments and contingencies (Note 6)
Mandatorily redeemable convertible preferred stock, $.01 par value; 1,000,000 shares authorized;
748,739 shares issued and outstanding at March 31, 1998 and 1999 (aggregate liquidation preference
of $15,347)......................................................................................... 14,515 15,347
Stockholders' equity (net capital deficiency)
Class A common stock, $.01 par value; 20,000,000 shares authorized; 9,073,532 shares issued and
outstanding at March 31, 1998 and 1999............................................................. 91 91
Class B common stock, $.01 par value; 4,000,000 shares authorized; 1,289,785 and 1,118,092 shares
issued and outstanding at March 31, 1998 and 1999, respectively.................................... 13 11
Class L common stock, $.01 par value; 2,000,000 shares authorized; 1,008,170 shares issued and
outstanding at March 31, 1998 and 1999............................................................. 10 10
Additional paid-in capital.......................................................................... 20,625 19,754
Accumulated deficit................................................................................. (89,686) (105,416)
Notes receivable from stockholders.................................................................. (288) (241)
Accumulated other comprehensive loss................................................................ (1,755) (1,180)
-------- ---------
Total stockholders' equity (net capital deficiency)............................................... (70,990) (86,971)
-------- ---------
Total liabilities and stockholders' equity (net capital deficiency)............................... $ 89,762 $ 72,352
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues............................................................. $109,493 $115,459 $ 66,207
Cost of revenues......................................................... 49,795 55,683 36,827
-------- -------- --------
Gross margin............................................................. 59,698 59,776 29,380
Operating expenses:
Research and development............................................... 13,050 19,057 15,130
Selling, general and administrative.................................... 22,004 24,589 17,870
Amortization of goodwill and purchased intangibles..................... 1,275 -- --
Recapitalization and other non-recurring expenses...................... -- 4,188 --
Expenses relating to operating cost improvements....................... -- -- 1,057
-------- -------- --------
Total operating expenses................................................. 36,329 47,834 34,057
-------- -------- --------
Operating income (loss).................................................. 23,369 11,942 (4,677)
Other (income) expense:
Interest expense....................................................... 1,621 12,930 14,060
Interest income........................................................ (346) (753) (651)
Other (income) expense................................................. (14) 194 (6)
-------- -------- --------
(1,261) (12,371) (13,403)
-------- -------- --------
Income (loss) before provision for income taxes.......................... 22,108 (429) (18,080)
Provision (benefit) for income taxes..................................... 9,007 604 (2,350)
-------- -------- --------
Net income (loss)........................................................ $ 13,101 (1,033) (15,730)
========
Preferred stock dividends................................................ 738 832
-------- --------
Net loss attributable to common stockholders............................. $ (1,771) $(16,562)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands, except share data)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Common Stock
Preferred Stock
Shares Amount Shares Amount Shares Amount Shares Amount
----------- ----------- ------------- ----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996..... -- $ -- 45,515,339 $ 45 -- $ -- -- $ --
Net income.................... -- -- -- -- -- -- -- --
Currency translation
adjustments.................. -- -- -- -- -- -- -- --
Comprehensive income.........
Repayment of notes receivable
from stockholders............ -- -- -- -- -- -- -- --
----------- ----------- ------------- ------------ ---------- ------------ ---------- ----------
Balance at March 31, 1997..... -- -- 45,515,339 45 -- -- -- --
Net loss...................... -- -- -- -- -- -- -- --
Currency translation -- --
adjustments.................. -- -- -- -- -- -- -- --
Comprehensive loss...........
Recapitalization
Transactions:................ -- -- 8,614,997 9 -- -- -- --
Conversion of outstanding
Common Stock into shares of
Class A and Class L Common
Stock........................ -- -- (8,614,997) (9) 7,264,236 73 -- --
Conversion of outstanding
common stock into shares
of Preferred Stock, Class
A and Class L Common Stock... 750,000 13,800 (6,101,252) (6) 509,433 5 -- --
<CAPTION>
Accumulated
Other
Notes Compre- Compre-
Additional Receivable hensive hensive
Class L Paid-In Accumulated From Income income
Common Stock Capital Deficit Stockholders (Loss) Total (Loss)
----------- ----------- ------------ ---------- ------------ -----------
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996..... -- $ -- $ 60,465 $ (52,028) $ (524) $ (1,055) $ 6,903
Net income.................... -- -- -- 13,101 -- - 13,101 $ 13,101
Currency translation
adjustments.................. -- -- -- -- -- (383) (383) (383)
-----------
$ 12,718
===========
Comprehensive income.........
Repayment of notes receivable
from stockholders............ -- -- -- -- -- -- 524
------ ---------- ---------- ----------- ------------ ---------- ------------
Balance at March 31, 1997..... -- $ 60,465 $ (38,927) -- (1,438) 20,145
Net loss...................... (1,033) $ (1,033)
Currency translation -- -- (1,033) --
adjustments.................. -- -- -- -- (317) (317) (317)
-----------
Comprehensive loss........... $ (1,350)
===========
Recapitalization
Transactions:................ -- 17,102 -- -- -- 17,111
Conversion of outstanding
Common Stock into shares of
Class A and Class L Common
Stock........................807,138 8 (72) -- -- -- --
Conversion of outstanding
common stock into shares
of Preferred Stock, Class
A and Class L Common Stock... 56,604 1 (8,100) (5,700) -- -- (13,800)
</TABLE>
56
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (Continued)
(in thousands, except share data)
<TABLE>
<CAPTION>
Class A Class B
Common Common Stock Common Stock
Preferred Stock
Shares Amount Shares Amount Shares Amount Shares Amount
-------- -------- ----------- ---------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Redemption of Common
Stock....................... -- -- (39,414,087) (39) -- -- -- --
Issuances of Class A, B and
L Common Stock............. -- -- -- -- 1,290,010 13 1,334,875 13
Conversion of Preferred
Stock into Class A Common
Stock....................... (1,261) (23) -- -- 9,853 -- -- --
Recapitalization related
expenses paid by Toray and
Shimadzu.................... -- -- -- -- -- -- -- --
Forgiveness of receivable
from Toray and Shimadzu..... -- -- -- -- -- -- -- --
Preferred stock dividends... -- 738 -- -- -- -- -- --
Repurchased shares.......... -- -- -- -- -- -- (45,090) --
--------- -------- ----------- ----------- --------- -------- --------- --------
Balance at March 31, 1998... 748,739 14,515 -- -- 9,073,532 91 1,289,785 13
Net loss.................... -- -- -- -- -- -- -- --
Currency translation
adjustments................. -- -- -- -- -- -- -- --
Comprehensive loss........
Preferred stock dividends... -- 832 -- -- -- -- -- --
Repurchased shares.......... -- -- -- -- -- -- (171,693) (2)
--------- -------- ---------- ----------- --------- -------- --------- --------
748,739 $15,347 -- $-- 9,073,532 $91 1,118,092 $11
Balance at March 31, 1999... ========= ======== =========== =========== ========= ======== ========= ========
<CAPTION>
Accumu-
lated
Other
Notes Compre-
Receivable hensive
Additional from Income
Class L Paid-In Accumulated Stockholders (Loss) Total
Common Stock Capital Deficit ------------ ------- -------
-------- ---------
Shares Amount
--------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Redemption of Common
Stock....................... -- -- (52,835) (44,026) -- -- (96,900)
Issuances of Class A, B and
L Common Stock............. 143,333 1 3,328 -- (299) -- 3,056
Conversion of Preferred
Stock into Class A Common
Stock....................... 1,095 -- 23 -- -- -- 23
Recapitalization related
expenses paid by Toray and
Shimadzu.................... -- -- 2,888 -- -- -- 2,888
Forgiveness of receivable
from Toray and Shimadzu..... -- -- (1,425) -- -- -- (1,425)
Preferred stock dividends... -- -- (738) -- -- -- (738)
Repurchased shares.......... -- -- (11) -- 11 -- --
--------- -------- -------- --------- ----------- ------- --------
Balance at March 31, 1998... 1,008,170 10 20,625 (89,686) (288) (1,755) (70,990)
Net loss.................... -- -- -- (15,730) -- -- (15,730)
Currency translation
adjustments................. -- -- -- -- -- 575 575
Comprehensive loss.......
Preferred stock dividends... -- -- (832) -- -- -- (832)
Repurchased shares.......... -- -- (39) -- 47 -- 6
--------- -------- -------- --------- ----------- ------- --------
Balance at MArch 31, 1999... 1,008,170 $ 10 $ 19,754 $(105,416) $ (241) $(1,180) $(86,971)
========= ======== ======== ========= =========== ======= ========
<CAPTION> Compre-
hensive
Income
(Loss)
--------
<S> <C>
Redemption of Common
Stock.......................
Issuances of Class A, B and
L Common Stock.............
Conversion of Preferred
Stock into Class A Common
Stock.......................
Recapitalization related
expenses paid by Toray and
Shimadzu....................
Forgiveness of receivable
from Toray and Shimadzu.....
Preferred stock dividends...
Repurchased shares..........
Balance at March 31, 1998...
Net loss.................... $(15,730)
Currency translation
adjustments................. 575
--------
Comprehensive loss........ $(15,155)
========
Preferred stock dividends...
Repurchased shares..........
Balance at March 31, 1999...
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss)............................................................. $13,101 $ (1,033) $(15,730)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation................................................................. 1,382 2,102 2,590
Amortization................................................................. 2,362 1,493 2,004
Amortization of deferred financing costs..................................... -- 1,385 1,607
Deferred income taxes........................................................ (2,214) (2,106) 5,977
Noncash recapitalization and related expenses................................ -- 3,888 --
Loss on disposal of property, plant and equipment............................ -- 400 --
Changes in assets and liabilities:
Accounts receivable........................................................ (1,277) (1,991) 9,918
Inventories................................................................ (5,006) (4,956) 4,310
Other assets............................................................... (44) 78 (4,136)
Accounts payable........................................................... 732 (57) 15
Accrued and other liabilities.............................................. 2,572 8,497 (5,368)
Other long-term liabilities................................................ 252 413 (442)
------- -------- --------
Net cash provided by operating activities................................. 11,860 8,113 745
------- -------- --------
Investing activities:
Purchases of property and equipment.......................................... (1,091) (2,900) (862)
Other........................................................................ (484) -- (527)
------- -------- --------
Net cash used in investing activities..................................... (1,575) (2,900) (1,389)
------- -------- --------
Financing activities:
Issuance of Senior Notes..................................................... -- 115,000 --
Proceeds from notes payable.................................................. 250 -- --
Repayment of notes payable................................................... (1,435) (26,934) --
Principal payments under capital lease obligations........................... (190) (128) (114)
Redemption of common stock................................................... -- (96,900) --
Proceeds from issuance of common stock....................................... -- 20,169 --
Deferred financing costs..................................................... -- (11,341) --
Other........................................................................ 141 (1,398) 581
------- -------- --------
Net cash (used in) provided by financing activities....................... (1,234) (1,532) 467
------- -------- --------
Net (decrease)/increase in cash and cash equivalents........................... 9,051 3,681 (177)
Cash and cash equivalents at beginning of period............................... 7,690 16,741 20,422
------- -------- --------
Cash and cash equivalents at end of period..................................... $16,741 $ 20,422 $ 20,245
======= ======== ========
Supplementary disclosures:
Cash paid for interest....................................................... $ 2,059 $ 6,323 $ 12,469
======= ======== ========
Cash paid for income taxes................................................... $10,661 $ 2,764 $ 293
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Therma-Wave, Inc. (the "Company") was incorporated in California on
March 11, 1986 and reincorporated in Delaware on October 16, 1990 and
subsequently amended its certificate of incorporation on May 16, 1997. The
Company develops, manufactures, and markets process control metrology systems
for use in the manufacture of semiconductors. These systems are based on the
Company's proprietary thermal wave and optical technologies. The Company markets
and sells its products worldwide to major semiconductor manufacturers.
Basis of Presentation
The Company's fiscal year is a 52 to 53-week year ending on the Sunday
on or following March 31 of each year. Fiscal years 1997, 1998 and 1999 ended on
April 6, 1997, April 5, 1998 and April 4, 1999, respectively. For convenience,
the accompanying financial statements have been presented as ending on the last
day of the nearest calendar month.
