<PAGE>
As filed with the Securities and Exchange Commission on August 13, 1999
Registration No. 333-76019
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE
AMENDMENT NO. 5
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
THERMA-WAVE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3823 94-3000561
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1250 Reliance Way, Fremont, California 94539
(510) 668-2200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
DR. ALLAN ROSENCWAIG
Chairman and Chief Technology Officer
Therma-Wave, Inc.
1250 Reliance Way, Fremont, California 94539
(510) 668-2200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies of all communications, including communications sent to agent for
service, should be sent to:
<TABLE>
<S> <C>
Eva Herbst Davis, Esq. David B. Walek, Esq.
Kirkland & Ellis Ropes & Gray
300 South Grand Avenue One International Place
Suite 3000 Boston, Massachusetts 02110
Los Angeles, California 90071 (617) 951-7000
(213) 680-8400
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed without +
+notice. Therma-Wave may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This prospectus is not an offer to sell these securities, and Therma-Wave is +
+not soliciting offers to buy these securities in any state where the offer or +
+sale of these securities is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 13, 1999
3,300,000 Shares
[THERMA-WAVE LOGO]
Common Stock
-----------
Therma-Wave, Inc. is offering shares of stock in a firmly underwritten
offering. This is Therma-Wave's initial public offering, and no public market
currently exists for Therma-Wave's shares. Therma-Wave anticipates that the
initial public offering price for its shares will be between $8.00 and $9.00
per share. After the offering, the market price for Therma-Wave's shares may be
outside of this range.
-----------
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "TWAV," subject to official notice of issuance.
-----------
Investing in the common stock involves a high degree of risk. See "Risk
Factors" beginning on page 9.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Offering Price $ $
Discounts and Commissions to Underwriters $ $
Offering Proceeds to Company $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Therma-Wave has granted the underwriters the right to purchase up to an
additional 495,000 shares of common stock to cover over-allotments. The
underwriters can exercise this right at any time within thirty days after the
offering.
Banc of America Securities LLC expects to deliver the shares of common stock
to investors on August , 1999.
Banc of America Securities LLC Lehman Brothers
-----------
The date of this prospectus is , 1999.
<PAGE>
[pictures of an Opti-Probe(R) system and a Therma-Probe(R) system]
2
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
Our fiscal year is a 52 to 53 week year ending on the Sunday on or nearest
preceding March 31 for periods prior to 1997 and the Sunday on or following
March 31 of each year for periods thereafter. Fiscal years 1997, 1998 and 1999
ended on April 6, 1997, April 5, 1998 and April 4, 1999, respectively. Fiscal
years are identified in this prospectus according to the calendar year in which
they end. For example, the fiscal year ended April 4, 1999 is referred to
herein as "fiscal 1999." For convenience, the financial information included in
this prospectus has been presented as ending on the last day of the nearest
calendar month.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 18
The Reclassification..................................................... 18
Capitalization........................................................... 19
Dividend Policy.......................................................... 20
Dilution................................................................. 20
Selected Historical Financial Data....................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 33
Management............................................................... 48
Principal Stockholders................................................... 58
Certain Relationships and Related Transactions........................... 59
Description of Indebtedness.............................................. 66
Description of Capital Stock............................................. 70
Shares Eligible for Future Sale.......................................... 74
Underwriting............................................................. 76
Experts.................................................................. 78
Legal Matters............................................................ 78
Change in Independent Accountants........................................ 78
Where You Can Find More Information...................................... 78
Index to Financial Statements............................................ F-1
</TABLE>
Therma-Wave(R), Therma-Probe(R), Opti-Probe(R) and Meta-Probe(R) are
registered trademarks of Therma-Wave. Fab Productivity Enhancement(TM), AE(TM),
BPE(TM) and BPR(TM) are trademarks of Therma-Wave. This prospectus contains
trademarks, service marks and trade names of companies and organizations other
than Therma-Wave.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully. This prospectus contains forward-looking
statements, which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including those set forth in "Risk Factors" and
elsewhere in this prospectus. Unless otherwise stated, the information
contained in this prospectus: (1) assumes no exercise of the underwriters'
over-allotment option and (2) reflects a one-for-0.818 reverse stock split and
the reclassification of all of our classes of common stock into a single class
of common stock which will occur immediately prior to the effectiveness of the
registration statement of which this prospectus forms a part.
Therma-Wave, Inc.
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.
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 increasingly complex, with smaller feature sizes and
shorter product life cycles, resulting in a more costly and complex
manufacturing process. Increasingly, process control metrology has been used by
semiconductor manufacturers to effectively monitor these complex manufacturing
processes. 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. 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% and are
expected to grow at a compound annual growth rate of 22.9% through 2002.
Historically, semiconductor manufacturers have achieved an approximate 25%
to 30% annual reduction in the 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 for semiconductor manufacturers,
increasingly, we believe, gains will come from reduced feature size and non-
yield related equipment productivity enhancements, including increased
equipment uptime, reduced manufacturing space requirements, reduced use of
wafers for testing purposes and lower tool maintenance costs. Our strategy,
which we refer to as Fab Productivity Enhancement(TM), is to be a leader in
4
<PAGE>
providing semiconductor manufacturers with enabling technologies to improve
productivity within semi-conductor fabrication facilities. Our current Fab
Productivity Enhancement(TM) solutions, the Therma-Probe and Opti-Probe
systems, enhance fab productivity by helping to enable semiconductor
manufacturers to reduce feature size, increase wafer size and increase
equipment productivity by providing non-contact, non-destructive enabling
technologies extendable over multiple process generations. Our future Fab
Productivity Enhancement(TM) solutions are expected to include:
. 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-situ systems means systems that measure product wafers and monitor
equipment during the semiconductor fabrication process and within the
semiconductor fabrication equipment.
We believe we are a technology leader in process control metrology and one
of the first companies to pioneer the usage of non-contact, non-destructive
process control metrology technology. We have focused heavily on the
development and protection of our proprietary technology as we hold 51 U.S. and
foreign patents. In addition, we have filed applications for 22 additional U.S.
and foreign patents. We believe we have superior technical resources including
a staff of 46 Ph.Ds, which represents over 13% of our employees. We have
accomplished a number of significant innovations including the development of
patented technologies for:
. the most widely accepted metrology system for measuring the critical ion
implantation process on product wafers;
. a state-of-the-art metrology system for measuring thin films on product
wafers;
. the successful combination of thin film measurement technologies in one
system; and
. metrology software providing for advanced signal processing and data
analysis.
We believe we can leverage our strong intellectual property position and our
core technological expertise in non-contact based process control metrology
systems to provide additional Fab Productivity Enhancement(TM) solutions to
semiconductor manufacturers.
We believe we have achieved leading market share positions in two principal
segments of the process control metrology market. We estimate that we have over
95% of the market segment for the non-destructive measurement of ion
implantation on product wafers and approximately 33% of the thin film
measurement market segment. We sell our products worldwide to leading
semiconductor manufacturers including: Advanced Micro Devices, Inc., Chartered
Semiconductor, Ltd., Intel Corporation, Lucent Technologies, Samsung America,
Inc., Siemens AG, STMicroelectronics N.V., Toshiba Corporation and the UMC
Group. International sales represented approximately 52% and 69% of our net
revenues in fiscal 1998 and 1999, respectively. We have sold our products to
over 70 semiconductor manufacturers located in 14 different countries. We
provide our customers with a worldwide network of sales and support personnel.
We intend to continue to invest in our sales and support network, as we believe
it is an increasingly important competitive factor in today's global
semiconductor capital equipment market.
Therma-Wave was established in 1982 by Dr. Allan Rosencwaig, our current
Chairman and Chief Technology Officer and the principal developer of the field
of thermal wave physics. In fiscal 1992, Therma-Wave was acquired by Toray
Industries, Inc. and Shimadzu Corporation. Through a recapitalization effected
in May 1997, Bain Capital, Inc., Sutter Hill Ventures and our senior management
team collectively acquired securities representing approximately 87% of our
outstanding voting power. Our senior management team currently owns
approximately 21% of our outstanding common stock and holds options to acquire
an additional 12% of the common stock. Such equity ownership represents a
significant economic commitment to, and participation in, the continued success
of Therma-Wave.
5
<PAGE>
Recent Operating Results
For the first quarter of fiscal 2000, which ended June 30, 1999, our
revenues were $21.1 million, up 14% from the prior fiscal quarter, and up 39%
compared to the same quarter a year ago. Our operating income for the same
period was $1.0 million, representing an increase of 18% from $0.8 million in
the prior fiscal quarter and up $4.5 million from the same quarter a year ago.
These increases were the result of higher revenues as well as cost reductions
implemented last year.
Gross margin for the first quarter of fiscal 2000 was 42%, down from 46% for
the fourth quarter of fiscal 1999 and up from 41% for the first quarter of our
last fiscal year. The decrease from the fourth quarter was the result of lower
average selling prices due to price competition during the semiconductor
industry downturn and higher manufacturing costs associated with the
manufacturing scale-up of new products. The increase versus the first quarter
of fiscal 1999 resulted from headcount reductions in manufacturing and customer
service.
We experienced a net loss of $2.3 million for the first quarter of fiscal
2000, which included interest expense of $3.5 million and other non-operating
expenses of $0.2 million. This was equal to our net loss for the prior fiscal
quarter and, as compared to our net loss for the first quarter of fiscal 1999,
represented an improvement of $3.8 million.
Our new orders for the first quarter of fiscal 2000, which increased across
all geographic regions, totaled $25.6 million, representing a gain of 54% as
compared to the prior fiscal quarter and 151% as compared to the first quarter
of fiscal 1999. Our book to bill ratio was 1.2 to 1 for the quarter and backlog
increased to $20.4 million at June 30, 1999, up $4.4 million from the prior
fiscal quarter and down $11.0 million from the first quarter of fiscal 1999.
Additional Information
Therma-Wave is a Delaware corporation organized in October 1990. Our
principal executive offices are located at 1250 Reliance Way, Fremont,
California 94539, and our telephone number is (510) 668-2200. We maintain a
website on the Internet at www.thermawave.com. Our website, and the information
contained therein, is not a part of this prospectus.
The Offering
<TABLE>
<S> <C>
Common Stock offered by Therma-Wave............. 3,300,000 shares
Common Stock to be outstanding after this
offering....................................... 15,225,222 shares
Use of proceeds................................. To redeem a portion of our 10 5/8% senior
notes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.......... "TWAV"
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of March 31, 1999 and excludes: (1) 1,454,475 shares of common
stock issuable upon the exercise of outstanding options granted under our stock
option plans, of which 978,658 were then exercisable, at exercise prices
ranging from $7.33 to $19.43 per share; (2) 800,000 additional shares of common
stock expected to be reserved for future grants, awards or sale under the 1999
Equity Incentive Plan or sale under the 1999 Employee Stock Purchase Plan; and
(3) 612,469 shares of common stock issuable upon the conversion of our
mandatorily redeemable convertible preferred stock. In addition, the common
stock to be outstanding after this offering does not include an aggregate of
497,802 shares of common stock issuable upon the exercise of options granted in
the first quarter of fiscal 2000. See "Management--Stock Plans." The common
stock to be outstanding after this offering assumes a reclassification of our
Class A common stock, Class B common stock and Class L common stock on August
16, 1999. See "The Reclassification."
6
<PAGE>
Summary Historical Financial Data
(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
Gross margin.................. 30,651 44,266 59,698 59,776 29,380
Operating income (loss)....... 9,498 13,578 23,369 11,942 (4,677)
Income (loss) before income
taxes........................ 7,487 11,965 22,108 (429) (18,080)
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)
Net income (loss) per share
(3):
Basic........................ $ 0.30 $ 0.20 $ 0.35 $ (0.34) $ (2.28)
Diluted...................... $ 0.29 $ 0.20 $ 0.35 $ (0.34) $ (2.28)
Weighted average number of
shares outstanding:
Basic........................ 24,877 37,231 37,231 11,076 7,686
Diluted...................... 25,765 37,231 37,231 11,076 7,686
Pro Forma Statement of
Operations Data (4):
Pro forma net loss............ $(13,776)
Pro forma net loss per share:
Basic and Diluted............ $ (0.95)
Pro forma weighted average
common shares outstanding:
Basic and Diluted............ 14,459
Other Financial Data:
EBITDA (excluding non-
recurring charges) (5)....... $12,496 $17,185 $ 27,113 $ 19,723 $ 974
Cash provided by 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>
<TABLE>
<CAPTION>
March 31,
-------------------------------------------
1997 1998 1999 As Adjusted (6)
------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......... $16,741 $ 20,422 $ 20,245 $ 20,245
Working capital................... 38,720 43,348 31,394 32,345
Total assets...................... 68,620 89,762 72,352 70,669
Long-term debt.................... 23,100 115,000 115,000 91,822
Mandatorily redeemable convertible
preferred stock (2).............. -- 14,515 15,347 15,347
Stockholders' equity (net capital
deficiency)...................... 20,145 (70,990) (86,971) (64,525)
</TABLE>
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.
On July 16, 1999, the Board of Directors declared a one-for-0.818 reverse
stock split of our common stock, which will occur immediately prior to the
effectiveness of the registration statement of which this prospectus forms a
part. All references throughout this prospectus to number of shares, per share
amounts and stock option data have been restated, giving retroactive effect to
the stock split.
Footnotes to table appear on following page.
7
<PAGE>
- --------
Footnotes to table on previous page.
(1) On May 16, 1997, we effected the recapitalization. We issued $115.0 million
in aggregate principal amount of 10 5/8% senior notes in connection with
the recapitalization.