Certain items previously reported in specific financial statement
captions have been reclassified to conform with the March 31, 1999 presentation.
Principles of Consolidation
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.
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 $11.3 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.
59
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Concentration of Credit Risk/Major Customers
The Company sells its products to major semiconductor manufacturing
companies throughout the world. The Company performs continuing credit
evaluations of its customers and, generally, does not require collateral.
Letters of credit may be required from its customers in certain circumstances.
Sales to customers representing 10% or more of net revenues were as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
Customer 1997 1998 1999
-------- ---- ---- ----
<S> <C> <C> <C>
A 13% 23% 23%
B 10% -- --
C -- -- 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.
Accounts receivable from three customers accounted for approximately
31%, 10% and 9% of total accounts receivable at March 31, 1998. Accounts
receivable from three customers accounted for approximately 26%, 12% and 11% of
total accounts receivable at March 31, 1999.
Risks and Uncertainties
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,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates, and such differences
could affect the results of operations reported in future periods.
Foreign Currency Translations and Transactions
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 stockholders' equity (net capital deficiency).
Foreign currency transaction gains (losses) are included in other income and
expense in the accompanying consolidated statements of operations and amounted
to $74,000, $(275,000) and $(23,000) for the years ended March 31, 1997, 1998
and 1999.
60
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are provided on the
straight-line basis over the estimated useful lives of the respective assets,
generally three to five years. Leasehold improvements and assets recorded under
capital leases are amortized on the straight-line basis over the shorter of the
assets' useful lives or lease terms. Depreciation and amortization expense for
fiscal years 1997, 1998 and 1999 are $1,382,000, $2,102,000, and $2,590,000,
respectively.
Long-lived Assets
The Company reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss would be recognized when estimated
future cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. No such impairment losses have
been identified by the Company.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection
with the issuance of the Senior Notes. These amounts are stated net of
accumulated amortization and amortized on the straight-line basis over the term
of the related notes.
Research and Development Expenses
Expenditures for research and development are expensed as incurred.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The Company accounts for employee stock options
in accordance with Accounting Principles Board Opinion No. 25 and has adopted
the "disclosure only" alternative described in SFAS No. 123.
61
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities measured using enacted tax rates expected to apply to taxable
income in the years in which the temporary differences are expected to be
recovered or settled. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
Advertising Costs
The Company expenses advertising and promotional costs, which are not
material, as they are incurred.
Recently Issued Accounting Standards
In June 1998, the FASB issued Statement on Financial Accounting
Standards No. 133 ("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.
2. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
March 31,
--------------------------
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Inventory:
Purchased materials............................... $ 9,958 $ 6,678
Systems in process................................ 7,146 5,302
Finished systems.................................. 4,188 3,389
------- --------
$21,292 $ 15,369
======= ========
Property and equipment:
Laboratory and test equipment..................... $ 3,786 $ 4,096
Office furniture and equipment.................... 5,423 5,766
Machinery and equipment........................... 1,766 1,816
Leasehold improvements............................ 3,145 3,154
------- --------
14,120 14,832
Accumulated depreciation and amortization......... (7,879) (10,319)
------- --------
$ 6,241 $ 4,513
======= ========
Accrued liabilities:
Interest payable.................................. $ 5,074 $ 4,932
Accrued compensation and related expenses......... 4,051 2,313
Accrued warranty costs............................ 6,671 4,733
Commissions payable............................... 1,389 1,311
Other accrued liabilities......................... 5,013 7,206
------- --------
$22,198 $ 20,495
======= ========
</TABLE>
62
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. FINANCING ARRANGEMENTS
Senior Notes
The $115.0 million of senior notes ("Senior Notes") issued to finance
the Recapitalization are senior unsecured obligations of the Company and will
mature on May 15, 2004. Interest on the Senior Notes will accrue at the rate of
10 5/8% per annum and is payable semiannually in cash on each May 15 and
November 15 to registered holders at the close of business on May 1 and November
1, respectively, immediately preceding the applicable interest payment date. The
Senior 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. If the Company completes an initial
public offering, with net proceeds equal to or in excess of $25.0 million, the
Company is required to make an offer to redeem up to 35% of the aggregate
principal amount of the Senior Notes outstanding at a price equal to 110.625% of
the principal amount thereof plus accrued and unpaid interest thereon. At any
time, or from time to time, if the Company completes one or more equity
offerings (not considered an initial public offering) on or prior to May 15,
2000, the Company may, at its option, use the net cash proceeds to redeem up to
35% of the aggregate principal amount of Senior Notes originally issued at a
redemption price equal to 110.625% of the principal amount thereof plus accrued
and unpaid interest.
Based upon the terms of the original notes, 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.
Bank Credit Facility
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
March 31, 1999, there was $3.5 million of an outstanding letter of credit and
unused borrowing capacity under the Amended Bank Credit Facility of $17.0
million. The interest rate under the Amended Bank Credit Facility is at the
lenders base rate plus 1.25% (9.5% at March 31, 1999).
At March 31, 1997, the Company had a credit agreement with a Japanese
bank for an unsecured, renewable note payable with an outstanding principal
balance of $3.8 million and $23.1 million of unsecured long-term debt under four
separate loan agreements with banks. These notes payable were repaid in
conjunction with the Recapitalization Agreement.
The fair value of the Company's long-term debt is based on quoted
market prices. The estimated fair value of long-term debt is $69,162,000 at
March 31, 1999.
63
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. INCOME TAXES
The domestic and foreign components of income (loss) before provision
(benefit) for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Domestic........... $ 19,419 $ (436) $ (19,016)
Foreign............ 2,689 7 936
-------- ------ ---------
Total......... $ 22,108 $ (429) $ (18,080)
-------- ------ ---------
</TABLE>
The components of the provision (benefit) for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-----------------------------------------
1997 1998 1999
------------ ------------- ------------
<S> <C> <C> <C>
Current:
Federal......... $ 9,696 $ 2,314 $ (8,344)
State........... 1,525 396 4
Foreign......... -- -- 13
------- ------- --------
11,221 2,710 (8,327)
Deferred:
Federal......... (1,921) (1,710) 5,807
State........... (293) (396) --
Foreign......... -- -- 170
------- ------- --------
(2,214) (2,106) 5,977
------- ------- --------
$ 9,007 $ 604 $ (2,350)
======= ======= ========
</TABLE>
A rate 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
-------------------------------------
MARCH 31,
-------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Provision at statutory rate........................................ 35.0% (35.0)% (35.0)%
State taxes, net of federal benefit................................ 3.6 -- --
Amortization of goodwill and purchased intangibles................. 2.0 -- --
Utilization of net operating loss and credit carryforwards......... (3.2) -- (5.5)
Foreign sales corporations......................................... (0.9) (40.5) --
Other changes in valuation allowances.............................. -- 195.4 26.1
Other.............................................................. 4.2 20.9 1.4
---- ------ ------
40.7% 140.8% (13.0)%
==== ====== ======
</TABLE>
For the year ended March 31, 1999 the Company realized an income tax
benefit from the carryback of its net operating loss to recover substantially
all income taxes paid during the carryback period. At March 31, 1999, the
Company recorded an income tax receivable of $7,351,000 which is included in
other current assets.
64
<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>
March 31,
------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Accrued costs and expenses................................. $ 5,935 $ 3,241
State taxes................................................ 117 1
Other...................................................... 2,441 3,156
Net operating loss and tax credits......................... 491 1,866
------- -------
Total gross deferred tax assets............................ 8,984 8,264
Less: valuation allowance...................................... (1,291) (6,010)
------- -------
Total gross deferred tax assets............................ 7,693 2,254
------- -------
Deferred tax liabilities:
Deferred revenue on foreign sales.......................... (1,281) (1,139)
Depreciation and amortization.............................. -- (834)
Other...................................................... (435) (281)
------- -------
Net deferred tax liabilities............................... (1,716) (2,254)
------- -------
Total net deferred tax assets.............................. $ 5,977 $ --
======= =======
</TABLE>
The net changes in the total valuation allowance for the years ended March
31, 1998 and 1999 were $800,000 and $4,719,000, respectively. The change in
valuation allowance for the year ended March 31, 1998 is primarily due to state
income tax temporary differences and foreign net operating losses. At March 31,
1999, management believes it is more likely than not that the net deferred tax
assets will not be fully realizable and has provided a full valuation against
its net deferred tax assets.
At March 31, 1999, the Company has net operating loss carryforwards for
foreign income tax purposes of approximately $390,000, which expire in varying
amounts through 2003.
5. EXPENSES RELATING TO OPERATING COST IMPROVEMENTS
On June 22 and September 24, 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. All terminated employees were
notified of their severance and related benefits at the time the program was
announced. This program resulted in a reduction of approximately 100 employees
primarily involved in customer service and manufacturing positions. Certain
leased facilities and fixed assets were consolidated. Total cash outlays for
fiscal 1999 were $832,000. Non-cash charges of $100,000 are primarily for asset
write-offs. The balance of $125,000 at March 31, 1999 primarily represents cash
payments and will be utilized in fiscal 2000. Expenses relating to operating
cost improvements are summarized as follows:
<TABLE>
<CAPTION>
Provision
--------------
Year Ended Balance
-------------- --------------
March 31, 1999 Utilized March 31, 1999
-------------- ------------- --------------
<S> <C> <C> <C>
Severance........... $ 837 $ 762 $ 75
Facilities.......... 120 70 50
Other............... 100 100 --
------- ------ -------
$ 1,057 $ 932 $ 125
======= ====== =======
</TABLE>
65
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. COMMITMENTS AND CONTINGENCIES
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 $3,500,000 standby letter of credit.
Property and equipment includes equipment recorded under capital leases of
approximately $895,000 and related accumulated amortization of $506,000 and
$620,000 at March 31, 1998 and 1999 respectively.
Rent expense was approximately $1,524,000, $1,629,000 and $1,661,000 for
the fiscal years ended March 31, 1997, 1998 and 1999, respectively.
At March 31, 1999, future minimum lease payments under capital and
noncancellable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
----------- ----------
Leases Leases
----------- ----------
Fiscal Year
<S> <C> <C>
2000.............................................. $ 90 $ 1,378
2001.............................................. 88 1,165
2002.............................................. 212 1,180
2003.............................................. -- 1,229
2004.............................................. -- 1,191
Thereafter........................................ -- 2,184
----- -------
Future Minimum Lease Payments..................... 390 $ 8,327
=======
Less: Amounts Representing Interest............... (115)
-----
Present Value of Minimum Lease Payments........... 275
Less: Current Portion............................. (74)
-----
$ 201
=====
</TABLE>
Deferred Bonus Arrangements
Pursuant to the terms of certain management bonus arrangements, the
Company may be obligated to pay up to an aggregate of $12.4 million after May
16, 2002 based upon achieving certain operating results and each employee's
continued employment. The Company must achieve a minimum cumulative EBITDA (as
defined in such bonus agreements) of $177.0 million for the five year period
ended May 15, 2002 in order for the deferred bonus of $12.4 million to be
payable. If the Company achieves cumulative EBITDA levels from $133.3 million to
$177.0 million for the five year period ended May 15, 2002, a fraction of the
deferred bonus is payable based on the amount EBITDA exceeds $133.3 million, up
to the maximum deferred bonus amount of $12.4 million. No amounts have been
accrued to date as the achievement of the required operating results is not
considered probable as of March 31, 1999.
Legal Proceedings
On September 3, 1998, the Company was named in a patent infringement
suit filed by KLA-Tencor Corporation ("KLA-Tencor"). KLA-Tencor alleged that
it patented an aspect of the thin film thickness measuring technology that the
Company uses in its Opti-Probe product family. KLA-Tencor is seeking damages and
an injunction to stop the sale of the equipment they allege uses this aspect.
The Company believes none of its products infringe any of the claims of KLA-
Tencor's patent and that their infringement allegations are unfounded. The
Company intends to vigorously defend its position and expects to prevail.
66
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On January 14, 1999, the Company commenced an action against KLA-Tencor for
patent infringement with respect to one of the Company's fundamental thin film
technology combination patents. The suit seeks damages for patent infringement
and a permanent injunction against any future activities undertaken by KLA-
Tencor or any third party working in conjunction with them, which infringes on
the Company's patent. The suit was filed as a counterclaim in the infringement
action initiated by KLA-Tencor and 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 systems.