(2) We issued shares of mandatorily redeemable convertible 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. See
"Description of Capital Stock--Series A Mandatorily Redeemable Convertible
Preferred Stock."
(3) For the calculation of net loss per share for the years ended March 31,
1998 and 1999: (a) net loss represents the loss attributable to the
weighted average number of shares of Class A common stock, Class B common
stock and, prior to the recapitalization, common stock outstanding after
giving effect to the 12% yield on Class L common stock and (b) weighted
average number of shares outstanding excludes unvested Class B common
stock.
(4) The pro forma statement of operations data gives pro forma effect to: (1)
the reclassification of our three classes of common stock into a single
class and (2) this offering and the application of the net proceeds
therefrom as described under "Use of Proceeds," as if each had occurred as
of the beginning of the periods presented. The unaudited pro forma
statement of operations data does not purport to represent what our results
of operations actually would have been if such transactions had actually
occurred as of the beginning of the periods presented, or what such results
will be for any future periods.
(5) "EBITDA" is defined herein as income (loss) 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 years 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 for
the period 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.
(6) Adjusted to reflect the sale of 3,300,000 shares of common stock and the
application of the net proceeds as described under "Use of Proceeds."
8
<PAGE>
RISK FACTORS
You should carefully consider the following factors in addition to the other
information set forth in this prospectus in analyzing an investment in the
common stock offered hereby. The risks and uncertainties described below are
not the only ones facing us. Additional risks and uncertainties that we do not
presently know about or that we currently believe are immaterial may also
adversely impact our business operations. If any of the following risks
actually occur, our business, financial condition or results of operations
would likely suffer. In such case, the trading price of our common stock could
fall, and you may lose all or part of the money you paid to buy our common
stock.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those identified below as well as those discussed elsewhere
in this prospectus.
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 recent 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;
. 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.
9
<PAGE>
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 and that could cause trading in our shares to be subject to extreme
price and volume fluctuations 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 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. In addition, we cannot assure you that the
market price of our common stock will not experience significant fluctuations
in the future, including fluctuations that are material, adverse and unrelated
to our performance.
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 become
more concentrated with a limited number of customers accounting for a
significant portion of our revenues. See "Business--Customers."
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
10
<PAGE>
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 selectively reduced
prices on our products in order to maintain our market share. These reductions
are not necessarily permanent nor do they affect all of our products. 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. At
March 31, 1999, on a pro forma basis giving effect to this offering and the
application of the net proceeds therefrom, our total indebtedness would have
been approximately $91.8 million and our net capital deficiency would have been
$64.5 million. In addition, 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 time to time to finance acquisitions,
capital expenditures and working capital, redeem our Series A mandatorily
redeemable convertible preferred stock, make 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.
11
<PAGE>
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 and August 1999, we entered
into amendments to our bank credit facility to adjust the financial tests that
require 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 and April 4, 1999, respectively, to the last day of
each fiscal quarter. Both of these amendments were effected in light of the
impact of the downturn in the semiconductor market on our operating results.
Without the first amendment to our bank credit facility, we would have violated
the financial test relating to the maintenance of minimum levels of EBITDA for
the six-month period ending June 30, 1998. Our ability to meet these 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. See "Description of Indebtedness."
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 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.
Any failure by us to anticipate or respond adequately to technological
developments and customer requirements, or any significant delays in product
development or introduction could result in a loss of competitiveness and could
materially adversely affect our operating results. 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
12
<PAGE>
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 activities utilizing such proprietary rights, including making
or selling products utilizing such proprietary rights. If we are required to do
any of the foregoing, there can be no assurance 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.
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 proprietary
third party technology and, consequently, could have a material adverse effect
on our business, financial condition or results of operations. We are currently
involved in two litigation proceedings 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 key 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 key members
of our senior management team, including Messrs. Rosencwaig,
13
<PAGE>
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 assure you that we will be successful in
attracting and retaining such personnel. See "Management--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.
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,
14
<PAGE>
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 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;
. 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 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, assure
you 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 assure you 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
15
<PAGE>
. 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.
We expect to use all of the net proceeds of this offering to repay indebtedness
and, as a result, we may be unable to meet our future capital and liquidity
requirements.
We expect to use all of the net proceeds of this offering to repay
indebtedness. As a result, none of the net proceeds will be available to fund
future operations. We expect that our principal sources of funds following this
offering will be cash generated from operating activities and, if necessary,
borrowings under our senior bank credit facility. 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 the foreseeable
future. 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 efforts. There can be no
assurance that additional financing will be available when required or, if
available, will be on terms satisfactory to us.
One of our stockholders, Bain Capital, Inc., will continue to have significant
influence over our business after this offering, and could delay, deter or
prevent a change of control or other business combination.
Upon completion of this offering, investment funds affiliated with Bain
Capital, Inc. will hold approximately 44% of our outstanding common stock. If
the underwriters' over-allotment is exercised in full, these funds will hold
approximately 43% of our outstanding common stock. In addition, three of the
eight directors that will serve on our board following this offering will be
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 could have
the effect of delaying, deterring or preventing a change of control of Therma-
Wave or other business combination that might otherwise be beneficial to
stockholders.
Provisions of our charter documents and Delaware law could discourage potential
acquisition proposals and could delay, deter or prevent a change in control.
Provisions of our certificate of incorporation and by-laws may inhibit
changes in control of Therma-Wave not approved by our board of directors and
would limit the circumstances in which a premium may be paid for the common
stock in proposed transactions, or a proxy contest for control of the board may
be initiated. These provisions provide for:
. a classified board of directors;
. a prohibition on stockholder action through written consents;
. a requirement that special meetings of stockholders be called only by
our chief executive officer or the board of directors;
. advance notice requirements for stockholder proposals and nominations;
. limitations on the ability of stockholders to amend, alter or repeal the
by-laws; and
. the authority of the board to issue, without stockholder approval,
preferred stock with such terms as the board may determine.
We will also be afforded the protections of Section 203 of the Delaware
General Corporation Law, which could have similar effects. See "Description of
Capital Stock."
16
<PAGE>
You will experience an immediate and significant dilution in the book value of
your investment.
Because the initial public offering price is substantially higher than the
book value per share of common stock, purchasers of the common stock in this
offering will be subject to immediate and substantial dilution of $13.71 per
share. See "Dilution."
Future sales by our existing stockholders could adversely affect the market
price of our common stock.
Future sales of the shares of common stock held by existing stockholders
could have a material adverse effect on the market price of our common stock.
Upon completion of this offering (assuming an August 16, 1999 effective date
and a $30.142 Preference Amount per share of Class L common stock), we expect
that:
. 3,300,000 shares of common stock, or 3,795,000 shares if the
underwriters' over-allotment option is exercised in full, sold in this
offering will be freely tradeable without restriction under the
Securities Act, except any such shares which may be acquired by an
"affiliate" of Therma-Wave; and
. 11,925,222 shares of common stock held by our existing stockholders will
be eligible for sale into the public market, subject to compliance with
the resale volume limitations and other restrictions of Rule 144 under
the Securities Act, beginning 180 days after the date of this
prospectus.
Beginning 180 days after the completion of this offering, the holders of an
aggregate of approximately 11,848,474 shares of common stock will have limited
rights to require us to register their shares of common stock under the
Securities Act at our expense.
The forward-looking statements contained in this prospectus are based on our
predictions of future performance. As a result, you should not place undue
reliance on these forward-looking statements.
This prospectus contains 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 "Risk
Factors" and elsewhere in this prospectus 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 prospectus will in fact occur.
17
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of 3,300,000 shares of
common stock in this offering will be approximately $26.6 million. If the
underwriters' over-allotment option is exercised in full, our net proceeds will
be approximately $30.7 million assuming an initial public offering price of
$9.00 per share. We intend to use all of the net proceeds to redeem or
repurchase senior notes and to pay the redemption premium and accrued and
unpaid interest thereon.
Our senior notes in the aggregate principal amount of $115.0 million mature
on May 15, 2004, and bear interest at the rate of 10 5/8% per annum. Under the
terms of the indenture relating to the senior notes, we are required to use the
net proceeds from this offering 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 and, to the extent such offer is not accepted, we may use such proceeds
to redeem up to 35% of the aggregate principal amount of the senior notes
outstanding on the same economic terms. The amount of senior notes we redeem
will be equal to the aggregate amount of net proceeds we receive in the
offering divided by 110.625%, up to a maximum of 35% of the aggregate principal
amount of such notes. Pending such use, we will invest such proceeds in short-
term, interest-bearing, investment-grade securities. See "Description of
Indebtedness--Senior Notes."
THE RECLASSIFICATION
We currently have three classes of common stock, designated as Class A
common stock, Class B common stock and Class L common stock. The Class A common
stock and Class B common stock are identical, except that the Class B common
stock is non-voting and is convertible on a share-for-share basis into Class A
common stock at any time following this offering. The Class L common stock is
identical to the Class A common stock, except that each share of Class L common
stock is entitled to a preferential payment upon any distribution by us to
holders of our capital stock, whether by dividend, liquidating distribution or
otherwise, equal to the original cost of such share ($23.331) plus an amount
which accrues on a daily basis at a rate of 12.0% per annum, compounded
annually. This preferential amount is referred to herein as the "Preference
Amount." On March 31, 1999, the Preference Amount was $28.901 per share of
Class L common stock issued at the time of the recapitalization. On August 16,
1999, the expected effective date of this offering, the Preference Amount will
be $30.142 per share of Class L common stock issued at the time of the
recapitalization.
Prior to the effectiveness of the registration statement, our certificate of
incorporation provides that we will reclassify:
. all of the outstanding shares of Class A common stock and Class B common
stock into a single class of common stock on a share-for-share basis and
. all of the outstanding shares of Class L common stock into one share of
common stock plus an additional number of shares of common stock
determined by dividing the Preference Amount by the value of a share of
common stock based on the initial public offering price.
The foregoing is referred to in this prospectus as the "Reclassification."
At March 31, 1999, assuming an initial public offering price of $9.00 per
share and a Class L common stock Preference Amount of $28.901 per share, an
aggregate of 3,472,905 shares of common stock would have been issued in
exchange for the outstanding shares of Class L common stock in connection with
the Reclassification. Assuming an initial public offering price of $9.00 per
share and a Class L common stock Preference Amount of $30.142 per share, an
aggregate of 3,586,546 shares of common stock will be issued in exchange for
the outstanding shares of Class L common stock in connection with the
Reclassification. The actual number of shares of common stock that will be
issued as a result of the Reclassification is subject to change based on the
actual offering price and the effectiveness of the registration statement of
which this prospectus forms a part. Fractional shares otherwise issuable as a
result of the Reclassification will be rounded to the nearest whole number. See
"Description of Capital Stock."
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CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of Therma-Wave as of March 31, 1999 on an actual basis and on an
as adjusted basis to reflect: (1) the Reclassification and (2) the sale by us
of 3,300,000 shares of common stock pursuant to this offering, assuming an
offering price of $9.00 per share and the application of the net proceeds
therefrom as described under "Use of Proceeds." This table should be read in
conjunction with the "Selected Historical Financial Data" included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
----------------------
Actual As Adjusted
--------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents............................... $ 20,245 $ 20,245
========= ========
Long-term obligations:
Bank Credit Facility.................................. $ -- $ --
Senior Notes (1)...................................... 115,000 91,822
Other long-term obligations........................... 2,817 2,817
--------- --------
Total long-term obligations......................... 117,817 94,639
Mandatorily redeemable convertible preferred stock (2).. 15,347 15,347
Stockholders' equity (net capital deficiency):
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; no shares issued on an actual and as
adjusted basis....................................... -- --
Common stock, $0.01 par value, no shares authorized or
issued on an actual basis; 35,000,000 shares
authorized; 15,109,653 shares issued and outstanding
on an as adjusted basis.............................. -- 151
Class A common stock, $0.01 par value, 20,000,000
shares authorized; 7,422,149 shares issued and
outstanding on an actual basis and no shares
authorized, issued and outstanding on an as adjusted
basis................................................ 74 --
Class B common stock, $0.01 par value, 4,000,000
shares authorized; 914,599 shares issued and
outstanding on an actual basis and no shares
authorized, issued and outstanding on an as adjusted
basis................................................ 9 --
Class L common stock, $0.01 par value, 2,000,000
shares authorized; 824,683 shares issued and
outstanding on an actual basis and no shares
authorized, issued and outstanding on an as adjusted
basis................................................ 8 --
Additional paid-in capital............................ 19,775 46,306
Accumulated deficit (3) .............................. (105,416) (109,561)
Other................................................. (1,421) (1,421)
--------- --------
Total stockholders' equity (net capital
deficiency)........................................ (86,971) (64,525)
--------- --------
Total capitalization................................ $ 46,193 $ 45,461
========= ========
</TABLE>
- --------
(1) Assumes all net proceeds are used to redeem senior notes at a redemption
price of 110.625% of the aggregate principal amount thereof.
(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. See "Description of Capital Stock--
Series A Mandatorily Redeemable Convertible Preferred Stock."
(3) The As Adjusted, Accumulated deficit balance at March 31, 1999 includes an
extraordinary charge of $4,145 relating to the redemption of a portion of
our senior notes (assuming a redemption premium of 110.625%) and the pro
rata portion of deferred financing costs.