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 or results of operations.
The Company is involved in various other legal proceedings from time to
time arising in the ordinary course of business, none of which management
expects to have a material adverse effect on the Company's results of operations
or financial condition.
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Mandatorily Redeemable Convertible Preferred Stock
The Series A Mandatorily Redeemable Convertible Voting Preferred Stock
("Preferred Stock") has a liquidation preference of $18.40 and is convertible at
any time into one share of Class A Common Stock at the option of the holder.
Dividends on each share of the Preferred Stock shall be cumulative and accrue at
the rate of 6% per annum. The Preferred Stock has a scheduled redemption on May
17, 2004, and is otherwise redeemable by the Company at any time from time after
the earlier of (a) June 30, 1998 or (b) an initial public offering. Each share
of Preferred Stock is convertible into one share of Class A Common Stock (as
adjusted for stock splits, stock dividends, recapitalizations and similar
transactions). The Preferred Stock entitles the holder to one vote for each
share of Class A Common Stock issuable upon conversion of the Preferred Stock.
Upon any liquidation, dissolution or winding up of the Company, each holder of
the Preferred Stock shall be entitled to be paid before any distribution or
payment is made upon any capital stock or other equity securities of the
Company.
We issued shares of Preferred Stock as part of the Recapitalization. The
fair value of the Preferred Stock at March 31, 1999 of $15,347 represents the
liquidation value plus accrued dividends.
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 748,739 shares of
Preferred Stock. The shares of Class A Stock and Class L Stock each entitle the
holder 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
Stock are entitled to a preference over Class A Stock 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 Stock is
identical to the Class A Stock except that the Class B Stock is non-voting and
is convertible into Class A Stock at any time following an initial public
offering by the Company at the option of the holder.
All unvested shares of Class B Stock are subject to repurchase by the
Company if the holder is no longer employed by the Company. Such shares vest
over five years from the date of issuance. During the fiscal year ended
67
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1999, 171,693 shares of Class B Stock were repurchased by the Company.
As of March 31, 1999, 351,008 shares of Class B Stock were vested and 767,084
shares of Class B Stock were subject to repurchase by the Company at the paid-in
amount.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations in accounting for its employee stock awards because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") requires use of option valuation models for use
in valuing employee stock options. Under APB No. 25, when the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
During fiscal year 1998, the Company adopted several stock option plans
(the "Plans") whereby the Board of Directors may grant incentive stock options
and nonstatutory stock options to employees, directors or consultants. The
Company has reserved 3,742,500 shares of Class A Stock and 3,742,500 shares of
Class B Stock for issuance under the Plans. Unless terminated sooner, the Plans
will terminate automatically in May 2007. Vesting provisions for stock options
granted under the Plans are determined by the Board of Directors. Unless the
Board of Directors specifically determines otherwise at the time of the grant,
the option shall vest 25% on each of the first four anniversaries from the date
of grant. Stock options expire no later than ten years from the date of grant.
Common shares issued on exercise of options prior to vesting are subject to
repurchase by the Company if the holder is no longer employed by the Company.
A summary of the Company's stock option activity, and related information
for the years ended March 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------
Weighted Average
----------------
Shares Number Of Exercise Price
-------------- ------------- ----------------
Available Shares Per Share
-------------- ------------- ----------------
<S> <C> <C> <C>
Balance at March 31, 1997........................ -- -- $ --
Authorized................................... 7,485,000 -- --
Granted...................................... (1,836,384) 1,836,384 10.67
Exercised.................................... -- -- --
Canceled..................................... 70,926 (70,926) 10.08
---------- ---------
Balance at March 31, 1998...................... 5,719,542 1,765,458 10.69
Granted...................................... (320,100) 320,100 4.44
Exercised.................................... -- -- --
Canceled..................................... 307,472 (307,472) 10.28
---------- ---------
Balance at March 31, 1999...................... 5,706,914 1,778,086 $ 9.64
========== =========
</TABLE>
68
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes information about stock options outstanding
as of March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Life Price
-------------------------------------
<S> <C> <C> <C>
Range of exercise prices:
$4.00..................................... 270,000 9.32 $ 4.00
$6.00-$7.00............................... 423,255 8.75 $ 6.10
$8.93-$15.89.............................. 1,084,831 8.13 $12.42
---------
1,778,086
=========
</TABLE>
At March 31, 1999, there were 111,572 vested shares and 1,196,403 shares
were exercisable.
Pro forma information regarding net loss is required by FAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted subsequent to March 31, 1996 under the fair
value method. The fair value for these options was estimated using the Black-
Scholes option pricing model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of options of publicly traded companies and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in the opinion of management, the existing models do not necessarily
provide a reliable single measure of the fair value of its options.
For the years ended March 31, 1998 and 1999, the fair value of each option
grant was estimated on the date of the grant using the Black-Scholes option-
pricing model using a dividend yield of 0% for both periods and the following
additional weighted-average assumptions: volatility of zero and expected life of
an option of 5 years and a risk-free interest rate of 7.0% and 5.0%,
respectively. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the option's vesting period.
Had compensation costs been determined based upon the fair value at the
grant date for awards under these plans, consistent with the methodology
prescribed under SFAS No. 123, the Company's pro forma net loss attributable to
common stockholders under SFAS No. 123 would have been $(1,856,000) for the year
ended March 31, 1998 and $(16,717,000) for the year ended March 31, 1999,
respectively.
The weighted average fair value of options granted during the years ended
March 31, 1998 and 1999 with exercise prices equal to the market price at the
date of grant is $0.45 and $0.96 per share, respectively.
69
<PAGE>
THERMA-WAVE,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. RELATED PARTY TRANSACTIONS
Transactions with Toray & Shimadzu are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------
MARCH 31,
------------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Revenue......................... $ 590 $ 82 $ 31
Purchases of inventories........ 94 -- --
</TABLE>
The Company incurred expenses of approximately $559,000, $75,000 and
$118,000 for the fiscal years ended March 31, 1997, 1998 and 1999, respectively,
for employees loaned to the Company by Toray and Shimadzu.
On March 31, 1999, the Company had loans to management of $241,000 used to
acquire the Company's capital stock (notes receivable from stockholders) and
$1,043,000 used to pay certain tax liabilities incurred by certain executives in
connection with the Recapitalization (the Tax Notes). The notes receivable from
stockholders bear interest at the applicable federal rate in effect at the time
of the Recapitalization. The Tax Notes do not bear interest. The executives have
pledged their stock as security for the notes.
In connection with the Recapitalization, the Company entered into an
Advisory Agreement with Bain Capital, a majority stockholder, pursuant to which
Bain Capital agreed to provide management services. The management fees
incurred, excluding out-of pocket expenses, during the fiscal years ended March
31, 1998 and 1999 were $750,000 and $1,000,000, respectively.
9. 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, $566,000 and $0 in fiscal 1997, 1998 and 1999, respectively.
70
<PAGE>
THERMA-WAVE,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. SEGMENT INFORMATION
The Company operates in one segment as it manufactures, markets and
services process control metrology systems within the semiconductor equipment
market. All products and services are marketed within the geographic regions in
which the Company operates. The Company's current product offerings qualify for
aggregation under SFAS No. 131 as its products are manufactured and distributed
in the same manner, have similar long-term gross margins and are sold to the
same customer base.
The following is a summary of operations in geographic areas (in
thousands):
<TABLE>
<CAPTION>
Other
-------
U.s. Japan Foreign Eliminations Consolidation
--------- -------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Fiscal year ended March 31, 1997..................
Sales to unaffiliated customers.................... $ 97,237 $ 9,730 $2,526 $ -- $109,493
Transfers between geographic locations............. 3,859 1,261 2,028 (7,148) --
-------- ------- ------ ------- --------
Total net sales.................................... $101,096 $10,991 $4,554 $(7,148) $109,493
Operating income (loss)............................ $ 21,965 $ 1,633 $ 136 $ (365) $ 23,369
Long-lived assets.................................. $ 5,732 $ 739 $ 510 $ -- $ 6,981
All other identifiable assets...................... 54,868 6,758 2,869 (2,856) 61,639
-------- ------- ------ ------- --------
Total assets....................................... $ 60,600 $ 7,497 $3,379 $(2,856) $ 68,620
======== ======= ====== ======= ========
Fiscal year ended March 31, 1998
Sales to unaffiliated customers.................... $110,098 $ 2,645 $2,716 $ -- $115,459
Transfers between geographic locations............. (1,929) 1,706 2,572 (2,349) --
-------- ------- ------ ------- --------
Total net sales.................................... $108,169 $ 4,351 $5,288 $(2,349) $115,459
Operating income (loss)............................ $ 11,661 $ 103 $ 458 $ (280) $ 11,942
Long-lived assets.................................. $ 16,974 $ 624 $ 414 $ -- $ 18,012
All other identifiable assets...................... 69,237 2,841 3,030 (3,358) 71,750
-------- ------- ------ ------- --------
Total assets....................................... $ 86,211 $ 3,465 $3,444 $(3,358) $ 89,762
======== ======= ====== ======= ========
Fiscal year ended March 31, 1999
Sales to unaffiliated customers.................... $ 60,355 $ 2,542 $3,310 $ -- $ 66,207
Transfers between geographic locations............. (2,811) 1,047 3,620 (1,856) --
-------- ------- ------ ------- --------
Total net sales.................................... $ 57,544 $ 3,589 $6,930 $(1,856) $ 66,207
Operating income (loss)............................ $ (5,652) $ 338 $ 634 $ 3 $ (4,677)
Long-lived assets.................................. $ 13,893 $ 555 $ 351 $ -- $ 14,799
All other identifiable assets...................... 53,645 2,482 3,775 (2,349) 57,553
-------- ------- ------ ------- --------
Total assets....................................... $ 67,538 $ 3,037 $4,126 $(2,349) $ 72,352
======== ======= ====== ======= ========
</TABLE>
Other foreign areas include the United Kingdom, Taiwan and Korea, each of
which are individually not material for separate disclosure.
Revenue in each geographic area is recognized upon shipment from the
locations within a designated geographic region. Transfers and commission
arrangements between geographic areas are at prices sufficient to recover a
reasonable profit. Export sales were $54,390,000, $56,006,000 and $39,892,000 of
the net sales in fiscal 1997, 1998 and 1999, respectively.
71
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Therma-Wave, Inc.
Our audit of the consolidated financial statements as of March 31, 1999 and for
the year then ended referred to in our report dated April 27, 1999 appearing on
page 53 of the consolidated financial statements in this Annual Report on Form
10-K also included an audit of the Financial Statement Schedule for the year
ended March 31, 1999 listed in Item 14(a) in this Annual Report on Form 10-K. In
our opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
San Jose, California
April 27, 1999
72
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
THERMA-WAVE, INC.
(in thousands)
<TABLE>
<CAPTION>
Balance at
Beginning Deductions-- Balance at
Description of Period Additions Describe End of Period
- -----------------------------------------------------------------------------------------------------------------------
Charged to
Other
Accounts--
Describe
--------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999:
Reserves and allowances deducted from asset
accounts; Allowance for Doubtful
Accounts $3,016 $ (631) $ -- $ 474 $1,911
Year ended March 31, 1998:
Reserves and allowances deducted from asset
accounts; Allowance for Doubtful
Accounts $1,622 $1,394 $ -- $ -- $3,016
Year ended March 31, 1997:
Reserves and allowances deducted from asset
accounts; Allowance for Doubtful
Accounts $ 284 $1,338 $ -- $ -- $1,622
</TABLE>
73
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Act of 1934, Therma-Wave, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fremont,
State of California, on June 30, 1999.
Therma-Wave, Inc.
(Registrant)
By: /s/ Allan Rosencwaig
---------------------------------------
Allan Rosencwaig
Chief Executive Officer
* * * *
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated:
SIGNATURE TITLE DATE
- ---------------------------- ------------------------------ ---------------
/s/ Allan Rosencwaig Chairman of the Board and June 30, 1999
Chief Executive Officer
Allan Rosencwaig (Principal Executive Officer)
/s/ Martin M. Schwartz President, Chief Operating June 30, 1999
Officer and Director
Martin M. Schwartz
/s/ L. Ray Christie Vice President and Chief June 30, 1999
Financial Officer (Principal
L. Ray Christie Financial and Accounting
Officer)
/s/ G. Leonard Baker, Jr. Director June 30, 1999
G. Leonard Baker, Jr.
/s/ David Dominik Director June 30, 1999
David Dominik
/s/ Adam W. Kirsch Director June 30, 1999
Adam W. Kirsch
74
<PAGE>
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
August 3, 1998, between Therma-Wave, Inc., a Delaware corporation (the
"Company"), and Martin M. Schwartz ("Executive").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive hereby
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date hereof and ending on the
earlier of (a) the fifth anniversary of the date hereof and (b) the date of
termination as provided in Section 4 hereof (the "Employment Period").
2. Position and Duties.
(a) During the Employment Period, Executive shall serve as the
President and Chief Operating Officer of the Company and shall have the normal
duties, responsibilities and authority of the President and Chief Operating
Officer, subject to the overall direction and authority of the Company's board
of directors (the "Board") and the Company's Chief Executive Officer.
(b) Executive shall report to the Company's Chief Executive Officer
and Board, and Executive shall devote his best efforts and his full business
time and attention to the business and affairs of the Company and its
Subsidiaries.
(c) For purposes of this Agreement, "Subsidiaries" shall mean any
corporation of which the securities having a majority of the voting power in
electing directors are, at the time of determination, owned by the Company,
directly or through one or more Subsidiaries.
(d) Upon commencement of his employment with the Company, Allan
Rosencwaig will designate Executive to be elected to the Company's Board in
accordance with the Voting Agreement dated as of May 16, 1997 by and between the
Company and the other parties thereto, to serve until his successor is duly
elected and qualified.
3. Base Salary and Benefits.
(a) During the Employment Period, Executive's base salary shall be at
least $265,000 per annum, subject to review by the Board and the Chief Executive
Officer (who shall consider the Radford Survey in such review) on an annual
basis (the
1
<PAGE>
"Base Salary"), which salary shall be payable in regular installments in
accordance with the Company's general payroll practices and shall be subject to
customary withholding. In addition, during the Employment Period, Executive
shall be entitled to the fringe benefits listed on Exhibit A attached hereto and
(to the extent not listed on Exhibit A) shall be entitled to participate in all
of the Company's employee benefit programs for which senior executive employees
of the Company and its Subsidiaries are generally eligible (collectively, the
"Benefits").
(b) The Company shall reimburse Executive for all reasonable expenses
incurred by him in the course of performing his duties under this Agreement
which are consistent with the Company's policies in effect from time to time
with respect to travel, entertainment and other business expenses, subject to
the Company's requirements with respect to reporting and documentation of such
expenses.
(c) In addition to the Base Salary, for each of the Company's fiscal
years beginning with the 1999 fiscal year, Executive will be eligible to earn a
bonus of up to 37.5% of his Base Salary (the "Bonus") based on the Company
achieving certain corporate performance goals and Executive achieving certain
individual goals. The target amount of the Bonus, the corporate performance
goals and the individual goals each shall be set annually by the Board and the
Company's Chief Executive Officer. The amount of the Bonus shall be determined
in accordance with the procedures set forth on Exhibit B attached hereto.
4. Termination.
(a) The Employment Period (i) shall terminate upon Executive's
resignation (other than for Good Reason) or death, (ii) shall terminate upon
Executive's Disability, (iii) may be terminated by the Company at any time for
Cause (as defined below) or without Cause and (iv) may be terminated by
Executive for Good Reason.
(b) If the Employment Period is terminated by the Company without
Cause, by Executive for Good Reason or as a result of Executive's Disability,
Executive shall be entitled to receive the Base Salary, the Bonus (which during
the Severance Period will be equal to 37.5% of the Base Salary in effect
immediately prior to the termination) and the Benefits (the "Severance
Payment"), in each case until (i) if the date of termination is prior to the
second anniversary of the date of this Agreement, the date which is twelve
months after the date of such termination and (ii) if the date of termination is
on or after the second anniversary of the date of this Agreement, until the date
which is fifteen months after the date of such termination (the "Severance
Period"); provided that the portion of the Bonus that Executive would have been
entitled to receive for the fiscal year in which the Severance Period terminates
shall be reduced proportionately by the ratio of the number of days of such
fiscal year not included in the Severance Period to the total number of days in
such fiscal year. The Severance Payment will be payable at such times as such
payments would have been payable had Executive not been terminated.
Notwithstanding anything in this Agreement to the
2
<PAGE>
contrary, the Company shall have no obligation to pay any part or all of the
Severance Payment if at any time during the Severance Period Executive is in
breach of Section 6 hereof. If the Employment Period is terminated for any of
the foregoing reasons after the second anniversary of the date of this
Agreement, the Severance Payment shall be reduced by fifty percent (50%) of the
amount of any compensation Executive receives in respect of any other employment
during the Severance Period. Upon request from time to time, Executive shall
furnish the Company with a true and complete certificate specifying any such
compensation due to or received by him. As a condition to the Company's
obligations (if any) to make the Severance Payment pursuant to this Section
4(b), Executive will execute and deliver a general release in form and substance
satisfactory to the Company.
(c) If the Employment Period is terminated by the Company for Cause
or is terminated pursuant to subsection 4(a)(i) above, Executive shall be
entitled to receive the Base Salary through the date of termination.
(d) Except as specifically provided herein, all of Executive's rights
to Benefits and bonuses which accrue or become payable after the termination of
the Employment Period shall cease upon such termination.
(e) For purposes of this Agreement, "Disability" shall mean any
physical or mental illness or incapacity of Executive if, as determined by the
Board, such illness or incapacity results in Executive's inability to perform
his full-time duties and responsibility for the Company (i) for a period of
three consecutive months, (ii) for a period of 6 months in any twelve month
period, or (iii) at such time when satisfactory medical evidence exists that
Executive has a physical or mental illness or incapacity that will likely
prevent him from returning to the performance of his work duties for 6 months or
longer.
(f) For purposes of this Agreement, "Cause" shall mean (i) the
commission of a felony or any other act or omission involving dishonesty,
disloyalty or fraud with respect to the Company or any of its Subsidiaries or
any of their customers or suppliers, (ii) conduct tending to bring the Company
or any of its Subsidiaries into substantial public disgrace or disrepute, (iii)
substantial and repeated failure to perform duties as reasonably directed by the
Board, (iv) gross negligence or willful misconduct with respect to the Company
or any of its Subsidiaries, or (v) any other material breach of this Agreement
or the Option Agreement (as hereinafter defined).
(g) For purposes of this Agreement, "Good Reason" shall mean the
occurrence (without Executive's consent) of any one of the following acts by the
Company, or failure by the Company to act: (i) the assignment to Executive of
duties that represent a substantial adverse alteration in the nature or status
of his responsibilities as a senior executive officer of the Company, except in
the event Executive is unable to or fails to perform his normal full-time duties
and responsibility with the Company as a result of incapacity due to physical or
mental illness or
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incapacity; (ii) a reduction in the Base Salary as in effect on the date hereof;
(iii) the relocation of the Company's principal executive offices to a location
outside the San Francisco Bay Area (which includes the counties of San
Francisco, Alameda, Santa Clara, Contra Costa, San Mateo and Marin)or the
Company's requiring Executive to be based anywhere other than the Company's
principal executive offices (but not including required travel on the Company's
business); or (iv) the wrongful failure by the Company to pay to Executive any
portion of the Base Salary, Bonus or Benefits, or to pay to Executive any
portion of an installment of deferred compensation or Benefits under any
deferred compensation or benefits program of the Company, within 45 days of the
date such Base Salary, Bonus, compensation or Benefit is due.
5. Stock Option.
(a) Executive shall be granted nonstatutory options to purchase
200,000 shares of the Company's Common Stock on the effective date of this
Agreement (the "Grant Date"). The options shall vest annually in equal
installments over a vesting term of 5 years from the Grant Date and shall have
an exercise price of $4.00 per share. The vesting of the options shall be
accelerated and the options shall become immediately exercisable upon a Sale of
the Company (as defined below). The grant of the options shall be set forth in
the Company's standard form of option agreement (the "Option Agreement").
(b) For purposes of this Agreement, a "Sale of the Company" means any
transaction involving the Company and an Independent Third Party or affiliated
group of Independent Third Parties pursuant to which such party or parties
acquire (i) a majority of the outstanding shares of capital stock of the Company
entitled to vote generally in the election of the Board (whether by merger,
consolidation or sale or transfer of the Company's capital stock) or (ii) all or
substantially all of the Company's assets determined on a consolidated basis.
(c) For purposes of this Agreement, an "Independent Third Party"
means any Person who, immediately prior to the contemplated transaction, does
not own in excess of 5% of the capital stock on a fully diluted basis, who is
not controlling, controlled by or under common control with any such 5% owner of
the capital stock and who is not the spouse or descendant (by birth or adoption)
of any such 5% owner of the capital stock; provided that in no event will Bain
Capital, Inc. or any of its affiliates be an Independent Third Party.
6. Noncompetition; Confidentiality; Nonsolicitation.
(a) Noncompetition. Executive agrees that while he is employed by
the Company he will not Compete with the Company or any of its Subsidiaries. For
purposes of this Agreement, "Compete" or "Competing" shall mean, directly or
indirectly, without the prior written consent of the Company, providing
consultive service with or without pay, owning, managing, operating, joining,
controlling, participating in, or being connected as a stockholder, partner or
otherwise with any business, individual,
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partner, firm, corporation or other entity that (i) is in competition with the
Company or any Subsidiary or Related Entity (as defined in Section 6(d) below)
to the extent its products are similar or materially related to those of the
Company or any Subsidiary or Related Entity (including products under
development by the Company, or to Executive's knowledge, by any Subsidiary or
Related Entity) or (ii) otherwise engages in any business in which the Company
or any Subsidiary or Related Entity is engaged or proposes to engage, in either
case as of the date of the termination of Executive's employment; provided that
"Compete" and "Competing" shall not mean being a passive owner of not more than
2% of the outstanding stock of any class of a corporation which is publicly
traded, so long as Executive has no active participation in the business of such
corporation.
(b) Confidential Information. Executive agrees that he will not at
any time, during and/or after the term of this Agreement, directly or
indirectly, divulge, furnish or make accessible to any party or otherwise use or
exploit any of the proprietary or confidential information or knowledge,
including without limitation, any financial information, marketing plans,
strategies, trade secrets (as defined by California Civil Code Section 3426),
data, know-how, processes, techniques, patents, patent applications,
improvements, inventions, formulas and other Proprietary Information, as such
term is used in the Proprietary Information and Employee Inventions Agreement
between the Company and Executive, of the Company or its Subsidiaries,
affiliates, vendors, suppliers or customers, other than in the course of
performing his duties hereunder and with the consent of the Company in
accordance with the Company's policies and regulations, as established from time
to time, for the protection of the Company's Proprietary Information. The
provisions of this Section 6(b) shall not apply to any information, documents or
materials which are, as shown by appropriate written evidence, in the public
domain, other than by reason of a default by Executive of his obligations
hereunder.
(c) Right to Company Materials. Executive agrees that all styles,
designs, lists, materials, books, files, reports, correspondence, data, records,
and other documents pertaining to his employment or to any confidential
information referred to above ("Company Material") used or prepared by, or made
available to, Executive, shall be and shall remain the property of the Company
or its designees. Upon the termination of Executive's employment or the
expiration of this Agreement, all Company Materials shall be returned
immediately to the Company, and Executive shall not make or retain any copies or
excerpts thereof.
(d) Antisolicitation. Executive promises and agrees that while he is
employed by the Company, during the Severance Period, and for a period of two
(2) years thereafter (the "Antisolicitation Periods"), he will not induce or
attempt to induce any customer, supplier, licensee, licensor, franchisee or
other business relation of the Company or any of its present or future
Subsidiaries or any affiliate of the Company to which the technology of the
Company is hereafter transferred and which at such time engages in activities
similar or materially related to those of the Company (a "Related
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<PAGE>
Entity"), either directly or indirectly, to cease doing business with the
Company or any Subsidiary or Related Entity or in any way materially interfere
with the relationship between any such customer, supplier, licensee or business
relation and the Company or any Subsidiary or Related Entity.