19
<PAGE>
DIVIDEND POLICY
We have not in the past paid, and do not expect for the foreseeable future
to pay, dividends on our common stock. Instead, we anticipate that all of our
earnings in the foreseeable future will be used for working capital purposes
and to reduce indebtedness. The payment of dividends by us to holders of our
common stock is prohibited by our bank credit facility and is restricted by our
indenture relating to the senior notes. Any future determination to pay
dividends will be at the discretion of our board of directors and will depend
upon, among other factors, our results of operations, financial condition,
capital requirements and contractual restrictions.
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was $(95.3)
million, or $(8.07) per share of common stock. Pro forma net tangible book
value (deficiency) per share is determined by dividing our tangible net capital
deficiency by the aggregate number of shares of common stock outstanding,
assuming the Reclassification had taken place on March 31, 1999. For purposes
of the foregoing, we calculated our net capital deficiency by subtracting our
intangible assets and total liabilities from our total assets. After giving
effect to the sale of the shares of common stock offered hereby, at an assumed
offering price of $9.00 per share and the receipt and application of the net
proceeds therefrom, pro forma net tangible book value as of March 31, 1999
would have been approximately $(71.2) million, or $(4.71) per share. This
represents an immediate increase in pro forma net tangible book value of $3.36
per share to the current stockholders and an immediate dilution in pro forma
net tangible book value of $13.71 per share to purchasers of common stock in
the offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $ 9.00
Pro forma net tangible book value (deficiency) per share at
March 31, 1999.............................................. $(8.07)
Increase per share attributable to new investors............. 3.36
------
Pro forma net tangible book value deficiency per share after
this offering................................................. (4.71)
------
Net tangible book value dilution per share to new
investors (1)................................................. $13.71
======
</TABLE>
- --------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the offering from the offering price per share.
The following table summarizes, on a pro forma basis, as of March 31, 1999,
the number of shares purchased, the total consideration paid (or to be paid)
and the average price per share paid (or to be paid) by the existing
stockholders and the purchasers of common stock in the offering, at an assumed
offering price of $9.00 per share, the midpoint of the range set forth on the
cover page of this prospectus, before deducting the estimated offering expenses
and underwriting discounts and commissions:
<TABLE>
<CAPTION>
Average Price
Shares Purchased Total Consideration Per Share
------------------ ------------------- -------------
Number Percent Amount Percent
---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 11,809,653 78% $19,866,000 40% $1.68
New investors.............. 3,300,000 22 29,700,000 60 $9.00
---------- ----- ----------- -----
Total.................... 15,109,653 100.0% $49,566,000 100.0%
========== ===== =========== =====
</TABLE>
As of March 31, 1999, there were an aggregate of: (1) 1,454,475 shares of
common stock issuable upon the exercise of outstanding options granted under
our stock plans, of which 978,658 were then exercisable, at exercise prices
ranging from $7.33 to $19.43 per share; (2) 800,000 additional shares of common
stock expected to be reserved for grants, awards or sale under the 1999 Equity
Incentive Plan or sale under the 1999 Employee Stock Purchase Plan; and (3)
612,469 shares of common stock issuable upon the conversion of our mandatorily
redeemable convertible preferred stock. In addition, we granted options to
purchase an aggregate of 497,802 shares of common stock in the first quarter of
fiscal 2000. See "Management--Stock Plans."
20
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(in thousands, except per share 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 prospectus. 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 prospectus. 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
prospectus.
On July 16, 1999, the Board of Directors declared a one-for-0.818 reverse
stock split of our common stock, which will occur immediately prior to the
effectiveness of the registration statement of which this prospectus forms a
part. All references throughout this prospectus to number of shares, per share
amounts and stock option data have been restated, giving retroactive effect to
the stock split.
<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)
======= ======= ======== ======== ========
Net income (loss) per
share (3):
Basic........................ $ 0.30 $ 0.20 $ 0.35 $ (0.34) $ (2.28)
Diluted...................... $ 0.29 $ 0.20 $ 0.35 $ (0.34) $ (2.28)
Weighted average common shares
outstanding:
Basic........................ 24,877 37,231 37,231 11,076 7,686
Diluted...................... 25,765 37,231 37,231 11,076 7,686
Pro Forma Statement of
Operations Data (4):
Pro forma net loss............ $(13,776)
Pro forma net loss per share:
Basic and Diluted............ $ (0.95)
Pro forma weighted average
common shares outstanding:
Basic and Diluted............ 14,459
Other Financial Data:
EBITDA (excluding non-
recurring charges) (5)....... $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>
21
<PAGE>
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------
As
1995 1996 1997 1998 1999 Adjusted (6)
------- ------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 8,329 $ 7,690 $16,741 $ 20,422 $ 20,245 $ 20,245
Working capital......... 17,240 23,740 38,720 43,348 31,394 32,345
Total assets............ 45,081 53,056 68,620 89,762 72,352 70,669
Long-term debt.......... 23,100 23,100 23,100 115,000 115,000 91,822
Mandatorily redeemable
convertible preferred
stock (2).............. -- -- -- 14,515 15,347 15,347
Stockholders' equity
(net capital
deficiency)............ (379) 6,903 20,145 (70,990) (86,971) (64,525)
</TABLE>
- --------
(1) On May 16, 1997, we effected the recapitalization. We issued $115.0 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. See "Description of Capital Stock--
Series A Mandatorily Redeemable Convertible Preferred Stock."
(3) For the calculation of net loss per share for the years ended March 31,
1998 and 1999: (a) net loss represents the loss attributable to the
weighted average number of shares of Class A common stock, Class B common
stock and, prior to the recapitalization, common stock outstanding after
giving effect to the 12% yield on Class L common stock and (b) weighted
average number of shares outstanding excludes unvested Class B common
stock.
(4) The pro forma statement of operations data give pro forma effect to: (1)
the reclassification of our three classes of common stock into a single
class and (2) this offering and the application of the net proceeds
therefrom as described under "Use of Proceeds," as if each had occurred as
of the beginning of the periods presented. The unaudited pro forma
statement of operations data does not purport to represent what our results
of operations actually would have been if such transactions had actually
occurred as of the beginning of the periods presented or what such results
will be for any future periods.
(5) "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.
(6) Adjusted to reflect the sale of 3,300,000 shares of common stock and the
application of the net proceeds as described under "Use of Proceeds."
22
<PAGE>
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.
If this offering is completed with net proceeds resulting therefrom of
approximately $26.6 million, we may incur in the second quarter of fiscal 2000
a non-recurring extraordinary charge for early debt extinguishment of a maximum
of approximately $4.0 million, net of tax, relating primarily to the redemption
premium on our senior notes.
23
<PAGE>
Recent Operating Results
For the first quarter of fiscal 2000, which ended June 30, 1999, our
revenues were $21.1 million, up 14% from the prior fiscal quarter, and up 39%
compared to the same quarter a year ago. Our operating income for the same
period was $1.0 million, representing an increase of 18% from $0.8 million in
the prior fiscal quarter, and up $4.5 million from the same quarter a year ago.
These increases were the result of higher revenues as well as cost reductions
implemented last year.
Gross margin for the first quarter of fiscal 2000 was 42%, down from 46% for
the fourth quarter of fiscal 1999 and up from 41% for the first quarter of our
last fiscal year. The decrease from the fourth quarter was the result of lower
average selling prices due to price competition during the semiconductor
industry downturn and higher manufacturing costs associated with the
manufacturing scale-up of new products. The increase versus the first quarter
of fiscal 1999 resulted from headcount reductions in manufacturing and customer
service.
We experienced a net loss of $2.3 million for the first quarter of fiscal
2000, which included interest expense of $3.5 million and other non-operating
expenses of $0.2 million. This was equal to our net loss for the prior fiscal
quarter and, as compared to our net loss for the first quarter of fiscal 1999,
represented an improvement of $3.8 million.
Our new orders for the first quarter of fiscal 2000, which increased across
all geographic regions, totaled $25.6 million, representing a gain of 54% as
compared to the prior fiscal quarter and 151% as compared to the first quarter
of fiscal 1999. Our book to bill ratio was 1.2 to 1 for the quarter and backlog
increased to $20.4 million at June 30, 1999, up $4.4 million from the prior
fiscal quarter and down $11.0 million from the first quarter of fiscal 1999.
24
<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 prospectus. The information
contained in this table should be read in conjunction with "Selected Historical
Financial Data," and the Consolidated Financial Statements and accompanying
notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
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 $115.0 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.
25
<PAGE>
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 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,
26
<PAGE>
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 in line with our current operating
environment. All terminated employees were notified at the time the program was
announced. Leased facilities in Texas, Arizona and Osaka, Japan were closed,
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.
27
<PAGE>
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.
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,
. the timing of research and development expenditures,
. acquisitions, strategic alliances and the future development of
marketing and service capabilities, and
. increased price competition.
28
<PAGE>
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
------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 $ 4,932 $(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.
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.
29
<PAGE>
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. In August 1999, we entered into a second amendment to our bank
credit facility to further adjust these financial tests. These amendments were
effected in light of the impact of the downturn in the semiconductor industry
on our operating results. Without the first amendment 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 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 following the offering 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 received a tax refund of $8.3 million in the early part 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.
Disclosure Relating to 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.
30
<PAGE>
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.
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 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. We have adopted the Sematech guidelines known as Year 2000
readiness testing scenarios as the baseline for our product testing. Sematech
is a consortium of integrated circuit manufacturers that provides guidelines to
equipment suppliers to the semiconductor industry. 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.
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<PAGE>
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 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 on 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.
32
<PAGE>
BUSINESS
Market data used throughout this prospectus 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 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
33
<PAGE>
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*
<TABLE>
<CAPTION>
Factor 1980 Present Future
------ ------ ------- -------
<S> <C> <C> <C>
Reduced feature sizes............................... 12% 12-14% 12-14%
Increased wafer sizes............................... 8% 4% <2%
Improved yields..................................... 5% 2% <1%
Other gains in equipment productivity............... 3% 7-10% >10-13%
</TABLE>
--------
* Percentages reflect the annual reduction in the cost per chip
function.
Source: Sematech
To continue to improve fab productivity, semiconductor manufacturers must
increase equipment and overall fab productivity. The following diagram sets
forth the principal areas on which we will focus to enhance semiconductor
manufacturer productivity. Those items in bold correspond to our existing Fab
Productivity Enhancement(TM) solutions. We believe planned new additions to our
Fab Productivity Enhancement(TM) solutions (italics) will significantly enhance
the productivity gains provided by our existing Fab Productivity
Enhancement(TM) solutions (bold) and, in addition, will provide new areas of
productivity gains for semiconductor manufacturers.
[GRAPHIC APPEARS HERE]
34
<PAGE>
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,
obtain higher throughput 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.
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 pilot runs 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
35
<PAGE>
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 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 leading to higher yields, less misprocessing,
less rework, faster production ramp-up and increased 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 approximately 33% 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 while improving equipment
reliability. 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 reduced set up time, reduced cycle
time, 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.
36
<PAGE>
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.
Competitive Strengths
. Technologically Advanced Capabilities and Products. We have focused
heavily on the development and protection of our proprietary technology
and currently hold 51 U.S. and foreign patents. In addition, we have
filed applications for 22 additional U.S. and foreign patents. We
believe we have superior technical resources, including a staff of 46
Ph.Ds, which represents over 13% of our employees. We believe that our
expertise in engineering, research and development enables us to offer
process control metrology systems with more advanced technical
capabilities and features than those offered by our competitors. Our
systems provide superior measurement capabilities, including resolution,
accuracy, repeatability and reliability. The Therma-Probe product family
employs a patented optically-based thermal wave technology to provide
the industry's only non-contact, non-contaminating ion implant
measurement capability on product wafers. We believe a combination of
measurement technologies is critical to perform advanced thin film
metrology. 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. 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.
. Leading Market Share. We are one of the world's leading manufacturers of
process control metrology equipment and systems. We believe we are the
largest provider of non-destructive ion implant process control
metrology systems worldwide with over 95% of the market. Our Therma-
Probe systems have become the industry standard for ion implant process
control metrology and are installed in virtually every major
semiconductor fabrication facility. We are also a leading supplier of
thin film measurement metrology systems worldwide. We believe that our
Opti-Probe systems have captured approximately 33% of the market as a
result of technological superiority and lower cost of ownership to our
customers.
. Strong and Diverse Customer Base. We market and sell our products
worldwide to virtually all of the major semiconductor manufacturers,
including: Advanced Micro Devices, Inc., Chartered Semiconductor, Ltd.,
Intel Corporation, Lucent Technologies, Samsung America, Inc., Siemens
AG, STMicroelectronics N.V., Toshiba Corporation and the UMC Group. We
believe our top customers are among the fastest growing manufacturers in
the semiconductor industry. In addition, we have a diverse customer base
in terms of both geographic location and the types of semiconductor
devices manufactured. In the aggregate, we serve more than 70 customers
located in 14 different countries.
. Worldwide Distribution and Strong Customer Support Capabilities. We have
expended considerable resources to create a high-quality worldwide
distribution network with highly trained sales and support personnel.
International sales represented approximately 52%, and 69% of our net
revenues in fiscal 1998 and 1999, respectively. We provide our customers
with comprehensive support before, during and after delivery of our
systems. Our engineers have extensive experience and provide valuable
assistance to our customers, thereby strengthening our relationships
with them. We anticipate we will continue to strengthen and expand our
distribution and customer support organizations worldwide, particularly
in Asia.
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. Experienced and Successful Management Team. We are led by an experienced
senior management team whose members average more than 10 years in the
semiconductor capital equipment manufacturing industry. Dr. Allan
Rosencwaig has over 17 years of experience in the industry. Our senior
management team currently owns approximately 21% of the outstanding
common stock and holds options to acquire an additional 12% of such
common stock. Such equity ownership represents a significant economic
commitment to and participation in our continued success.
Business and Growth Strategy
Our objective is to be a leader in providing Fab Productivity
Enhancement(TM) solutions to semiconductor manufacturers. Our business and
growth strategy includes the following key initiatives:
. Focus on Fab Productivity Enhancement(TM). We plan to continue to
develop products which enable semiconductor manufacturers to reduce
feature size, increase wafer size and increase equipment productivity.
Although increasing wafer size and yields will continue to be sources of
fab productivity gains by semiconductor manufacturers, increasingly, we
believe, gains will come from reduced feature size and non-yield related
equipment productivity enhancements, including increased equipment
uptime, reduced fab floor footprint requirements, reduced use of test
wafers and lower tool maintenance costs. We believe our technological
capabilities will enable semiconductor manufacturers to address a
broader range of issues that impact fab productivity. We expect our new
product development efforts to include combining separate metrology
systems into one tool, implementing in-situ systems to improve the
direct control of process equipment and provide real-time measurement of
product wafers, and networking these systems together.
. Continue to Focus on Technological Innovation. We intend to continue to
emphasize engineering and research and development in our effort to
anticipate and address technological advances in semiconductor
manufacturing. We currently have a staff of 46 Ph.Ds, which represents
more than 13% of our employees. Our current product development efforts
include combining separate metrology systems into one tool, implementing
in-situ systems and networking all of these systems together.
Additionally, we are developing Meta-Probe, a thin film metrology system
specifically designed to measure the thickness and material properties
of opaque and metallic films. The Meta-Probe system, as a non-contact,
non-destructive metrology system, will reduce the quantity of test
wafers, thereby decreasing the costs of the semiconductor manufacturing
process. We believe that continued product innovation and investment in
research and development will help us strengthen our leadership
position.
. Maintain and Leverage Strong Customer Relationships. We expect to
continue to strengthen our existing customer relationships and foster
working partnerships by providing technologically superior systems and
high levels of customer support. We believe we are the dominant supplier
of ion implant metrology systems to virtually all major semiconductor
manufacturers and have become the primary supplier of thin film
metrology systems to many of our customers. Furthermore, we intend to
continue to capitalize on our strong customer relationships, which have
enabled us to develop new products and applications through close
collaboration with customers. Such collaboration has often resulted in
products and applications which have a broader market appeal.
. Leverage Existing Infrastructure. To support our worldwide growth, we
have expended considerable resources in establishing our infrastructure,
including a worldwide customer support organization and a state-of-the-
art manufacturing facility. We believe we have the opportunity to
improve our operating margins by leveraging our existing infrastructure
through increased sales.
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
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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 typically range from approximately $650,000 to $900,000.
The Therma-Probe product family accounted for approximately 20% of our revenues
for the three-year period ended March 31, 1999.
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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<PAGE>
The following table summarizes our improvements to the Therma-Probe product
family:
<TABLE>
<CAPTION>
Year
System Introduced Description of Innovation/Advancement
------ ---------- -------------------------------------
<C> <C> <S>
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.
</TABLE>
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
approximately 33% of the thin film measurement market. The selling prices for
Opti-Probe systems typically range from approximately $450,000 to $900,000. The
Opti-Probe product family accounted for approximately 67% of our revenues for
the three-year period ended March 31, 1999.
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
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recipe development. We have a staff of over fifty experienced applications
scientists and 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.
The following table summarizes our improvements to the Opti-Probe product
family:
<TABLE>
<CAPTION>
Year
System Introduced Description of Innovation/Advancement
------ ---------- -------------------------------------
<C> <S> <C>
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.
</TABLE>
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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.
Customers
Therma-Wave sells its products to leading semiconductor and semiconductor
equipment manufacturers throughout the world. Our top customers are listed
below:
<TABLE>
<S> <C>
Advanced Micro Devices, Inc. (AMD) Siemens AG
Chartered Semiconductor Ltd. STMicroelectronics N.V.
Intel Corporation Taiwan Semiconductor Manufacturing Corp. (TSMC)
Lucent Technologies Toshiba Corporation
Samsung America, Inc. UMC Group
</TABLE>
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 Samsung and Intel represented
approximately 10% and 13%, 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. 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.
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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. Our support services accounted for approximately 13% of
our revenues for the three-year period ended March 31, 1999.
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.
See Note 11 to Notes to Consolidated Financial Statements for a summary of
our operations in the United States, Japan and other foreign 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
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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 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 some 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
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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 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.
Facilities
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.
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We also lease sales and customer support offices in California, Florida,
Texas, Japan, Korea, Taiwan and the United Kingdom.
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.
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 as between Rudolph Technologies and Therma-Wave. 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 our business, financial condition or results
of operations.
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. Nonetheless, KLA-Tencor has made broad allegations
covering technology that accounts for a significant portion of our revenues.
Since we believe these allegations are unfounded, we intend to vigorously
defend our position, and we expect to prevail. We believe that the outcome from
such litigation, even if adverse to us, would not have a material adverse
effect on our business, financial condition or results or operations.
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
46
<PAGE>
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 1998
infringement action initiated by KLA-Tencor and described in the prior
paragraph 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.
On July 22, 1999, we were named in a second patent infringement suit filed
by KLA-Tencor. KLA-Tencor has alleged that it patented another aspect of one of
the thin film thickness measuring technologies that we have recently added to
some of our Opti-Probe products. KLA-Tencor is seeking damages and an
injunction to stop the sale of the equipment they allege uses this aspect.
Since the patent which is the subject of this second suit issued on June 8,
1999, any potential liability for past sales is not material. Prior to filing
its first infringement action, KLA-Tencor notified us of an earlier version of
the patent that is the subject of this second suit. We believe none of our
products infringed any of the claims of the earlier version of this KLA-Tencor
patent and previously informed KLA-Tencor of our belief. KLA-Tencor's new
patent is a continuation of the earlier patent. We believe KLA-Tencor's new
patent is invalid and we intend to vigorously defend our position and we expect
to prevail. We believe that the outcome from such litigation, even if adverse
to us, would not have a material adverse effect on our business, financial
condition or results or 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.
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 some of our products in our Opti-
Probe 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 that the outcome from such discussions, even if
adverse to us, would not have a material adverse effect on our business,
financial condition or results of operations. No lawsuit with respect to any of
these matters has been filed by either party.
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.
47
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
Executive officers, directors and key employees of Therma-Wave are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Allan Rosencwaig.......... 57 Chairman of the Board and Chief Technology
Officer
Martin M. Schwartz........ 54 President, Chief Executive 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
Ian K. Loring............. 33 Director
</TABLE>
We anticipate that two additional directors not otherwise affiliated with us
or any of our stockholders will be elected to the board of directors following
the completion of this offering.
Allan Rosencwaig co-founded Therma-Wave in January 1982 and has served as
our Chairman since that time. Since July 1999, Dr. Rosencwaig has also served
as the Chief Technology Officer of Therma-Wave. In addition, Dr. Rosencwaig
served as President from January 1982 to April 1998, and he served as Chief
Executive Officer from January 1982 to July 1999. 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 our President, Chief
Operating Officer and Director, and, since July 1999, has served as our Chief
Executive Officer. 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 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 our Vice President,
Chief Financial Officer and Secretary. From April 1996 to July 1998, Mr.
Christie 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 our 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
48
<PAGE>
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 our 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 our 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 our 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.
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 was a Managing Director of Bain Capital from May 1993 until July 1999.
Mr. Kirsch has been 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.
49
<PAGE>
Ian K. Loring has served as a Director of Therma-Wave since May 1999. Mr.
Loring joined Bain Capital in 1996. He has been a Principal since 1997. From
1993 to 1996, Mr. Loring was a Vice President at Berkshire Partners, where he
worked in the specialty manufacturing, technology, and retail industries.
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--
Stockholders Agreement." 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.
Prior to the completion of this offering, our board will be divided into
three classes, as nearly equal in number as possible, with each director
serving a three-year term and one class being elected at each year's annual
meeting of stockholders. Mr. Loring and the two additional directors
anticipated to be appointed by the board will be in the class of directors
whose term expires at the 2000 annual meeting of our stockholders. Messrs.
Schwartz and Dominik will be in the class of directors whose term expires at
the 2001 annual meeting of our stockholders. Messrs. Rosencwaig, Kirsch and
Baker will be in the class of directors whose term expires at the 2002 annual
meeting of our stockholders. At each annual meeting of our stockholders,
successors to the class of directors whose term expires at such meeting will be
elected to serve for three-year terms or until their respective successors are
elected and qualified.
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
Annual Compensation
Compensation Awards
----------------- ------------
Other Annual Securities
Fiscal Bonus Compensation Underlying All Other
Name and Position Year Salary ($) ($) (1) Options (#) Compensation ($)
- ----------------- ------ -------- -------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Allan Rosencwaig........ 1999 $429,236 $ -- -- -- $63,245(2)
Chairman and 1998 417,508 318,623(3) -- 549,594 41,285(2)
Chief Technology
Officer (6) 1997 332,846 243,989(4) -- -- 1,898(5)
Martin M. Schwartz (6).. 1999 161,042 -- -- 163,600 --
President and
Chief Executive Officer
Jon L. Opsal............ 1999 192,532 -- -- -- 1,262(7)
Vice President, 1998 186,482 68,247(3) -- 104,423 792(7)
Research and 1997 168,184 56,637(4) -- -- --
Development
David Willenborg........ 1999 164,592 -- -- -- 6,910(7)
Vice President, 1998 160,368 52,930(3) -- 82,439 4,335(7)
Marketing 1997 154,479 50,778(4) -- -- --
David Mak............... 1999 164,739 -- -- -- --
Vice President, 1998 154,830 58,767(3) -- 31,616 --
Factory Operations 1997 143,453 47,523(4) -- -- --
</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.
50
<PAGE>
(3) Reflects bonuses paid to Messrs. Rosencwaig, Opsal, Willenborg and Mak in
fiscal 1998 as a result of Therma-Wave achieving 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 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 as Therma-Wave's President
and Chief Operating Officer. Dr. Rosencwaig served as our Chief Executive
Officer from January 1982 through July 1999. In July 1999, Mr. Schwartz
began serving as Therma-Wave's Chief Executive Officer and Dr. Rosencwaig
began serving as Therma-Wave's Chief Technology Officer.
(7) Reflects imputed interest on outstanding borrowings from Therma-Wave.
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
Securities % of 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).. 163,600 62.5% $4.89 $4.89 8/3/08 $503,888 $1,274,444
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 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
$7.97 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
$12.68 per share.
(e) Mr. Schwartz joined Therma-Wave in August 1998.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table sets forth information for the named executives officers
concerning stock option exercises during our last fiscal year and options
outstanding at the end of the last fiscal year:
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
at Fiscal Year End Fiscal Year End ($) (a)
--------------------- -----------------------
Shares Acquired Value Unexercisable/ Unexercisable/
Name on Exercise Realized ($) Exercisable Exercisable
---- --------------- ------------ --------------------- -----------------------
<S> <C> <C> <C> <C>
Allan Rosencwaig........ -- -- 0/549,594 $ 0/0
Martin M. Schwartz (b).. -- -- 163,600/0 733,200/0
Jon L. Opsal............ -- -- 0/104,423 0/0
David Willenborg........ -- -- 0/82,439 0/0
David Mak............... -- -- 0/31,615 0/0
</TABLE>
- --------
(a) Based on an estimated fair market value of the common stock at March 31,
1999.
(b) Mr. Schwartz joined Therma-Wave in August 1998.
51
<PAGE>
Compensation Committee Interlocks and Insider Participation
We currently do not have a compensation committee. The compensation
arrangements for each of our executive officers was 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. See "Certain Relationships and Related Transactions--Employment
Agreements." 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
Prior to this offering, our board of directors had one committee, the audit
committee. Immediately prior to the completion of this offering, the board of
directors will establish an additional committee, the compensation 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 and, following this offering, will be comprised of a majority
of directors not otherwise affiliated with us or any of our principal
stockholders. PricewaterhouseCoopers LLP presently serves as our independent
auditors.
The duties of the compensation committee will be to provide a general review
of our compensation and benefit plans to ensure that they meet corporate
objectives. In addition, the compensation committee will review the chief
executive officer's recommendations on (1) compensation of all of our officers
and (2) adopting and changing major compensation policies and practices, and
report its recommendations to the whole board of directors for approval and
authorization. The compensation committee will administer our stock plans and
is expected to be comprised of at least two non-employee directors (as defined
in Rule 16b-3 under the Exchange Act). The board may also establish other
committees to assist in the discharge of its responsibilities.
Employment Agreements
In connection with the recapitalization, 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, and in July 1999, the board and Dr. Rosencwaig agreed that Mr.
Schwartz would be appointed to the position of Chief Executive Officer and Dr.
Rosencwaig would be appointed to the position of Chief Technology Officer. 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 annual increases beginning in 1998;
. an annual bonus based upon our achievement of operating targets and the
attainment of individual goals by Dr. Rosencwaig, each to be determined
by the board on an annual basis; and
. customary fringe benefits.
In addition, Dr. Rosencwaig is also entitled to receive a deferred payment
in the event we achieve operating targets. See "Certain Relationships and
Related Transactions--Management Equity Purchases."
52
<PAGE>
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;
. 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:
<TABLE>
<CAPTION>
Name Annual Base Salary
---- ------------------
<S> <C>
Martin M. Schwartz................................... $265,000
L. Ray Christie...................................... $155,000
David Willenborg..................................... $168,480
W. Lee Smith......................................... $143,859
Jon L. Opsal......................................... $197,077
</TABLE>
. an annual bonus based upon our achievement of operating targets and the
attainment of individual goals by such executive, each to be determined
by the board and our president or chief executive officer on an annual
basis; and
. customary fringe benefits.