(e) Soliciting Employees. Executive promises and agrees that for a
period of five years following the date of termination of employment hereunder,
he will not directly or indirectly (i) solicit any employee of the Company to
work for any business, individual, partnership, firm, corporation, or other
entity in competition with the business of the Company or any subsidiary of the
Company or Related Entity at any time during such period or (ii) hire any person
who was an employee of the Company or any Subsidiary or Related Entity at any
time during the last year of the Employment Period.
(f) Disclosure to Company; Inventions as Sole Property of the
Company.
(i) Executive agrees promptly to disclose to the Company any
and all inventions, discoveries, improvements, trade secrets, formulas,
techniques, processes, and know-how, whether or not subject to patent,
trademark, copyright, trade secret or mask work protection and whether or not
reduced to practice, conceived or learned by Executive during his employment
with the Company or any Subsidiary or affiliate of the Company, either alone or
jointly with others, which relate to or result from the actual or anticipated
business, work, research or investigations of the Company or any Subsidiary or
affiliate of the Company, or which result, to any extent, from its use of the
Company's premises or property (the work being hereinafter collectively referred
to as the "Inventions").
(ii) Executive acknowledges and agrees that all the Inventions
shall be the sole property of the Company or any other entity designated by it
and Executive hereby assigns to the Company his entire right and interest in and
to all the Inventions; provided, however, that such assignment does not apply to
any Invention which qualifies under the provisions of Section 2870 of the
California Labor Code. The Company or any other entity designated by it shall be
the sole owner of all domestic and foreign rights pertaining to the Inventions.
Executive further agrees as to all the Inventions to assist the Company or
entity designated by it in every way (at the Company's expense) to obtain and
from time to time enforce patents on the Inventions in any and all countries. To
that end, by way of illustration but not limitation, Executive will testify in
any suit or other proceeding involving any of the Inventions, execute all
documents which the Company reasonably determines to be necessary or convenient
for use in applying for and obtaining patents thereon and enforcing same, and
execute all necessary assignments thereof to the Company or entity designated by
it. Executive's obligation to assist the Company or entity designated by it in
obtaining and enforcing patents for the Inventions shall continue beyond the
termination of his employment with the Company, but the Company shall compensate
Executive at a
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reasonable rate after such termination for the time actually spent by Executive
at the Company's request on such assistance.
(g) List of Prior Inventions. Attached hereto as Exhibit C is a
complete list of all inventions, discoveries or improvements relating to the
Company's business (or the business of any Subsidiary or affiliate of the
Company) which have been made by Executive prior to the date of this Agreement
and which are not owned by the Company (or any Subsidiary or affiliate thereof).
Executive represents and warrants that such list is complete and accurate in all
respects and acknowledges and agrees that the Company owns the entire right and
interest to each of the inventions, discoveries or improvements relating to the
Company's or any Subsidiary's or affiliate's business that may be made by
Executive during the Employment Period and that are not listed in Exhibit C.
(h) Injunction. Executive agrees that it would be difficult to
measure damages to the Company from any breach by Executive of the promises set
forth in subsections (a) through (g) of this Section 6, that injury to the
Company from any such breach would be impossible to calculate, and that money
damages would therefore be an inadequate remedy for any such breach.
Accordingly, Executive agrees that if Executive shall breach any provision of
subsections (a) through (g) of this Section 6 or any of them, the Company shall
be entitled, in addition to all other remedies it may have, to injunctions or
other appropriate orders to restrain any such breach by Executive without
showing or proving any actual damage sustained by the Company.
7. Other Businesses. As long as Executive is employed by the Company
or any of its Subsidiaries, Executive agrees that he will not, except with the
express written consent of the Board, become engaged in, or render services for,
any business other than the business of the Company, any of its Subsidiaries or
any corporation or partnership in which the Company or any of its Subsidiaries
have an equity interest.
8. Executive's Representations. Executive hereby represents and warrants
to the Company that (i) the execution, delivery and performance of this
Agreement by Executive do not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which he is bound, (ii) Executive is
not a party to or bound by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity that would be violated
or breached by the execution, delivery and performance of this Agreement by
Executive, and (iii) upon the execution and delivery of this Agreement by the
Company, this Agreement shall be the valid and binding obligation of Executive,
enforceable in accordance with its terms. Executive hereby acknowledges and
represents that he has consulted with independent legal counsel regarding his
rights and obligations under this Agreement and that he fully understands the
terms and conditions contained herein.
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9. Survival. The Company's obligation to make Severance Payments under
Section 4(b), if any, and the provisions of Sections 6, 9, 10, 11, 12, 13, 15,
16 and 17 shall survive and continue in full force in accordance with their
respective terms notwithstanding any termination of the Employment Period.
10. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, mailed by first class mail,
return receipt requested, or delivered by express courier service, to the
recipient at the address below indicated:
Notices to Executive:
Martin M. Schwartz
22204 Via Camino Court
Cupertino, California 95014
Notices to the Company:
Therma-Wave, Inc.
1250 Reliance Way
Fremont, California 94539
Attention: Chief Executive Officer
With a copy to:
Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Attn: Adam W. Kirsh
David Dominik
and
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: Jeffrey C. Hammes
Stephen L. Ritchie
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or mailed.
11. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or
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unenforceability shall not affect any other provision or any other jurisdiction,
but this Agreement shall be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable provision had never
been contained herein.
12. Complete Agreement. This Agreement and those documents expressly
referred to herein embody the complete agreement and understanding among the
parties and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
13. No Strict Construction. The language used in this Agreement shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party.
14. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
15. Successors and Assigns. This Agreement is intended to bind and inure
to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
his rights or delegate his obligations hereunder without the prior written
consent of the Company.
16. Choice of Law. All issues and questions concerning the construction,
validity, enforcement and interpretation of this Agreement and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of California, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of California or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of California.
17. Amendment and Waiver. The provisions of this Agreement may be amended
or waived only with the prior written consent of the Company and Executive, and
no course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity, binding effect or enforceability of this
Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
THERMA-WAVE, INC.
By: /s/ Allan Rosencwaig
-----------------------------------
Allan Rosencwaig
Chairman and CEO
/s/ Martin M. Schwartz
-----------------------------------
Martin M. Schwartz
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EXHIBIT "A"
1. Full medical, dental and vision coverage.
2. Personal time off (PTO) of twenty (20) days per year.
3. Car allowance of $1,000 per month.
4. Life insurance of 2X Base Salary.
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EXHIBIT "B"
BONUS CALCULATION
PRESIDENT and COO: base salary x 37.5% x CPR x IPR
- --------------------------------------
Note
CPR - Corporate Performance Rating:
Ranges from .33 to 3.0 based on financial results.
IPR - Individual Performance Rating:
See attached.
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INDIVIDUAL PERFORMANCE RATING (IPR)
The Individual Performance Rating, IPR, is based on the accumulated weight of
the Individual Goals that have been successfully met and the IPR is calculated
in accordance with the following table:
<TABLE>
<CAPTION>
Accumulated Weight
From Individual Goals IPR
- ----------------------- ----
<S> <C> <C>
Below 50 0.00
50 0.25
60 0.50
70 0.70
80 0.90
90 1.00
100 1.00
110 1.10
120 1.20
130 1.30
etc. etc.
</TABLE>
If the accumulated weight falls in between two of the numbers listed above, then
the IPR is calculated in a pro rata fashion from the two closest IPR's in the
table.
*If accumulated weight exceeds 100.
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EXHIBIT "C"
[List of Prior Inventions]
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EXHIBIT 10.27
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
August 10, 1998, between Therma-Wave, Inc., a Delaware corporation (the
"Company"), and L. Ray Christie ("Executive").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive hereby
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date hereof and ending on the
earlier of (a) the fifth anniversary of the date hereof and (b) the date of
termination as provided in Section 4 hereof (the "Employment Period").
Position and Duties.
(a) During the Employment Period, Executive shall serve as the Vice
President of Finance and Chief Financial Officer of the Company and shall have
the normal duties, responsibilities and authority of the Vice President of
Finance and Chief Financial Officer, subject to the overall direction and
authority of the Company's board of directors (the "Board") and the Company's
President and/or Chief Executive Officer.
Executive shall report to the Company's President and Chief Operating
Officer, and Executive shall devote his best efforts and his full business time
and attention to the business and affairs of the Company and its Subsidiaries.
For purposes of this Agreement, "Subsidiaries" shall mean any
corporation of which the securities having a majority of the voting power in
electing directors are, at the time of determination, owned by the Company,
directly or through one or more Subsidiaries.
2. Base Salary and Benefits.
(a) During the Employment Period, Executive's base salary shall be at
least $155,000 per annum, subject to review by the Board and the President
and/or Chief Executive Officer on an annual basis (the "Base Salary"), which
salary shall be payable in regular installments in accordance with the Company's
general payroll practices and shall be subject to customary withholding. In
addition, during the Employment Period, Executive shall be entitled to the
fringe benefits listed on Exhibit A attached hereto and (to the extent not
listed on Exhibit A) shall be entitled to participate in all of the Company's
employee benefit programs for which senior executive employees of the Company
and its Subsidiaries are generally eligible (collectively, the
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"Benefits").
The Company shall reimburse Executive for all reasonable expenses
incurred by him in the course of performing his duties under this Agreement
which are consistent with the Company's policies in effect from time to time
with respect to travel, entertainment and other business expenses, subject to
the Company's requirements with respect to reporting and documentation of such
expenses.
In addition to the Base Salary, for each of the Company's fiscal years
beginning with the 1999 fiscal year, Executive will be eligible to earn a bonus
of up to 30% of his Base Salary (the "Bonus") based on the Company achieving
certain corporate performance goals and Executive achieving certain individual
goals. The target amount of the Bonus, the corporate performance goals and the
individual goals each shall be set annually by the Board and the Company's Chief
Executive Officer. The amount of the Bonus shall be determined in accordance
with the procedures set forth on Exhibit B attached hereto.
2. Termination.
(a) The Employment Period (i) shall terminate upon Executive's
resignation (other than for Good Reason) or death, (ii) shall terminate upon
Executive's Disability, (iii) may be terminated by the Company at any time for
Cause (as defined below) or without Cause and (iv) may be terminated by
Executive for Good Reason.
If the Employment Period is terminated by the Company without Cause,
by Executive for Good Reason or as a result of Executive's Disability, Executive
shall be entitled to receive the Base Salary, ,the Bonus (which during the
Severance Period will be equal to 30% of the Base Salary in effect immediately
prior to the termination) and the Benefits (the "Severance Payment"), in each
case until the date which is six (6) months after the date of such termination
(the "Severance Period"); provided that the portion of the Bonus that Executive
would have been entitled to receive for the fiscal year in which the Severance
Period terminates shall be reduced proportionately by the ratio of the number of
days of such fiscal year not included in the Severance Period to the total
number of days in such fiscal year. The Severance Payment will be payable at
such times as such payments would have been payable had Executive not been
terminated. Notwithstanding anything in this Agreement to the contrary, the
Company shall have no obligation to pay any part or all of the Severance Payment
if at any time during the Severance Period Executive is in breach of Section 6
hereof. If the Employment Period is terminated for any of the foregoing reasons,
the Severance Payment shall be reduced by fifty percent (50%) of the amount of
any compensation Executive receives in respect of any other employment during
the Severance Period. Upon request from time to time, Executive shall furnish
the Company with a true and complete certificate specifying any such
compensation due to or received by him. As a condition to the Company's
obligations (if any) to make the Severance Payment pursuant to this Section
4(b), Executive will execute and deliver a general release in
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form and substance satisfactory to the Company.
(b) If the Employment Period is terminated by the Company for Cause
or is terminated pursuant to subsection 4(a)(i) above, Executive shall be
entitled to receive the Base Salary through the date of termination.
Except as specifically provided herein, all of Executive's rights to
Benefits and bonuses which accrue or become payable after the termination of the
Employment Period shall cease upon such termination.