We anticipate that, as a result of his being promoted to Chief Executive
Officer of Therma-Wave, Mr. Schwartz will receive an increase in his annual
base salary to $350,000.
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
53
<PAGE>
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;
. 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.
Following this offering, directors who are not employees of Therma-Wave or who
are not otherwise affiliated with us or our principal stockholders will receive
compensation that is commensurate with arrangements offered to directors of
companies that are similar to Therma-Wave. Compensation arrangements for
independent directors established by our board could be in the form of cash
payments and/or option grants.
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 2,454,000 shares of
Class A common stock and 2,454,000 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 specified events to prevent any dilution or
expansion of the rights of participants that might otherwise result from the
occurrence of such events. As of August 13, 1999, an aggregate of 916,526
shares of Class B common stock, a portion of which is subject to repurchase,
were outstanding, and options to purchase an aggregate of 1,606,072 shares of
Class B common stock were outstanding, with exercise prices ranging from $4.89
to $19.43 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 563,909 shares of Class A
common stock and 563,909 shares of Class B common stock, subject to adjustment
upon the occurrence of specified events to prevent any dilution or expansion of
the rights of participants that might otherwise result from the occurrence of
such events.
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<PAGE>
Options to purchase an aggregate of 259,394 shares of Class B common stock
were outstanding as of August 13, 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 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 prospectus, 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 43,457 shares of Class A common stock and 43,457 shares of Class B common
stock, subject to adjustment upon the occurrence of specified 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 38,455 shares of Class B common stock
were outstanding as of August 13, 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 prospectus, 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."
1999 Equity Incentive Plan
The 1999 Equity Incentive Plan, or the "1999 Plan," is expected to be
adopted by our board of directors and approved by our stockholders prior to the
completion of this offering. As of the date of this prospectus, no awards have
been made under the 1999 Plan. No future grants will be made under the 1997
Plans upon the effectiveness of the 1999 Plan.
The 1999 Plan provides for the grant of incentive stock options to our
employees (including officers and employee directors) and for the grant of
nonstatutory stock options and to our employees, directors and consultants. A
total of (1) 300,000 shares of common stock, (2) any shares returned to the
1997 Plans as a result of termination of options and (3) annual increases to be
added on the date of each annual meeting of stockholders of Therma-Wave
commencing in 2000 equal to 1.0% of the outstanding shares of common stock, or
such lesser amount as may be determined by the board of directors, will be
reserved for issuance pursuant to the 1999 Plan.
The administrator of the 1999 Plan has the power to determine the terms of
the options granted, including the exercise price of the option, the number of
shares subject to each option, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, our board of directors
has the authority to amend, suspend or terminate the 1999 Plan, provided that
no such action may affect any share of common stock previously issued and sold
or any option previously granted under the 1999 Plan.
55
<PAGE>
Options granted under the 1999 Plan are generally not transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
and only by such optionee. Options granted under the 1999 Plan must generally
be exercised within 3 months after the end of an optionee's status as an
employee, director or consultant of Therma-Wave, or within 18 months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option term.
The exercise price of all incentive stock options granted under the 1999
Plan must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price of nonstatutory stock options granted under
the 1999 Plan is determined by the administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must be at least equal to the fair market value of the common stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of the outstanding capital
stock of Therma-Wave, the exercise price of any incentive stock option granted
must be at least equal to 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the 1999 Plan may not exceed ten years.
The 1999 Plan provides that in the event of a merger of Therma-Wave with or
into another corporation, or a sale of substantially all of our assets, each
option shall be assumed or an equivalent option substituted for by the
successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the administrator shall provide
for the optionee to have the right to exercise the option as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If the administrator makes an option exercisable in full in the
event of a merger or sale of assets, the administrator shall notify the
optionee that the option shall be fully exercisable for a period of fifteen
(15) days from the date of such notice, and the option will terminate upon the
expiration of such period.
Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan, or the "Stock Purchase Plan," will be
adopted by our board of directors and our stockholders prior to the completion
of this offering. The Stock Purchase Plan will be established to give employees
desiring to do so a convenient means of purchasing shares of common stock
through payroll deductions. The Stock Purchase Plan provides an incentive to
participate by permitting purchases at a discounted price. We believe that
ownership of stock by employees will foster greater employee interest in the
success, growth and development of Therma-Wave.
Subject to restrictions, each of our employees is eligible to participate in
the Stock Purchase Plan if he or she has been employed by us for more than six
months. Participation is discretionary with each eligible employee. We have
reserved 500,000 shares of common stock for issuance in connection with the
Stock Purchase Plan. Elections to participate and purchases of stock will be
made on a quarterly basis. Each participating employee contributes to the Stock
Purchase Plan by choosing a payroll deduction in any specified amount. A
participating employee may increase or decrease the amount of such employee's
payroll deduction, including a change to a zero deduction as of the beginning
of any calendar quarter. Elected contributions will be credited to
participants' accounts at the end of each calendar quarter. In addition,
employees may make lump sum contributions at the end of the year to enable them
to purchase the maximum number of shares available for purchase during the plan
year. Each eligible employee will be entitled to purchase a maximum of
approximately 1,200 shares per year; provided that the number of shares subject
to an eligible employee's option shall not exceed 200% of the number of shares
determined by dividing 15% of such eligible employee's compensation over any
six-month offering period by 85% of the fair market value of a share of common
stock on the first day of such six-month offering period.
Set forth below is a summary of how the Stock Purchase Plan will operate:
. Each participating employee's contributions will be used to purchase
shares for the employee's share account within 15 days after the last
day of each calendar quarter.
. The cost per share is 85% of the lower of the closing price of our
common stock on the Nasdaq National Market on the first or the last day
of the calendar quarter.
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<PAGE>
. The number of shares purchased on each employee's behalf and deposited
in his/her share account is based on the amount accumulated in such
participant's cash account and the purchase price for shares with
respect to any calendar quarter.
. Shares purchased under the Stock Purchase Plan carry full rights to
receive dividends declared from time to time.
. Any dividends attributable to shares in the employee's share account are
automatically used to purchase additional shares for such employee's
share account.
. Share distributions and share splits will be credited to the
participating employee's share account as of the record date and
effective date, respectively.
. A participating employee has full ownership of all shares in his/her
share account and may withdraw them for sale or otherwise by written
request to the committee following the close of each calendar quarter.
Subject to applicable federal securities and tax laws, the board of
directors has the right to amend or to terminate the Stock Purchase Plan.
Amendments to the Stock Purchase Plan will not affect a participating
employee's right to the benefit of the contributions made by such employee
prior to the date of any such amendment. In the event the Stock Purchase Plan
is terminated, the committee is required to distribute all shares held in each
participating employee's share account plus an amount of cash equal to the
balance in each participating employee's cash account.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of March 31, 1999, regarding
the beneficial ownership of our shares after giving effect to the one-for-0.818
reverse stock split and the Reclassification, assuming an offering price of
$9.00 per share and a Class L common stock Preference Amount of $30.142 per
share, (a) prior to the offering of 3,300,000 shares of our common stock, and
(b) immediately following the offering, in each case by: (i) each person or
entity known to us to own more than 5% of any class of outstanding voting
securities and (ii) each of our directors, each named executive officer and all
of our directors and executive officers as a group. The actual number of shares
of common stock to be issued to each holder of Class L common stock in the
Reclassification is subject to change based upon changes in the initial public
offering price and the completion date of this offering. See "The
Reclassification." 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
--------------------------------
Percentage of Class
----------------------
Number of Prior to the After the
Name and Address Shares Offering Offering
---------------- --------- ------------ ---------
<S> <C> <C> <C>
Principal Stockholders:
Bain Capital Funds (1).................... 6,717,846 56.3% 44.1%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Sutter Hill Ventures (2).................. 1,992,663 16.7 13.1
755 Page Mill Road
Palo Alto, California 94304
Toray Industries, Inc. (3)................ 961,080 7.8 6.1
8-1, Mihama 1-chome
Urayasu, Chiba 279, Japan
Shimadzu Corporation (4).................. 281,428 2.3 1.8
1, Nishinokyo-Kuwabaracho
Nakagyo-ku, Kyoto 604, Japan
Directors and Executive Officers:
Allan Rosencwaig (5)...................... 2,304,308 18.5 14.6
Martin M. Schwartz (6).................... -- -- --
Jon L. Opsal (7).......................... 237,269 2.0 1.5
David Willenborg (8)...................... 320,538 2.7 2.1
David Mak (9) ............................ 63,230 * *
G. Leonard Baker, Jr. (10)................ 1,992,663 16.7 13.1
David Dominik (11)........................ 1,977,403 16.6 13.0
Adam W. Kirsch (11)....................... 1,977,403 16.6 13.0
Ian K. Loring (11)........................ 1,977,403 16.6 13.0
All directors and executive officers as a
group (12 persons)....................... 7,130,791 59.3 46.7
</TABLE>
- --------
* Less than one percent.
(1) Includes: 1,315,331 shares of common stock held by Bain Capital Fund V,
L.P. ("Fund V"); 3,425,112 shares of common stock held by Bain Capital
Fund V-B, L.P. ("Fund V-B"); 705,209 shares of common stock held by BCIP
Associates ("BCIP"); and 1,272,194 shares of 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").
(2) Also includes shares held by affiliates and related parties of Sutter
Hill.
(3) The 961,080 shares of common stock included in the table represent: (i)
464,827 shares of common stock and (ii) 473,745 shares of preferred stock,
each of which is convertible into 0.818 shares of common stock at any time
at the option of the holder thereof.
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<PAGE>
(4) The 274,839 shares of common stock included in the table represent: (i)
136,115 shares of common stock and (ii) 138,724 shares of preferred stock,
each of which is convertible into 0.818 shares of common stock at any time
at the option of the holder thereof.
(5) The 2,248,642 shares of common stock in the table include: (i) 549,594
shares of common stock which are subject to vesting; and (ii) 549,594
shares of 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 235,960 shares of common stock in the table include: (i) 104,423
shares of common stock which are subject to vesting; and (ii) 104,423
shares of common stock that can be acquired upon the exercise of
outstanding options.
(8) The 313,351 shares of common stock in the table include: (i) 82,439 shares
of common stock which are subject to vesting; and (ii) 82,439 shares of
common stock that can be acquired upon the exercise of outstanding
options.
(9) The 63,230 shares of common stock in the table include: (i) 31,615 shares
of common stock which are subject to vesting; and (ii) 31,615 shares of
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 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, Kirsch and Loring are each 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.
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
. 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.
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<PAGE>
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 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 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 common stock,
which were divided into five equal tranches with the exercise prices of
$10.92, $13.06, $15.20, $17.33 and $19.43 per share, respectively.
The following table summarizes the shares of common stock purchased by, and
the number of options granted to, our executive officers under the stock
agreements:
<TABLE>
<CAPTION>
No. of Shares Aggregate No. of Options
Name Purchased(2) Purchase Price Granted
---- ------------- -------------- --------------
<S> <C> <C> <C>
Allan Rosencwaig................. 1,754,714 $2,497,608 549,594
Anthony W. Lin (1)............... 153,667 125,611 104,423
Jon L. Opsal..................... 132,846 85,183 104,423
W. Lee Smith..................... 131,864 119,636 82,439
David Willenborg................. 238,099 325,890 82,439
</TABLE>
- --------
(1) Mr. Lin purchased 20,885 shares of vested 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
holds 70,130 shares of common stock.
(2) The number of shares presented gives effect to the one-for-0.818 reverse
stock split and the Reclassification, assuming an offering price of $9.00
per share and a Class L common stock Preference Amount of $30.142 per
share.
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<PAGE>
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
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 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 common stock are subject to earlier vesting upon specified
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. Our cumulative earnings before interest,
taxes, depreciation and amortization from May 16, 1997 through May 31, 1999 was
$13.8 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.
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
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<PAGE>
shares. Following this offering, this repurchase option will only be applicable
to an executive's unvested Option Shares and unvested Time Vesting Stock at a
repurchase price equal to the original cost of such 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. The other provisions referenced above will
terminate upon the completion of this offering.
Loans to Executive Officers
In connection with the recapitalization, we made loans in an aggregate
principal amount of $297,931.55 to senior management 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 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
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:
<TABLE>
<CAPTION>
Amount of Loan
-------------------
Name Stock Loan Tax Loan
---- ---------- --------
<S> <C> <C>
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
</TABLE>
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;
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<PAGE>
. 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:
. 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 participation rights in
connection with specified 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 Experts
Randolph Street Partners owns 103,014 shares of common stock acquired 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. Some 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.
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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:
<TABLE>
<CAPTION>
Name Cash
---- ----------
<S> <C>
Allan Rosencwaig................................................ $2,339,718
Anthony W. Lin.................................................. 95,612
Jon L. Opsal.................................................... 55,183
W. Lee Smith.................................................... 95,952
David Willenborg................................................ 302,207
</TABLE>
Voting Agreement
In connection with the recapitalization, Therma-Wave, the Bain Group, Sutter
Hill and 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 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 2,183,856 shares of the
Investors' common stock at an exercise price equal to $0.287 per share. Such
options become exercisable upon:
. any sale by the Investors of all or a portion of the 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
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.