For purposes of this Agreement, "Disability" shall mean any physical
or mental illness or incapacity of Executive if, as determined by the Board,
such illness or incapacity results in Executive's inability to perform his full-
time duties and responsibility for the Company (i) for a period of three
consecutive months, (ii) for a period of 6 months in any twelve month period, or
(iii) at such time when satisfactory medical evidence exists that Executive has
a physical or mental illness or incapacity that will likely prevent him from
returning to the performance of his work duties for 6 months or longer.
For purposes of this Agreement, "Cause" shall mean (i) the commission
of a felony or any other act or omission involving dishonesty, disloyalty or
fraud with respect to the Company or any of its Subsidiaries or any of their
customers or suppliers, (ii) conduct tending to bring the Company or any of its
Subsidiaries into substantial public disgrace or disrepute, (iii) substantial
and repeated failure to perform duties as reasonably directed by the Board, (iv)
gross negligence or willful misconduct with respect to the Company or any of its
Subsidiaries, or (v) any other material breach of this Agreement or the Option
Agreement (as hereinafter defined).
For purposes of this Agreement, "Good Reason" shall mean the
occurrence (without Executive's consent) of any one of the following acts by the
Company, or failure by the Company to act: (i) the assignment to Executive of
duties that represent a substantial adverse alteration in the nature or status
of his responsibilities as a senior executive officer of the Company, except in
the event Executive is unable to or fails to perform his normal full-time duties
and responsibility with the Company as a result of incapacity due to physical or
mental illness or incapacity; (ii) a reduction in the Base Salary as in effect
on the date hereof; (iii) the relocation of the Company's principal executive
offices to a location outside the San Francisco Bay Area (which includes the
counties of San Francisco, Alameda, Santa Clara, Contra Costa, San Mateo and
Marin) or the Company's requiring Executive to be based anywhere other than the
Company's principal executive offices (but not including required travel on the
Company's business); or (iv) the wrongful failure by the Company to pay to
Executive any portion of the Base Salary, Bonus or Benefits, or to pay to
Executive any portion of an installment of deferred compensation or Benefits
under any deferred compensation or benefits program of the Company, within 45
days of the date such Base Salary, Bonus, compensation or Benefit is due.
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2. Stock Option.
(a) Executive shall be granted nonstatutory options to purchase
70,000 shares of the Company's Common Stock on the effective date of this
Agreement (the "Grant Date"). The options shall vest annually in equal
installments over a vesting term of 5 years from the Grant Date and shall have
an exercise price of $4.00 per share. The vesting of the options shall be
accelerated and the options shall become immediately exercisable upon a Sale of
the Company (as defined below). The grant of the options shall be set forth in
the Company's standard form of option agreement (the "Option Agreement").
For purposes of this Agreement, a "Sale of the Company" means any
transaction involving the Company and an Independent Third Party or affiliated
group of Independent Third Parties pursuant to which such party or parties
acquire (i) a majority of the outstanding shares of capital stock of the Company
entitled to vote generally in the election of the Board (whether by merger,
consolidation or sale or transfer of the Company's capital stock) or (ii) all or
substantially all of the Company's assets determined on a consolidated basis.
(b) For purposes of this Agreement, an "Independent Third Party"
means any Person who, immediately prior to the contemplated transaction, does
not own in excess of 5% of the capital stock on a fully diluted basis, who is
not controlling, controlled by or under common control with any such 5% owner of
the capital stock and who is not the spouse or descendant (by birth or adoption)
of any such 5% owner of the capital stock; provided that in no event will Bain
Capital, inc. or any of its affiliates be an Independent Third Party.
3. Noncompetition; Confidentiality; Nonsolicitation.
(a) Noncompetition. Executive agrees that while he is employed by
the Company he will not Compete with the Company or any of its Subsidiaries. For
purposes of this Agreement, "Compete" or "Competing" shall mean, directly or
indirectly, without the prior written consent of the Company providing
consultive service with or without pay, owning, managing, operating, joining,
controlling, participating in, or being connected as a stockholder, partner or
otherwise with any business, individual, partner, firm, corporation or other
entity that (i) is in competition with the Company or any Subsidiary or Related
Entity (as defined in Section 6(d) below) to the extent its products are
similar or materially related to those of the Company or any Subsidiary or
Related Entity (including products under development by the Company, or to
Executive's knowledge, by any Subsidiary or Related Entity) or (ii) otherwise
engages in any business in which the Company or any Subsidiary or Related Entity
is engaged or proposes to engage, in either case as of the date of the
termination of Executive's employment; provided that "Compete" and "Competing"
shall not mean being a passive owner of not more than 2% of the outstanding
stock of any class of a corporation which is publicly traded, so long as
Executive has no active participation in the business of
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such corporation.
Confidential Information. Executive agrees that he will not at any
time, during and/or after the term of this Agreement, directly or indirectly,
divulge, furnish or make accessible to any party or otherwise use or exploit any
of the proprietary or confidential information or knowledge, including without
limitation, any financial information, marketing plans, strategies, trade
secrets (as defined by California Civil Code Section 3426), data, know-how,
processes, techniques, patents, patent applications, improvements, inventions,
formulas and other Proprietary Information, as such term is used in the
Proprietary Information and Employee Inventions Agreement between the Company
and Executive, of the Company or its Subsidiaries, affiliates, vendors,
suppliers or customers, other than in the course of performing his duties
hereunder and with the consent of the Company in accordance with the Company's
policies and regulations, as established from time to time, for the protection
of the Company's Proprietary Information. The provisions of this Section 6(b)
shall not apply to any information, documents or materials which are, as shown
by appropriate written evidence, in the public domain, other than by reason of a
default by Executive of his obligations hereunder.
Right to Company Materials. Executive agrees that all styles,
designs, lists, materials, books, files, reports, correspondence, data, records,
and other documents pertaining to his employment or to any confidential
information referred to above ("Company Material") used or prepared by, or made
available to, Executive, shall be and shall remain the property of the Company
or its designees. Upon the termination of Executive's employment or the
expiration of this Agreement, all Company Materials shall be returned
immediately to the Company, and Executive shall not make or retain any copies or
excerpts thereof.
Antisolicitation. Executive promises and agrees that while he is
employed by the Company, during the Severance Period, and for a period of two
(2) years thereafter (the "Antisolicitation Periods"), he will not induce or
attempt to induce any customer, supplier, licensee, licensor, franchisee or
other business relation of the Company or any of its present or future
Subsidiaries or any affiliate of the Company to which the technology of the
Company is hereafter transferred and which at such time engages in activities
similar or materially related to those of the Company (a "Related Entity"),
either directly or indirectly, to cease doing business with the Company or any
Subsidiary or Related Entity or in any way materially interfere with the
relationship between any such customer, supplier, licensee or business relation
and the Company or any Subsidiary or Related Entity.
(a) Soliciting Employees. Executive promises and agrees that for a
period of five years following the date of termination of employment hereunder,
he will not directly or indirectly (i) solicit any employee of the Company to
work for any business, individual, partnership, firm, corporation, or other
entity in competition with the business of the Company or any subsidiary of the
Company or Related Entity at any time during
5
<PAGE>
such period or (ii) hire any person who was an employee of the Company or any
Subsidiary or Related Entity at any time during the last year of the Employment
Period.
(a) Disclosure to Company; Inventions as Sole Property of the Company.
(i) Executive agrees promptly to disclose to the Company any
and all inventions, discoveries, improvements, trade secrets, formulas,
techniques, processes, and know-how, whether or not subject to patent,
trademark, copyright, trade secret or mask work protection and whether or not
reduced to practice, conceived or learned by Executive during his employment
with the Company or any Subsidiary or affiliate of the Company, either alone or
jointly with others, which relate to or result from the actual or anticipated
business, work, research or investigations of the Company or any Subsidiary or
affiliate of the Company, or which result, to any extent, from its use of the
Company's premises or property (the work being hereinafter collectively referred
to as the "lnventions").
(ii) Executive acknowledges and agrees that all the Inventions
shall be the sole property of the Company or any other entity designated by it
and Executive hereby assigns to the Company his entire right and interest in and
to all the Inventions; provided, however, that such assignment does not apply to
any Invention which qualifies under the provisions of Section 2870 of the
California Labor Code. The Company or any other entity designated by it shall be
the sole owner of all domestic and foreign rights pertaining to the Inventions.
Executive further agrees as to all the Inventions to assist the Company or
entity designated by it in every way (at the Company's expense) to obtain and
from time to time enforce patents on the Inventions in any and all countries. To
that end, by way of illustration but not limitation, Executive will testify in
any suit or other proceeding involving any of the Inventions, execute all
documents which the Company reasonably determines to be necessary or convenient
for use in applying for and obtaining patents thereon and enforcing same, and
execute all necessary assignments thereof to the Company or entity designated by
it. Executive's obligation to assist the Company or entity designated by it in
obtaining and enforcing patents for the Inventions shall continue beyond the
termination of his employment with the Company, but the Company shall compensate
Executive at a reasonable rate after such termination for the time actually
spent by Executive at the Company's request on such assistance.
(b) List of Prior Inventions. Attached hereto as Exhibit C is a
complete list of all inventions, discoveries or improvements relating to the
Company's business (or the business of any Subsidiary or affiliate of the
Company) which have been made by Executive prior to the date of this Agreement
and which are not owned by the Company (or any Subsidiary or affiliate thereof).
Executive represents and warrants that such list is complete and accurate in all
respects and acknowledges and agrees that the Company owns the entire right and
interest to each of the inventions, discoveries or improvements relating to the
Company's or any Subsidiary's or affiliate's business that may be made by
Executive during the Employment Period and that are not listed in
6
<PAGE>
Exhibit C.
(b) Injunction. Executive agrees that it would be difficult to
measure damages to the Company from any breach by Executive of the promises set
forth in subsections (a) through (g) of this Section 6, that injury to the
Company from any such breach would be impossible to calculate, and that money
damages would therefore be an inadequate remedy for any such breach.
Accordingly, Executive agrees that if Executive shall breach any provision of
subsections (a) through (g) of this Section 6 or any of them, the Company shall
be entitled, in addition to all other remedies it may have, to injunctions or
other appropriate orders to restrain any such breach by Executive without
showing or proving any actual damage sustained by the Company.
4. Other Businesses. As long as Executive is employed by the Company or
any of its Subsidiaries, Executive agrees that he will not, except with the
express written consent of the Board, become engaged in, or render services for,
any business other than the business of the Company, any of its Subsidiaries or
any corporation or partnership in which the Company or any of its Subsidiaries
have an equity interest.
Executive's Representations. Executive hereby represents and warrants to
the Company that (i) the execution, delivery and performance of this Agreement
by Executive do not and will not conflict with, breach, violate or cause a
default under any contract, agreement, instrument, order, judgment or decree to
which Executive is a party or by which he is bound, (ii) Executive is not a
party to or bound by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity that would be violated
or breached by the execution, delivery and performance of this Agreement by
Executive, and (iii) upon the execution and delivery of this Agreement by the
Company, this Agreement shall be the valid and binding obligation of Executive,
enforceable in accordance with its terms. Executive hereby acknowledges and
represents that he has consulted with independent legal counsel regarding his
rights and obligations under this Agreement and that he fully understands the
terms and conditions contained herein.
Survival. The Company's obligation to make Severance Payments under
Section 4(b), if any, and the provisions of Sections 6, 9, 10, 11, 12, 13, 15,
16 and 17 shall survive and continue in full force in accordance with their
respective terms notwithstanding any termination of the Employment Period.
5. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, mailed by first class mail,
return receipt requested, or delivered by express courier service, to the
recipient at the address below indicated:
Notices to Executive:
L. Ray Christie
425 Dunblane Drive
Walnut Creek, CA 94598
7
<PAGE>
Notices to the Company:
Therma-Wave, Inc.
1250 Reliance Way
Fremont, California 94539
Attention: President
With a copy to:
Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Attn: Adam W. Kirsch
David Dominik
and
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: Jeffrey C. Hammes
Stephen L. Ritchie
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or mailed.
6. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
Complete Agreement. This Agreement and those documents expressly referred
to herein embody the complete agreement and understanding among the parties and
supersede and preempt any prior understandings, agreements or representations by
or among the parties, written or oral, which may have related to the subject
matter hereof in any way.