Like the management equity purchases described above, 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. Unlike the management
equity purchases described above, the options granted pursuant to the option
agreements were entered into with the Investors and not with us, and are
exercisable upon a sale of any Investor's stock as described above if the fair
market value of such shares is equal to or greater than $500 million. These
terms may incentivize management to work toward obtaining a profitable and
growing company with a valuation significantly higher than the initial
investments made by the Investors in our stock. A high valuation would provide
a profit to the Investors (and therefore the executive officers) in the event
of a sale of such Investor's stock.
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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 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 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 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 film
measurement equipment for a non-semiconductor application.
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DESCRIPTION OF INDEBTEDNESS
Bank Credit Facility
In connection with the recapitalization, we entered into our bank credit
facility with Bankers Trust Company. We may borrow amounts under the bank
credit facility to finance our working capital requirements and other general
corporate purposes. All revolving loans incurred under the bank credit facility
will mature 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. In August 1999, we entered into a
second amendment to our bank credit facility to further adjust these financial
covenants. These amendments were effected in light of the impact of the
downturn in the semiconductor industry on our operating results. Without the
first amendment 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. At March 31, 1999, there
was $3.5 million of an outstanding letter of credit and $17.0 million of unused
borrowing capacity under the amended bank credit facility.
The bank credit facility provides that all of our indebtedness be secured
by:
. a first priority security interest in all of our receivables, contracts,
contract rights, equipment, intellectual property, inventory and all
other tangible and intangible assets and each of our domestic
subsidiaries, subject to customary exceptions;
. a pledge of all capital stock of any direct and indirect domestic
subsidiaries; and
. a pledge of 65% of the capital stock of each of our first-tier foreign
subsidiaries.
Our borrowings under the bank credit facility bear interest at a floating
rate and may be maintained as base rate loans or, at our option, as eurodollar
loans. Base rate loans bear interest at the base rate plus 1.75%. Eurodollar
loans bear interest at the eurodollar rate applicable for one, two, three, six
or twelve month periods, in each case plus 3.00%. Base rate loans, eurodollar
loans and eurodollar rate are defined in the bank credit facility. The base
rate equals the higher of:
. the applicable prime lending rate of Bankers Trust Company, and
. the Federal Reserve reported certificate of deposit rate plus 1%.
Amounts borrowed under the bank credit facility may be repaid and
reborrowed. We are required to pay to the lenders under the bank credit
facility a commitment fee equal to .50% per annum, payable in arrears on a
quarterly basis, on the average unused portion of the bank credit facility
during such quarter; provided, however, that such commitment fee increases to
.75% per annum if during any quarterly payment period the daily average
outstanding borrowings were less than 1/2 of the total revolving loan
commitment. We are also required to pay to the lenders a letter of credit fee
with respect to each letter of credit outstanding equal to 3.00% per annum of
the average daily stated amount of such letter of credit and an additional
fronting fee of .25% on such average daily stated amount to the lender issuing
such letter of credit, in each case payable in arrears on a quarterly basis.
The agent and the lenders will receive and continue to receive such other fees
as have been separately agreed upon with the agent.
The bank credit facility requires us to meet financial tests, including,
without limitation, minimum levels of EBITDA and maximum amount of capital
expenditures. The bank credit facility contains covenants which limit the
incurrence of additional indebtedness, investments, dividends, transactions
with affiliates, asset sales, acquisitions, mergers and consolidations,
prepayments of other indebtedness (including the senior notes), liens and
encumbrances and other matters customarily restricted in such agreements.
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The bank credit facility contains customary events of default, including
without limitation, payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to other specified indebtedness
in excess of $1.5 million, certain events of bankruptcy and insolvency,
judgment defaults in excess of $1.5 million that are otherwise not covered by
insurance, failure of any guaranty or security document supporting the bank
credit facility to be in full force and effect and change of control of Therma-
Wave.
The foregoing summary of the material provisions of the bank credit
facility, as amended, is qualified in its entirety by reference to all of the
provisions of the bank credit facility, which has been filed as an exhibit to
the registration statement of which this prospectus forms a part. See "Where
You Can Find More Information."
Senior Notes
The senior notes were issued pursuant to an indenture, dated as of May 15,
1997, by and between us and IBJ Schroder Bank & Trust Company, as trustee. The
senior notes are limited in aggregate principal amount to $115,000,000 and will
mature on May 15, 2004. Interest on the senior notes accrues at the rate of 10
5/8% per annum and is payable semiannually in cash on each May 15 and November
15, to the persons who are registered holders of the senior notes at the close
of business on the 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. The senior notes are senior unsecured
obligations of Therma-Wave, ranking pari passu in right of payment with all
other senior unsecured obligations of Therma-Wave.
The senior notes are redeemable, at our option, in whole at any time or in
part from time to time, on and after May 15, 2001, upon not less than 30 nor
more than 60 days' notice, at the following redemption prices, expressed as
percentages of the principal amount thereof, if redeemed during the twelve-
month period commencing on May 15 of the year set forth below, plus, in each
case, accrued interest to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2001............................................................ 105.313%
2002............................................................ 102.656
2003............................................................ 100.000
</TABLE>
At any time, or from time to time, on or prior to May 15, 2000, we may, at
our option, use the net cash proceeds of one or more equity offerings 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 thereon, if any, to the date of such redemption;
provided that at least $69.0 million aggregate principal amount of senior notes
originally issued remains outstanding immediately after any such redemption.
If we consummate an initial public offering prior to May 15, 2000 in which
we receive net proceeds equal to or greater than $25.0 million, we are required
to apply the net cash proceeds relating to such initial public offering to make
an offer to purchase from all holders on a pro rata basis that amount of senior
notes equal to the net cash proceeds from such initial public offering at a
price equal to 110.625% of the aggregate principal amount of senior notes to be
repurchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase. The aggregate amount of net cash proceeds required to be applied
pursuant to this provision is reduced dollar-for-dollar:
. to the extent such net cash proceeds are used to prepay indebtedness
under our bank credit facility and effect a permanent reduction in the
availability thereunder; and
. by the aggregate amount of net cash proceeds of one or more equity
offerings consummated prior to the consummation of the initial public
offering to the extent used to redeem senior notes.
We are not required pursuant to this provision to redeem an aggregate principal
amount of senior notes in excess of 35% of the aggregate principal amount of
senior notes originally issued. We will be required to use the net proceeds of
this offering to make the repurchase offer described above. See "Use of
Proceeds."
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The indenture provides that, upon the occurrence of a change of control,
each holder will have the right to require that we purchase all or a portion of
such senior notes, at a purchase price equal to 101% of the principal amount
thereof plus accrued interest thereon to the date of purchase. The term "change
of control" is defined under the indenture to include one or more of the
following events:
. any sale, lease, exchange or other transfer, in one transaction or a
series of related transactions, of all or substantially all of our
assets to any person or group of related persons, together with any
affiliates thereof;
. the approval by the holders of our capital stock of any plan or proposal
for the liquidation or dissolution of Therma-Wave, whether or not
otherwise in compliance with the provisions of the indenture;
. any person or group of related person, other than the Bain Capital
Funds, Sutter Hill or their respective related parties, shall become the
owner, directly or indirectly, beneficially or of record, of shares
representing more than 50% of the aggregate ordinary voting power
represented by our issued and outstanding capital stock; or
. the first day within any two-year period on which a majority of the
members of the board of directors are not continuing directors.
The following events are defined in the indenture as "events of default":
. the failure to pay interest on any senior notes and such default
continues for a period of 30 days;
. the failure to pay the principal on any senior notes;
. a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a
period of 30 days;
. the failure to pay at final stated maturity the principal amount of any
indebtedness of Therma-Wave or any restricted subsidiary of Therma-Wave
and such failure continues for a period of 20 days or more, if the
aggregate principal amount of such indebtedness, together with the
principal amount of any other such indebtedness in default for failure
to pay principal at final maturity or which has been accelerated,
aggregates $5.0 million or more at any time;
. one or more judgments in an aggregate amount in excess of $5.0 million
shall have been rendered against us or any of our significant
subsidiaries and such judgments remain undischarged, unpaid or unstayed
for a period of 60 days after such judgment or judgments become final
and non-appealable; and
. events of bankruptcy affecting us or any of our significant
subsidiaries.
The indenture contains covenants for the benefit of the holders of the
senior notes that, among other things, limit our ability and any of our
restricted subsidiaries to:
. enter into transactions with affiliates;
. pay dividends or make other restricted payments;
. consummate asset sales;
. incur indebtedness that is senior in right of payment to the senior
notes;
. incur liens;
. impose restrictions on the ability of a subsidiary to pay dividends or
make payments to Therma-Wave and its subsidiaries;
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. merge or consolidate with any other person; or
. sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of Therma-Wave.
The foregoing summary of the material provisions of the indenture is
qualified in its entirety by reference to all of the provisions of the
indenture, which has been filed as an exhibit to the registration statement, of
which this prospectus forms a part. See "Where You Can Find More Information."
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DESCRIPTION OF CAPITAL STOCK
General Matters
Upon completion of this offering, the total amount of our authorized capital
stock will consist of 35,000,000 shares of common stock, 1,000,000 shares of
Series A mandatorily redeemable convertible preferred stock and
5,000,000 shares of one or more additional series of preferred stock. As of
March 31, 1999, we had outstanding 7,422,149 shares of Class A common stock,
914,599 shares of Class B common stock, 824,683 shares of Class L common stock
and 748,739 shares of Series A mandatorily redeemable convertible preferred
stock. Prior to the effectiveness of the registration statement, all of the
outstanding shares of Class A common stock, Class B common stock and Class L
common stock will be reclassified into a single class of common stock in the
Reclassification. See "The Reclassification."
After giving effect to this offering, assuming an offering price of $9.00
per share and a Class L common stock Preference Amount of $30.142 per share, we
will have 15,225,222 shares of common stock (15,720,222 shares if the
underwriters' over-allotment option is exercised in full), 748,739 shares of
Series A mandatorily redeemable convertible preferred stock and no other shares
of any series of preferred stock outstanding. As of March 31, 1999, we had
31 stockholders of record with respect to our common stock and two stockholders
of record with respect to our Series A mandatorily redeemable convertible
preferred stock. The following summary of provisions of our capital stock
describes all material provisions of, but does not purport to be complete and
is subject to, and qualified in its entirety by, our restated certificate of
incorporation and our amended and restated by-laws, which are included as
exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable law.
The restated certificate and by-laws contain provisions that are intended to
enhance the likelihood of continuity and stability in the composition of the
board of directors and which may have the effect of delaying, deferring or
preventing a future takeover or change in control of Therma-Wave unless such
takeover or change in control is approved by our board of directors.
Common Stock
The issued and outstanding shares of common stock are, and the shares of
common stock to be issued by us in connection with the offering will be,
validly issued, fully paid and nonassessable. Subject to the prior rights of
the holders of any series of preferred stock, the holders of outstanding shares
of common stock are entitled to receive dividends out of assets legally
available therefor at such time and in such amounts as the board of directors
may from time to time determine. See "Dividend Policy." The shares of common
stock are not convertible and the holders thereof have no preemptive or
subscription rights to purchase any of our securities. Upon liquidation,
dissolution or winding up of Therma-Wave, the holders of common stock are
entitled to receive pro rata our assets which are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of any series of preferred stock then
outstanding. Each outstanding share of common stock is entitled to one vote on
all matters submitted to a vote of stockholders. There is no cumulative voting.
Except as otherwise required by law or the restated certificate, the holders of
common stock and the holders of Series A mandatorily redeemable convertible
preferred stock vote together as a single class on all matters submitted to a
vote of stockholders.
The common stock has been approved for inclusion on the Nasdaq National
Market under the symbol "TWAV," subject to official notice of issuance.
Series A Mandatorily Redeemable Convertible Preferred Stock
The Series A mandatorily redeemable convertible preferred stock has a
liquidation preference of $18.40 per share and each share is convertible into
0.818 shares of common stock at the option of the holder thereof. Dividends on
the Series A mandatorily redeemable convertible preferred stock accrue at a
rate of 6.0% per
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annum. The Series A mandatorily redeemable convertible preferred stock has a
scheduled redemption date of May 17, 2004 and is otherwise redeemable by us at
any time in our sole discretion. The Series A mandatorily redeemable
convertible preferred stock entitles the holder thereof to one vote for each
share of common stock issuable upon conversion of such Series A mandatorily
redeemable convertible preferred stock on all matters submitted to a vote of
stockholders. All of the shares of Series A mandatorily redeemable convertible
preferred stock are held by Toray and Shimadzu. The terms of the Series A
mandatorily redeemable convertible preferred stock can not be amended, modified
or waived without the prior written consent of the holders of a majority of the
Series A mandatorily redeemable convertible preferred stock outstanding at the
time such action is taken.
If any of the following occur:
. any member of the Bain Group receives any proceeds in respect of common
stock owned by such member in connection with any registered public
offering of our shares of common stock;
. the Bain Group sells or transfers 25% of the common stock acquired by
the Bain Group pursuant to the Recapitalization Agreement; or
. Therma-Wave or any of its subsidiaries engages in any transaction or
series of transactions which would result in the sale of all or
substantially all of our assets on a consolidated basis,
then the holders of a majority of the Series A mandatorily redeemable
convertible preferred stock then outstanding may require us, upon written
notice, to redeem all of the outstanding shares of Series A mandatorily
redeemable convertible preferred stock at a price of $18.40 per share (plus all
accrued and unpaid dividends thereon). Any redemptions by us of the Series A
mandatorily redeemable convertible preferred stock for the reasons described in
the bullets listed above does not extinguish our obligation to redeem shares of
such stock pursuant to the preceding paragraph.
Other Preferred Stock
Our board of directors may, without further action by our stockholders, from
time to time, direct the issuance of shares of preferred stock in a series and
may, at the time of issuance, determine the rights, preferences and limitations
of each series. Satisfaction of any dividend preferences of outstanding shares
of preferred stock would reduce the amount of funds available for the payment
of dividends on shares of common stock. Holders of shares of preferred stock
may be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of Therma-Wave before any payment is
made to the holders of shares of common stock. The issuance of shares of
preferred stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
block of our securities or the removal of incumbent management. Upon the
affirmative vote of a majority of the total number of directors then in office,
the board of directors, without stockholder approval, may issue shares of
preferred stock with voting and conversion rights which could adversely affect
the holders of shares of common stock. Except for the Series A convertible
preferred stock described above, there are no other shares of preferred stock
outstanding, and we have no present intention to issue any additional shares of
preferred stock.
Other Provisions of the Restated Certificate of Incorporation and By-laws
The restated certificate provides for the board to be divided into three
classes, as nearly equal in number as possible, serving staggered terms.
Approximately one-third of the board will be elected each year. See
"Management." Under the Delaware General Corporation Law, directors serving on
a classified board can only be removed for cause. The provision for a
classified board could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of the board until the
second annual stockholders meeting following the date the acquiror obtains the
controlling stock interest. The classified board provision could have the
effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of Therma-Wave and could increase the
likelihood that incumbent directors will retain their positions.
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The restated certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The restated certificate and the by-laws provide
that, except as otherwise required by law, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the board
of directors or by our chief executive officer. Stockholders will not be
permitted to call a special meeting or to require the board to call a special
meeting.
The by-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the board. Stockholders at an annual
meeting may only consider proposals or nominations specified in the notice of
meeting or brought before the meeting by or at the direction of the board or by
a stockholder who was a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has given to our
secretary timely written notice, in proper form, of such stockholder's
intention to bring that business before the meeting. Although the by-laws do
not give the board the power to approve or disapprove stockholder nominations
of candidates or proposals regarding other business to be conducted at a
special or annual meeting, the by-laws may have the effect of precluding the
conduct of business at a meeting if the proper procedures are not followed or
may discourage or defer a potential acquiror from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of Therma-Wave.
The restated certificate and by-laws provide that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required to amend, alter, change or repeal some of
their provisions, unless such amendment or change has been approved by a
majority of the directors not affiliated or associated with any person or
entity holding 20% or more of the voting power of our outstanding capital
stock, other than the Bain Capital Funds. This requirement of a super-majority
vote to approve amendments to the restated certificate and by-laws could enable
a minority of our stockholders to exercise veto power over any such amendments.
Provisions of Delaware Law Governing Business Combinations
Following the consummation of this offering, we will be subject to the
"Business Combination" provisions of the Delaware General Corporation Law. In
general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless:
. the transaction is approved by the board of directors prior to the date
the "interested stockholder" obtained such status;
. upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining
the number of shares outstanding those shares owned by (a) persons who
are directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested
stockholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In general,
an "interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of a corporation's voting stock or within three
years did own 15% or more of a corporation's voting stock. The statute could
prohibit or delay mergers or other takeover or change in control attempts with
respect to Therma-Wave and, accordingly, may discourage attempts to acquire
Therma-Wave.
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Limitations on Liability and Indemnification of Officers and Directors
The restated certificate limits the liability of directors to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
restated certificate provides that we will indemnify our directors and officers
to the fullest extent permitted by such law. We expect to enter into
indemnification agreements with our current directors and executive officers
prior to the completion of the offering and expect to enter into a similar
agreement with any new directors or executive officers.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is BankBoston, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there was no market for our common stock. We can
make no predictions as to the effect, if any, that sales of shares or the
availability of shares for sale will have on the market price prevailing from
time to time. Nevertheless, sales of significant amounts of our common stock in
the public market, or the perception that such sales may occur, could adversely
affect prevailing market prices.
Sale of Restricted Shares
Upon completion of this offering, we will have, assuming no exercise of the
underwriters' over-allotment option, an offering price of $9.00 per share and a
Class L common stock Preference Amount of $30.142 per share, 15,225,222 shares
of common stock outstanding. In addition, 1,020,118 shares of common stock are
issuable upon the exercise of currently exercisable outstanding stock options.
Of the shares outstanding after the offering, 3,300,000 shares of common stock,
or 3,795,000 shares if the underwriters' over-allotment is exercised in full,
are freely tradeable without restriction under the Securities Act, except for
any such shares which may be held or acquired by an "affiliate" of Therma-Wave,
as that term is defined in Rule 144 promulgated under the Securities Act, which
shares will be subject to the volume limitations and other restrictions of Rule
144 described below. An aggregate of 11,925,222 shares of common stock held by
our existing stockholders upon completion of the offering will be "restricted
securities," as that phrase is defined in Rule 144, and may not be resold in
the absence of registration under the Securities Act or pursuant to an
exemption from such registration, including among others, the exemptions
provided by Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, if a period of at least one year has elapsed since
the later of the date the "restricted securities" were acquired from us or the
date they were acquired from an affiliate, then the holder of such restricted
securities, including an affiliate, is entitled to sell in the public market a
number of shares within any three-month period that does not exceed the greater
of 1% of the then outstanding shares of the common stock or the average weekly
reported volume of trading of the common stock on the Nasdaq National Market
during the four calendar weeks preceding such sale. The holder may only sell
such shares through "brokers' transactions" or in transactions directly with a
"market maker," as such terms are defined in Rule 144. Sales under Rule 144 are
also subject to requirements regarding providing notice of such sales and the
availability of current public information concerning us. Affiliates may sell
shares not constituting restricted securities in accordance with the foregoing
volume limitations and other requirements but without regard to the one-year
holding period.
Under Rule 144(k), if a period of at least two years has elapsed between the
later of the date restricted securities were acquired from us or the date they
were acquired from an Affiliate, as applicable, a holder of such restricted
securities who is not an Affiliate at the time of the sale and has not been an
Affiliate for at least three months prior to the sale would be entitled to sell
the shares in the public market without regard to the volume limitations and
other restrictions described above. Beginning 90 days after the date of this
prospectus, approximately 289,310 shares of common stock will be eligible for
sale in the public market pursuant to Rule 144(k).
Securities issued in reliance on Rule 701, such as shares of common stock
acquired upon exercise of options granted under Therma-Wave stock plans, are
also restricted and, beginning 90 days after the effective date of this
prospectus, may be sold by stockholders other than affiliates of Therma-Wave
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year holding period requirement.
Options
We intend to file registration statements on Form S-8 under the Securities
Act to register approximately 2,703,921 shares of common stock issuable under
our stock plans. These registration statements are expected to be filed within
six months of the effective date of the registration statement of which this
prospectus is a part and will be effective upon filing. Shares issued upon the
exercise of stock options after the effective date of the
74
<PAGE>
Form S-8 registration statements will be eligible for resale in the public
market without restriction, subject to Rule 144 limitations applicable to
Affiliates and the lock-up agreements described below.
Lock-Up Agreements
Notwithstanding the foregoing, Therma-Wave, our executive officers,
directors and substantially all of our existing stockholders and many of our
optionholders who are senior officers have agreed not to offer, sell, contract
to sell or otherwise dispose of any shares of our common stock for a period of
180 days after the date of this prospectus without the prior written consent of
Banc of America Securities LLC, except, in the case of Therma-Wave, for the
shares of common stock to be issued in connection with the offering or pursuant
to employee benefit plans existing on the date of this prospectus or upon the
conversion of the Series A mandatorily redeemable convertible preferred stock,
sales or dispositions to Therma-Wave, permitted transfers to related parties
that agree to be bound by the foregoing restrictions, and permitted sales of
shares acquired in the open market following the completion of the offering.
Registration Agreement
Pursuant to the recapitalization, Therma-Wave, the Bain Group, Sutter Hill,
the Existing Stockholders and our executive officers that participated in the
recapitalization entered into a registration agreement. Under the registration
agreement, the holders of a majority of the registerable securities owned by
the Bain Group have the right at any time, subject to conditions, to require us
to register any or all of their shares of common stock under the Securities Act
on Form S-1, a "Long-Form Registration," on three occasions at our expense or
on Form S-2 or Form S-3, a "Short-Form Registration," on six occasions at our
expense. In addition, at any time after a Public Offering, the holders of a
majority of the registrable securities owned by the Existing Stockholders have
the right, subject to conditions, to require either a Long-Form Registration or
a Short-Form Registration on one occasion at our expense. Further, at any time
after the later of the fifth anniversary of the closing of the recapitalization
and 180 days after a public offering, the executive officers have the right,
subject to conditions, to require either a Long-Form Registration or a Short-
Form Registration, at our expense, with respect to a number of shares of common
stock the proceeds of which, subject to limitations, would be sufficient to pay
taxes incurred by them upon receipt of the deferred bonuses under their
employment contracts. See "Management--Employment Agreements." We are not
required, however, to effect any such Long-Form Registration or Short-Form
Registration within six months after the effective date of a prior demand
registration and may postpone the filing of such registration for up to six
months if we believe that such a registration would reasonably be expected to
have an adverse effect on any proposal or plan by us or any of our subsidiaries
to engage in an acquisition, merger or similar transaction.
In addition, all holders of registerable securities are entitled to request
the inclusion of any shares of common stock subject to the registration
agreement in any registration statement at our expense whenever we propose to
register any of our securities under the Securities Act. Such right to request
inclusion of shares is not permitted:
. in connection with a public offering, unless any holders of registrable
securities are permitted to participate in the public offering;
. pursuant to a demand registration; or
. pursuant to a registration on Form S-4 or S-8.
In connection with all such registrations, we have agreed to indemnify all
holders of registerable securities against liabilities set forth in the
registration agreement, including liabilities under the Securities Act. In
addition, all the parties to the registration agreement have agreed not to make
any public sales of their registerable securities for a period beginning seven
days prior to the effective date of any registration statement and continuing
for a period of 180 days thereafter, other than registerable securities
included in such registration statement. Beginning 180 days after the
completion of the offering, the holders of an aggregate of 11,848,474 shares of
common stock, assuming an offering price of $9.00 per share and a Class L
common stock Preference Amount of $30.142 per share, will have limited rights
to require us to register their shares of common stock under the Securities Act
at our expense.
75
<PAGE>
UNDERWRITING
Therma-Wave is offering the shares of common stock described in this
prospectus through a number of underwriters. Banc of America Securities LLC and
Lehman Brothers Inc. are the representatives of the underwriters. Therma-Wave
has entered into an underwriting agreement with the representatives. Subject to
the terms and conditions of the underwriting agreement, Therma-Wave has agreed
to sell to the underwriters, and each underwriter has severally agreed to
purchase, the number of shares of common stock listed next to its name in the
following table.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Banc of America Securities LLC...................................
Lehman Brothers Inc. ............................................
---
Total..........................................................
===
</TABLE>
Shares sold by the underwriters to the public will initially be offered on
the terms set forth on the cover page of this prospectus. The underwriters may
allow to selected dealers a concession of not more than $ per share, and the
underwriters may also allow, and any other dealers may reallow, a concession of
not more than $ per share to other dealers. If all the shares are not sold
at the initial public offering price, the underwriters may change the offering
price and the other selling terms. The common stock is offered subject to
receipt and acceptance by the underwriters and other conditions, including the
right to reject orders in whole or in part.
If the underwriters sell more shares than the total number of shares set
forth in the table above, they have an option to buy up to a maximum of 495,000
additional shares from Therma-Wave to cover such sales. The underwriters have
30 days to exercise this option. If any shares are purchased pursuant to this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above. If purchased, the underwriters
will offer such additional shares on the same terms as those on which the
3,300,000 shares are being offered. The following table sets forth the per
share and total underwriting discounts and commissions to be paid to the
underwriters assuming both no exercise and full exercise of the underwriters'
option to purchase 495,000 additional shares.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share........................................ $ $
---- ----
Total............................................ $ $
==== ====
</TABLE>
Therma-Wave, our executive officers, directors and substantially all of our
existing stockholders as well as holders of options to purchase common stock
who are senior officers have agreed with the underwriters not to dispose of or
hedge any of their common stock or securities convertible into or exchangeable
for shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus without
the prior written consent of Banc of America Securities LLC. At any time and
without notice, Banc of America Securities LLC may, in its sole discretion,
release all or any portion of the securities from these lock-up agreements.
The underwriting agreement provides that Therma-Wave will indemnify the
underwriters against liabilities set forth in such agreement, including civil
liabilities under the Securities Act, or will contribute to payments the
underwriters may be required to make in respect thereof.
At our request, the underwriters have reserved up to 130,000 shares of
common stock offered by this prospectus for sale at the initial public offering
price to persons having business relationships with us. The number of shares of
common stock available to the general public will be reduced to the extent that
these persons purchase the reserved shares. Any reserved shares of common stock
that are not so purchased by
76
<PAGE>
such persons at the closing of the initial public offering, will be offered by
the underwriters to the general public on the same terms as the other shares in
the initial public offering.
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include:
. short sales
. stabilizing transactions
. purchases to cover positions created by short sales
Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while this offering
is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
The underwriters may engage in activities that stabilize, maintain or
otherwise affect the price of the common stock, including:
. over-allotment
. stabilization
. syndicate covering transactions
. imposition of penalty bids
As a result of these activities, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National
Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares of common stock offered by this prospectus.