No Strict Construction. The language used in this Agreement shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party.
Counterparts. This Agreement may be executed in separate counterparts,
each
8
<PAGE>
of which is deemed to be an original and all of which taken together constitute
one and the same agreement.
Successors and Assigns. This Agreement is intended to bind and inure to
the benefit of and be enforceable by Executive, the Company and their respective
heirs, successors and assigns, except that Executive may not assign his rights
or delegate his obligations hereunder without the prior written consent of the
Company.
7. Choice of Law. All issues and questions concerning the construction,
validity, enforcement and interpretation of this Agreement and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of California, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of California or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of California.
Amendment and Waiver. The provisions of this Agreement may be amended or
waived only with the prior written consent of the Company and Executive, and no
course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity, binding effect or enforceability of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
THERMA-WAVE, INC.
By: /s/ Martin M. Schwartz
----------------------------------
Martin M. Schwartz
Its: President and COO
/s/ L. Ray Christie
----------------------------------
L. Ray Christie
9
<PAGE>
EXHIBIT "A"
1. Personal time off (PTO) of fifteen (15) days per year and ten (10) paid
holidays per year.
2. Car allowance of $900 per month.
10
<PAGE>
EXHIBIT "B"
BONUS CALCULATION
Vice President: base salary x 30% x CPR x IPR
Note:
CPR - Corporate Performance Rating:
Ranges from .33 to 3.0 based on financial results.
IPR - Individual Performance Rating:
See attached.
11
<PAGE>
INDIVIDUAL PERFORMANCE RATING (IPR)
The Individual Performance Rating, IPR, is based on the accumulated weight of
the Individual Goals that have been successfully met and the IPR is calculated
in accordance with the following table:
<TABLE>
<CAPTION>
Accumulated Weight
From Individual Goals IPR
- ----------------------- ----
<S> <C> <C>
Below 50 0.00
50 0.25
60 0.50
70 0.70
80 0.90
90 1.00
100 1.00
110* 1.10
120 1.20
130 1.30
etc. etc.
</TABLE>
If the accumulated weight falls in between two of the numbers listed above, then
the IPR is calculated in a pro rata fashion from the two closest IPR's in the
table.
*If accumulated weight exceeds 100.
12
<PAGE>
EXHIBIT "C"
None
13
<PAGE>
EXHIBIT 23.1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Therma-Wave, Inc.
We have audited the accompanying consolidated balance sheet of Therma-Wave,
Inc. as of March 31, 1998, and the related consolidated statements of
operations, mandatorily redeemable convertible preferred stock and stockholders'
equity (net capital deficiency), and cash flows for each of the two years in the
period ended March 31, 1998. 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 March 31, 1998 and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
May 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERA-WAVE,
INC'S FINANCIAL STATEMENTS FOR THE TWELVE MONTH PERIOD ENDED APRIL 4, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-04-1999
<PERIOD-START> APR-05-1998
<PERIOD-END> APR-04-1999
<CASH> 20,245
<SECURITIES> 0
<RECEIVABLES> 14,091
<ALLOWANCES> 1,911
<INVENTORY> 15,369
<CURRENT-ASSETS> 57,553
<PP&E> 14,832
<DEPRECIATION> 10,319
<TOTAL-ASSETS> 72,352
<CURRENT-LIABILITIES> 26,159
<BONDS> 115,000
15,347
0
<COMMON> 112
<OTHER-SE> (87,083)
<TOTAL-LIABILITY-AND-EQUITY> 72,352
<SALES> 66,207
<TOTAL-REVENUES> 66,207
<CGS> 36,827
<TOTAL-COSTS> 36,827
<OTHER-EXPENSES> 34,057
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,060
<INCOME-PRETAX> (18,080)
<INCOME-TAX> (2,350)
<INCOME-CONTINUING> (15,730)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,730)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
RISK FACTORS
The forward-looking statements contained in this Form 10-K are based on our
predictions of future performance. As a result, you should not place undue
reliance on these forward-looking statements. This Form 10-K contains
certain forward-looking statements, including, without limitation,
statements concerning the conditions in the semiconductor and semiconductor
capital equipment industries, our operations, economic performance and
financial condition, including in particular statements relating to our
business and growth strategy and product development efforts. The words
"believe," "expect," "anticipate," "intend" and other similar
expressions generally identify forward-looking statements. Potential
investors are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of their dates.
These forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties,
including, without limitation other risks and uncertainties indicated from
time to time in our filings with the SEC. 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 our business or growth
strategy or an inability to execute our strategy due to changes in our
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 Form 10-K will in fact
occur.
We have had significant net losses and we anticipate losses to continue.
We have not reported net income since the first quarter of fiscal 1998. We
reported a net loss for fiscal 1999 of $15.7 million and for fiscal 1998 of $1.0
million. Due to the current downturn in the semiconductor industry and the
related downturn in the semiconductor capital equipment industry, weak economic
conditions in the Asia Pacific region, including Japan, and other factors, we
expect to remain unprofitable at least through the end of calendar 1999. We
cannot predict how long we will continue to experience significant net losses or
when we will become profitable.
Our performance is affected by the cyclicality of the semiconductor device
industry which may, from time to time, lead to decreased demand for our
products.
The current downturn in the semiconductor industry has had a material
adverse effect on our recent operating results. Our business depends upon the
capital expenditures of semiconductor manufacturers, which, in turn, depend upon
the current and anticipated market demand for semiconductors and products
utilizing semiconductors. The semiconductor industry is cyclical and has
historically experienced periodic downturns, which have often resulted in a
decrease in the semiconductor industry's demand for capital equipment, including
process control metrology systems. There is typically a six to twelve month lag
between changes in the semiconductor industry and the related impact on the
level of capital expenditures. In most cases, the resulting decrease in capital
expenditures has been more pronounced than the precipitating downturn in
semiconductor industry revenues. The semiconductor industry experienced
downturns in 1998 and 1996, during which industry revenues declined by an
estimated 8.4% and 6.4%, respectively, as reported by Dataquest. Dataquest
forecasts that sales of semiconductor capital equipment will decrease by
approximately 1.7% in calendar 1999 as compared to calendar 1998. Although there
are indications that the semiconductor industry is beginning to recover, there
can be no assurance that:
. the semiconductor industry will improve;
<PAGE>
. the semiconductor industry will not experience other, possibly more
severe and prolonged, downturns in the future; or
. any such recovery will result in increased demand for capital
equipment by the semiconductor industry.
The continuation of the current downturn or any future downturn in the
semiconductor industry will have a material adverse effect on our business,
financial condition and results of operations.
Our quarterly operating results have historically and may, in the future, vary
significantly. This may result in volatility in the market price for our shares.
Our quarterly operating results have historically and may, in the future,
vary significantly. Some of the factors that may influence our operating results
in a given quarter include:
. customer demand, which is influenced by economic conditions in the
semiconductor industry, demand for products that use semiconductors,
market acceptance of our products and those of our customers,
seasonality, changes in product mix, and the timing, cancellation or
delay of customer orders and shipments;
. competition, such as competitive pressures on prices of our products,
the introduction or announcement of new products by us or our
competitors and discounts that may be granted to certain customers;
. fluctuations in the availability and cost of components, subassemblies
and production capacity;
. expenses incurred in connection with litigation;
. product development costs, such as increased research, development,
engineering and marketing expenses associated with new products or
product enhancements, and the effect of transitioning to new or
enhanced products; and
. levels of fixed expenses relative to revenue levels, including
research and development costs associated with product development.
During a given quarter, a significant portion of our revenue may be derived
from the sale of a relatively small number of systems. Accordingly, a small
change in the number of systems actually shipped may cause significant changes
in operating results. In addition, because of the significantly different gross
margins attributable to our two product lines, changes in product mix may cause
fluctuations in operating results.
Our largest customers have historically accounted for a significant portion of
our revenues. Accordingly, our business may be adversely affected by the loss
of, or reduced purchases by, one or more of our large customers.
If, for any reason, any of our key customers were to purchase significantly
less of our products in the future, such decreased level of purchases could have
a material adverse effect on our business, financial condition and results of
operations. During fiscal 1999, sales to Intel Corporation and Advanced Micro
Devices, Inc. accounted for approximately 23% and 18% of our net revenues,
respectively, and sales to our top five customers in the aggregate accounted for
approximately 53% of our net revenues. During fiscal 1998, sales to Intel
Corporation accounted for approximately 23% of our net revenues, and sales to
our top five customers in the aggregate accounted for approximately 45% of our
net revenues. As customers seek to establish closer relationships with their
suppliers, we expect that our customer base will continue to
<PAGE>
become more concentrated with a limited number of customers accounting for a
significant portion of our revenues. See "Business--Customers" in our Form 10-K.
We operate in the highly competitive semiconductor capital equipment industry
and compete against larger companies.
We operate in the highly competitive semiconductor capital equipment
industry and face competition from a number of competitors, some of which have
greater financial, engineering, manufacturing and marketing resources and
broader product offerings than Therma-Wave. We cannot assure you that our
products will be able to compete successfully with the products of our
competitors. Many of our competitors are investing heavily in the development of
new products aimed at applications we currently serve. Our 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. In addition, we believe that our competitors
sometimes provide demonstration systems to semiconductor manufacturers at no
cost. We could be required to employ similar promotions in order to remain
competitive if this practice becomes more pervasive in the industry.
Competitive conditions in our industry may require us to reduce our prices.
Due to competitive conditions in our industry, we have reduced prices on
certain of our products in order to maintain our market share. There can be no
assurance that competitive pressures will not necessitate further price
reductions. Maintaining technological advantages to mitigate the adverse effect
of pricing pressures will require a continued high level of investment by us in
research and development and sales and marketing. There can be no assurance that
we will have sufficient resources to continue to make such investments or that
we will be able to make the technological advances necessary to maintain such
competitive advantages. To the extent our products do not provide technological
advantages over products offered by our competitors, we are likely to experience
increased price competition or loss of market share with respect to such
products.
We encounter difficulties in soliciting customers of our competitors because of
high switching costs in the markets in which we operate.
We believe 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.
Our business may be adversely impacted as a result of our substantial leverage,
which requires the use of a substantial portion of our excess cash flow and may
limit our access to additional capital.
We incurred substantial indebtedness in connection with our
recapitalization, which occurred on May 16, 1997. We currently are required to
make annual cash interest payments totaling $12.2 million relating to our
outstanding $115.0 million 10 5/8% senior notes which represented approximately
96% of our operating cash flows during fiscal 1999. Interest payments as a
percentage of operating cash flows can be expected to fluctuate in the future
depending primarily upon our net income (loss) and outstanding debt balance. As
of March 31, 1999, we had unused borrowing capacity of $17.0 million under our
bank credit facility. Furthermore, subject to the restrictions in our senior
bank credit facility and the indenture relating to our 10 5/8% senior notes, we
may incur additional indebtedness, including secured indebtedness, from
<PAGE>
time to time to finance acquisitions, capital expenditures and working capital,
redeem our Preferred Stock, make certain deferred bonus payments to our
executive officers or for other purposes.
The level of our indebtedness could have important consequences for us. The
following summarizes the material consequences:
. a substantial portion of our cash flow from operations must be
dedicated to the repayment of indebtedness and will not be available
for other purposes;
. our future ability to obtain additional debt financing for working
capital, capital expenditures, acquisitions or other purposes may be
limited; and
. our level of indebtedness has in the past, and could in the future,
limit our flexibility in reacting to changes in the industry, general
economic conditions and our ability to withstand a prolonged downturn
in the semiconductor and/or semiconductor capital equipment
industries.
Most of our competitors currently operate on a less leveraged basis and
have significantly greater operating and financing flexibility than we do.
A breach of any of the restrictive covenants in our senior notes indenture or
our bank credit facility could result in a default under our senior note
indenture and/or our bank credit facility. If the bank accelerates all amounts
owing under the bank credit facility because of a default under the bank credit
facility and we are unable to pay such amounts, the bank has the right to
foreclose on our assets, including the capital stock pledged as security under
our bank credit facility.
The indenture relating to our senior notes and our bank credit facility
contain restrictive covenants. In addition, our bank credit facility requires us
to maintain specified financial ratios and satisfy financial condition tests at
the end of each fiscal quarter. In June 1998, we amended our bank credit
facility to adjust the financial tests requiring us to maintain minimum levels
of EBITDA during each six-month period ending on the last day of each fiscal
quarter and minimum levels of cumulative EBITDA from April 7, 1996 to the last
day of each fiscal quarter. These amendments were effected in light of the
impact of the downturn in the semiconductor industry on our operating results.
Without these amendments to our bank credit facility, on June 30, 1998, we would
have violated the financial test relating to the maintenance of minimum levels
of EBITDA for the six-month period ending on such date. These adjustments relate
to periods prior to March 31, 2000. For periods after that time, the financial
tests and covenants contained in the original agreement will apply. Our ability
to meet those financial ratios and tests can be affected by events beyond our
control, and there can be no assurance that we will meet those tests. A breach
of any of these covenants could result in a default under our bank credit
facility and/or the indenture relating to our senior notes. Substantially all of
our assets and those of our subsidiaries, together with all of the capital stock
of any domestic subsidiary and 65% of the capital stock of each of our first-
tier foreign subsidiaries, are pledged as security under our bank credit
facility. If the bank accelerates all amounts owing under the bank credit
facility because of a default under the bank credit facility and we are unable
to pay such amounts, the bank has the right to foreclose on our assets,
including the capital stock pledged as security under our bank credit facility.
Our future growth depends on our ability to develop new and enhanced products
for the semiconductor industry. We cannot assure you that we will be successful
in our product development efforts or that our new products will gain general
market acceptance.
Our future growth will depend, in part, on our ability to design, develop,
manufacture, assemble, test, market and support new products and enhancements on
a timely and cost-effective basis. Our failure to successfully identify new
product opportunities or to develop, manufacture, assemble or introduce new
products could have a material adverse effect on our growth prospects. For
example, we expect our product development efforts to include combining separate
metrology systems into one tool, implementing in-situ
<PAGE>
systems and networking these systems together. In-situ systems allow us to
measure product wafers and monitor process equipment during the semiconductor
fabrication process. We are also developing the Meta-Probe system, which is a
thin film metrology system specifically designed to measure the thickness and
material properties of opaque and metallic thin films. We cannot assure you that
we will not experience difficulties or delays in our development efforts with
respect to these products or that we will be successful in developing these
products. In addition, we cannot assure you that these products will gain market
acceptance or that we will not experience reliability or quality problems.
Rapid technological changes in our industry will require us to continually
develop new and enhanced products.
Our industry is characterized by rapid technological changes and the need
to develop and introduce new products to meet customers' expanding needs and
evolving industry standards. There can be no assurance that we will successfully
develop and bring new products to market in a timely and cost-effective manner,
that any product enhancement or new product developed by us will gain market
acceptance, or that products or technologies developed by others will not render
our products or technologies obsolete or noncompetitive. A fundamental shift in
technology in our product markets could have a material adverse effect on us,
particularly in light of the fact that we currently derive substantially all of
our revenues from sales of our two product families, the Opti-Probe and Therma-
Probe.
Our business could be adversely affected if we are unable to protect our
proprietary technology or if we infringe on the proprietary technology of
others.
Our future success and competitive position depend in part upon our ability
to obtain and maintain proprietary technology used in our principal product
families, and we rely, in part, on patent, trade secret and trademark law to
protect that technology. We have obtained a number of patents relating to our
two key product families, the Opti-Probe and Therma-Probe, and have filed
applications for additional patents. There can be no assurance that any of our
pending patent applications will be approved, that we will develop additional
proprietary technology that is patentable, that any patents owned by or issued
to us will provide us 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 our patents. Any of the foregoing results
could have a material adverse effect on our business, financial condition or
results of operations.
In addition to patent protection, we rely upon trade secret protection for
our confidential and proprietary information and technology. We routinely enter
into confidentiality agreements with our employees. However, there can be no
assurance that these agreements will not be breached, that we will have adequate
remedies for any breach or that our confidential and proprietary information and
technology will not be independently developed by or become otherwise known to
third parties.
Our commercial success will also depend, in part, on our ability to avoid
infringing or misappropriating any patents or other proprietary rights owned by
third parties. If we are found to infringe or misappropriate a third party's
patent or other proprietary rights, we could be required to pay damages to such
third party, alter our products or processes, obtain a license from the third
party or cease certain activities, including making or selling certain products.
If we are required to do any of the foregoing, there can be no assurances that
we will be able to do so on commercially favorable terms, if at all. Our
inability to do any of the foregoing on commercially favorable terms could have
a material adverse impact on our business, financial condition or results of
operations.
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Protection of our intellectual property rights, or third parties seeking to
enforce their own intellectual property rights against us, may result in
litigation, the cost of which could be substantial. We are currently involved in
litigation regarding our thin-film thickness measuring technology.
We may be required to initiate litigation in order to enforce any patents
issued to or licensed to us or to determine the scope and/or validity of a third
party's patent or other proprietary rights. In addition, we may be subject to
lawsuits by third parties seeking to enforce their own intellectual property
rights. Any such litigation, regardless of outcome, could be expensive and time
consuming and, as discussed above in the prior risk factor, could subject us to
significant liabilities or require us to cease using certain technology and,
consequently, could have a material adverse effect on our business, financial
condition or results of operations. We are currently involved in litigation with
KLA-Tencor Corporation regarding our thin-film thickness measuring technology.
See "Business--Legal Proceedings."
We will need to be able to attract and retain key personnel with knowledge of
instruments used in semiconductor manufacturing processes to help support our
future growth. Competition for such personnel in our industry is high.
Our success depends to a significant degree upon the continued
contributions of key management, engineering, sales and marketing, customer
support, finance and manufacturing personnel. The loss of the services of
certain personnel, who would be extremely difficult to replace, could have a
material adverse effect on us. There can be no assurance that the services of
such personnel will continue to be available to us. We have employment
agreements with certain members of our senior management team, including Messrs.
Rosencwaig, Schwartz, Christie, Smith, Opsal and Willenborg. In addition, we
maintain and are 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. To support our future growth, we will need to
attract and retain additional qualified employees. Competition for such
personnel in our industry is high, and we cannot be certain that we will be
successful in attracting and retaining such personnel. See "Compensation of our
Executive Officers--Employment Agreements."
Our operations are characterized by the need for continued investment in
research and development and, as a result, our ability to reduce costs is
limited.
Our operations are characterized by the need for continued investment in
research and development and extensive ongoing customer service and support
capability. As a result, our operating results could be materially adversely
affected if our level of revenues are below expectations. In addition, because
of our emphasis on research and development and technological innovation, there
can be no assurance that our operating costs will not increase in the future. We
expect the level of research and development expenses to increase in the near
future in both absolute dollar terms and as a percentage of our revenues.
We obtain some of the components and subassemblies included in our systems from
a single source or limited group of suppliers, the partial or complete loss of
which could have at least a temporary adverse effect on our operations.
Some of the components and subassemblies included in our systems are
obtained from a single source or a limited group of suppliers. From time to
time, we have experienced temporary difficulties in receiving orders from some
of these suppliers. Although we seek to reduce dependence on these sole and
limited source suppliers, the partial or complete loss of these sources could
have at least a temporary adverse effect on our results of operations and damage
customer relationships. Further, a significant increase in the price of one or
more of these components or subassemblies could materially adversely affect our
results of operations.
<PAGE>
We are subject to risks associated with manufacturing all of our products at a
single facility. Any prolonged disruption in the operations of that facility
could have a material adverse effect on our business.
We produce all of our products in our manufacturing facility located in
Fremont, California. Our manufacturing processes are highly complex, require
sophisticated and costly equipment and a specially designed facility. As a
result, any prolonged disruption in the operations of our manufacturing
facility, whether due to technical or labor difficulties, destruction of or
damage to this facility as a result of an earthquake, fire or any other reason,
could have a material adverse effect on our business, financial condition or
results of operations.
We rely upon manufacturers' sales representatives for a significant portion of
our sales. A disruption in our relationship with any sales representative could
have a material adverse effect on our business.
Approximately 50% of our sales have historically been made through
manufacturers' sales representatives. The activities of these representatives
are not within our control, and they may sell products manufactured by other
manufacturers. In addition, in some locations our manufacturing sales
representatives also provide field service to our customers. A reduction in the
sales efforts or financial viability of such manufacturers' sales
representatives, or a termination of our relationship with such representatives,
could have a material adverse effect our sales, financial results and ability to
support our customers. Although we believe that we maintain good relations with
our sales representatives, there can be no assurance that such relationships
will continue.
Our net sales and results of operations can be adversely affected by the
instability of Asian economies, from which we derive a significant portion of
our revenues.
Our sales to customers in Asian markets represented approximately 40% and
33% of total net revenues for fiscal 1998 and 1999, respectively. Companies in
the Asia Pacific region, including Japan, Korea and Taiwan, each of which
accounts for a significant portion of our business in that region, have
experienced weaknesses in their currency, banking and equity markets over the
last 18 months. These weaknesses began to adversely affect our sales to
semiconductor device and capital equipment manufacturers located in these
regions in the fourth quarter of calendar 1997 and have continued to adversely
affect them in 1998. Although we have recently received an increased level of
orders from customers in the Asia Pacific region, we expect that turbulence in
the Asian markets could adversely affect our sales at least through the end of
calendar 1999.
We are subject to certain operational, financial, political and foreign exchange
risks due to our significant level of international sales.
International sales accounted for approximately 52% and 69% of our total
revenues for fiscal 1998 and 1999, respectively. We anticipate that
international sales will continue to account for a significant portion of our
revenue in the foreseeable future. Due to the significant level of our
international sales, we are subject to material risks which include:
. unexpected changes in regulatory requirements;
. tariffs and other market barriers;
. political and economic instability;
. potentially adverse tax consequences;
. outbreaks of hostilities;
<PAGE>
. difficulties in accounts receivable collection;
. extended payment terms;
. difficulties in managing foreign sales representatives; and
. difficulties in staffing and managing foreign branch operations.
In addition, the laws of certain countries in which our products are or may be
sold may not provide our products and intellectual property rights with the same
degree of protection as the laws of the United States.
A substantial portion of our international sales are denominated in U.S.
dollars. As a result, changes in the values of foreign currencies relative to
the value of the U.S. dollar can render our products comparatively more
expensive. Such conditions could negatively impact our international sales.
Our failure to identify and remediate all material Year 2000 risks could
significantly disrupt our business if we are forced to devote substantial
resources to Year 2000 remediation efforts, or if Year 2000 problems among our
suppliers or customers cause delays in shipping or receiving products.
We have implemented a multi-phase Year 2000 project consisting of
assessment and remediation, and testing following remediation. We cannot,
however, be certain that we have identified all of the potential risks. Failure
by us to identify and remediate all material Year 2000 risks could adversely
affect our business, financial condition and results of operations. We have
identified the following risks you should be aware of:
. we cannot be certain that the entities on whom we rely for certain
goods and services that are important for our business will be
successful in addressing all of their software and systems problems in
order to operate without disruption in the year 2000 and beyond;
. our customers or potential customers may be affected by Year 2000
issues that may, in part:
--cause a reduction, delay or cancellation of customer orders
--cause a delay in payments for products shipped
--cause customers to expend significant resources on Year 2000
compliance matters, rather than investing in our products; and
. we have not developed a contingency plan related to a failure of our,
or a third-party's, Year 2000 remediation efforts and may not be
prepared for such an event.
Further, while we have made efforts to notify our customers who have
purchased potentially non-compliant products, we cannot be sure that such
customers will not assert claims against us alleging that such products should
have been Year 2000 compliant at the time of purchase, which could result in
costly litigation and divert management's attention.
One of our stockholders, Bain Capital, Inc., will continue to have significant
influence over our business, and could delay, deter or prevent a change of
control or other business combination.
Three of the seven directors serving on our board are representatives of
Bain Capital, Inc. By virtue of such stock ownership and board representation,
Bain Capital, Inc. will continue to have a significant influence over all
matters submitted to our stockholders, including the election of our directors,
and to exercise significant control over our business, policies and affairs.
Such concentration of voting power
<PAGE>
could have the effect of delaying, deterring or preventing a change of control
of Therma-Wave or other business combination.