Prior to this offering, there has been no public market for the common stock
of Therma-Wave. The initial public offering price will be negotiated among
Therma-Wave and the underwriters. Among the factors to be considered in such
negotiations are:
. the history of, and prospects for, Therma-Wave and the industry in which
it competes
. the past and present financial performance of Therma-Wave
. an assessment of Therma-Wave's management
. the present state of Therma-Wave's development
. the prospects for Therma-Wave's future earnings
. the prevailing market conditions of the applicable U.S. securities
market at the time of this offering
. market valuations of publicly traded companies that Therma-Wave and the
representatives believe to be comparable to Therma-Wave
. other factors deemed relevant
The total expenses related to this initial public offering of our common
stock are estimated to be $1,030,000.
77
<PAGE>
EXPERTS
The consolidated financial statements as of March 31, 1999 and for the year
ended March 31, 1999 appearing in this Prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at March 31, 1998, and for each of the two fiscal years in
the period ended March 31, 1998, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Therma-Wave by Kirkland & Ellis (a partnership that includes professional
corporations), Chicago, Illinois. Some partners of Kirkland & Ellis are
partners in Randolph Street Partners, which owns 103,014 shares of common
stock. Some legal matters in connection with this offering will be passed upon
for the underwriters by Ropes & Gray, Boston, Massachusetts. Kirkland & Ellis
and Ropes & Gray have, from time to time, represented, and may continue to
represent, some of the underwriters in connection with various legal matters
and the Bain Capital Funds and some of their affiliates (including Therma-Wave)
in connection with legal matters.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective July 16, 1998, we dismissed Ernst & Young LLP as our independent
accountants. Concurrent with such dismissal, we engaged PricewaterhouseCoopers
LLP as our independent accountants. The decision to dismiss Ernst & Young LLP
as our independent accountants was approved by Therma-Wave's board of
directors.
The reports of Ernst & Young LLP on our consolidated financial statements
for each of the two fiscal years in the period ended March 31, 1998 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles.
In connection with the audits of our consolidated financial statements for
each of the two fiscal years in the period ended March 31, 1998, and through
July 16, 1998, there were no disagreements between us 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.
WHERE YOU CAN FIND MORE INFORMATION
We are currently subject to the informational requirements of the Exchange
Act, and in accordance therewith we are required to file periodic reports and
other information with the SEC. The reports and other information filed by us
with the SEC may be inspected and copied at the public reference facilities
maintained by the SEC as described below.
We have filed with the SEC a registration statement on Form S-1 (the
"Registration Statement," which term shall encompass all amendments, exhibits,
annexes and schedules thereto) pursuant to the Securities Act, and the rules
and regulations promulgated thereunder, with respect to the shares of common
stock offered hereby. This prospectus, which constitutes part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, parts of which are omitted in accordance with the rules
and regulations of the SEC. For further information with respect to us and the
common stock offered hereby,
78
<PAGE>
reference is made to the Registration Statement. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the
document or matter involved, and each such statement shall be deemed qualified
in its entirety by such reference.
The Registration Statement, including the exhibits thereto, can be inspected
and copied at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 (telephone number: 1-800-
SEC-0330), at the Regional Offices of the SEC at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a website
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
such site is http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent accounting firm, and to make
available quarterly reports containing unaudited financial information for the
first three quarters of each fiscal year.
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Therma-Wave, Inc. Audited Consolidated Financial Statements
Report of Independent Accountants........................................ F-2
Report of Ernst & Young LLP, Independent Auditors........................ F-3
Consolidated Balance Sheets as of March 31, 1998 and 1999................ F-4
Consolidated Statements of Operations for the years ended March 31, 1997,
1998 and 1999........................................................... F-5
Consolidated Statements of Mandatorily Redeemable Convertible Preferred
Stock and Stockholders' Equity (Net Capital Deficiency) for the years
ended March 31, 1997, 1998 and 1999..................................... F-6
Consolidated Statements of Cash Flows for the years ended March 31, 1997,
1998 and 1999........................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
Therma-Wave, Inc.
In our opinion, the accompanying consolidated balance sheet 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 March 31, 1999 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.
PricewaterhouseCoopers LLP
San Jose, California
April 27, 1999, except as to Note 12,
which is as of August 5, 1999
F-2
<PAGE>
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, except as to Note 12,
as to which the date is August 5, 1999
F-3
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity
(Net Capital
March 31, Deficiency)
------------------- at March 31,
1998 1999 1999
-------- --------- -------------
(Unaudited)
<S> <C> <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 7)
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)
Preferred stock, no shares issued and
outstanding at March 31, 1998 and 1999;
$0.01 par value, 5,000,000 authorized; no
shares issued or outstanding on a pro
forma basis (unaudited)................... -- -- $ --
Common stock, no shares issued and
outstanding at March 31, 1998 and 1999;
$.01 par value, 35,000,000 shares
authorized, 11,809,653 shares issued and
outstanding at March 31, 1999 on a pro
forma basis (unaudited)................... -- -- 118
Class A common stock, $.001 par value;
20,000,000 shares authorized;
7,422,149 shares issued and outstanding at
March 31, 1998 and 1999, and no shares
authorized, issued or outstanding at
March 31, 1999 on a pro forma
basis (unaudited)......................... 74 74 --
Class B common stock, $.001 par value;
4,000,000 shares authorized; 1,055,044 and
914,599 shares issued and outstanding at
March 31, 1998 and 1999, respectively; no
shares authorized, issued or outstanding
at March 31, 1999 on a pro forma basis
(unaudited)............................... 10 9 --
Class L common stock, $.001 par value;
2,000,000 shares authorized;
824,683 shares issued and outstanding at
March 31, 1998 and 1999; no shares
authorized, issued or outstanding at March
31, 1999 on a pro forma basis
(unaudited)............................... 8 8 --
Additional paid-in capital................. 20,647 19,775 19,748
Accumulated deficit........................ (89,686) (105,416) (105,416)
Notes receivable from stockholders......... (288) (241) (241)
Accumulated other comprehensive loss....... (1,755) (1,180) (1,180)
-------- --------- ---------
Total stockholders' equity (net capital
deficiency)............................... (70,990) (86,971) $ (86,971)
-------- --------- =========
Total liabilities and stockholders' equity
(net capital deficiency).................. $ 89,762 $ 72,352
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<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)
========= =========
Net income (loss) per share:
Basic....................................... $ 0.35 $ (0.34) $ (2.28)
Diluted..................................... $ 0.35 $ (0.34) $ (2.28)
Weighted average number of shares outstanding:
Basic....................................... 37,231 11,076 7,686
Diluted..................................... 37,231 11,076 7,686
Pro forma basic and diluted net loss per share
(unaudited).................................. $ (1.48)
Weighted average number of shares outstanding
in pro forma basic and diluted net loss per
share calculation (unaudited)................ 11,159
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<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 Class L
Preferred Stock Common Stock Common Stock Common Stock Common Stock Additional
---------------- ------------------- ---------------- ----------------- -------------- Paid-In
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital
------- ------- ----------- ------ --------- ------ --------- ------ ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
31, 1996......... -- $ -- 37,231,547 $ 37 -- $ -- -- $ -- -- $ -- $ 60,473
Net income....... -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustments...... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
income..........
Repayment of
notes receivable
from
shareholders..... -- -- -- -- -- -- -- -- -- -- --
------- ------- ----------- ----- --------- ----- --------- ----- ------- ----- --------
Balance at March
31, 1997......... -- -- 37,231,547 37 -- -- -- -- -- -- 60,473
Net loss......... -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustments...... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
loss............
Recapitalization
Transactions:.... -- -- 7,047,068 7 -- -- -- -- -- -- 17,104
Conversion of
outstanding
Common Stock into
shares of Class A
and Class L
Common Stock..... -- -- (7,047,068) (7) 5,942,151 59 -- -- 660,236 7 (59)
Conversion of
outstanding
Common Stock into
shares of
Preferred Stock,
Class A and Class
L Common Stock... 750,000 13,800 (4,990,824) (5) 416,717 4 -- -- 46,303 -- (8,099)
Redemption of
Common Stock..... -- -- (32,240,723) (32) -- -- -- -- -- -- (52,842)
Issuances of
Class A, B and L
Common Stock..... -- -- -- -- 1,055,221 11 1,091,944 10 117,248 1 3,333
Conversion of
Preferred Stock
into Class A
Common Stock..... (1,261) (23) -- -- 8,060 -- -- -- 896 -- 23
Recapitalization
related expenses
paid by Toray and
Shimadzu......... -- -- -- -- -- -- -- -- -- -- 2,888
Forgiveness of
receivable from
Toray and
Shimadzu......... -- -- -- -- -- -- -- -- -- -- (1,425)
Preferred stock
dividends........ -- 738 -- -- -- -- -- -- -- -- (738)
Repurchased
shares........... -- -- -- -- -- -- (36,891) -- -- -- (11)
------- ------- ----------- ----- --------- ----- --------- ----- ------- ----- --------
Balance at March
31, 1998......... 748,739 14,515 -- -- 7,422,149 74 1,055,053 10 824,683 8 20,647
Net loss......... -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustments...... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
loss............
Preferred stock
dividends........ -- 832 -- -- -- -- -- -- -- -- (832)
Repurchased
shares........... -- -- -- -- -- -- (140,454) (1) -- -- (40)
------- ------- ----------- ----- --------- ----- --------- ----- ------- ----- --------
Balance at March
31, 1999......... 748,739 $15,347 -- $ -- 7,422,149 $ 74 914,599 $ 9 824,683 $ 8 $ 19,775
======= ======= =========== ===== ========= ===== ========= ===== ======= ===== ========
<CAPTION>
Accumu-
lated
Other
Notes Compre- Compre-
Receivable hensive hensive
Accumulated from Income Income
Deficit Stockholders (Loss) Total (Loss)
----------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at March
31, 1996......... $ (52,028) $(524) $(1,055) $ 6,903
Net income....... 13,101 -- -- 13,101 $ 13,101
Currency
translation
adjustments...... -- -- (383) (383) (383)
---------
Comprehensive
income.......... $ 12,718
=========
Repayment of
notes receivable
from
shareholders..... -- 524 -- 524
----------- ------------ -------- ---------
Balance at March
31, 1997......... (38,927) -- (1,438) 20,145
Net loss......... (1,033) -- -- (1,033) $ (1,033)
Currency
translation
adjustments...... -- -- (317) (317) (317)
---------
Comprehensive
loss............ $ (1,350)
=========
Recapitalization
Transactions:.... -- -- -- 17,111
Conversion of
outstanding
Common Stock into
shares of Class A
and Class L
Common Stock..... -- -- -- --
Conversion of
outstanding
Common Stock into
shares of
Preferred Stock,
Class A and Class
L Common Stock... (5,700) -- -- (13,800)
Redemption of
Common Stock..... (44,026) -- -- (96,900)
Issuances of
Class A, B and L
Common Stock..... -- (299) -- 3,056
Conversion of
Preferred Stock
into Class A
Common Stock..... -- -- -- 23
Recapitalization
related expenses
paid by Toray and
Shimadzu......... -- -- -- 2,888
Forgiveness of
receivable from
Toray and
Shimadzu......... -- -- -- (1,425)
Preferred stock
dividends........ -- -- -- (738)
Repurchased
shares........... -- 11 -- --
----------- ------------ -------- ---------
Balance at March
31, 1998......... (89,686) (288) (1,755) (70,990)
Net loss......... (15,730) -- -- (15,730) $(15,730)
Currency
translation
adjustments...... -- -- 575 575 575
---------
Comprehensive
loss............ $(15,155)
=========
Preferred stock
dividends........ -- -- -- (832)
Repurchased
shares........... -- 47 -- 6
----------- ------------ -------- ---------
Balance at March
31, 1999......... $(105,416) $(241) $(1,180) $(86,971)
=========== ============ ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<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.
F-7
<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.
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.
F-8
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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.
F-9
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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.
Unaudited Pro Forma Stockholders' Equity (Net Capital Deficiency)
Prior to the closing of the Company's initial public offering, each
outstanding share of Class L common stock (the "Class L Stock") will be
reclassified into one share of Class A common stock (the "Class A Stock") plus
an additional number of shares of Class A Stock (determined by dividing the
preference amount for such share by the assumed initial public offering price
of $9.00 per share) and each share of Class B common stock (the "Class B
Stock") will be reclassified into one share of Class A Stock. In addition, the
Company will file a Restated Certificate of Incorporation which will authorize
35,000,000 shares of Common Stock.
F-10
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net Income (Loss) Per Share and Unaudited Pro Forma Net Loss Per Share
The Company had adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128
requires the Company to report both basic net income (loss) per share, which
is based on the weighted-average number of common shares outstanding excluding
contingently issuable or returnable shares such as unvested Class B Stock or
shares that contingently convert into Common Stock upon certain events, and
diluted net income (loss) per share, which is based on the weighted average
number of common shares outstanding and dilutive potential common shares
outstanding. Class A Stock, Class B Stock and Class L Stock share ratably in
the net income (loss) remaining after giving effect to the 12% yield on Class
L Stock. Net loss for the years ended March 31, 1998 and 1999 used in the net
loss per share calculation represents the loss attributable to the weighted
average number of shares of Class A Stock, Class B Stock and Common Stock
outstanding after giving effect to the 12% yield on Class L Stock. As a result
of the losses incurred by the Company during fiscal years 1998 and 1999, all
potential common shares were anti-dilutive and excluded from the diluted net
income (loss) per share calculation.
Unaudited pro forma basic and diluted net loss per share for the year ended
March 31, 1999 have been calculated based on net loss applicable to all
classes of Common Stock and assuming the reclassification of the Company's
Class B and L Stock prior to the completion of this offering, as if such
reclassification had occurred at the beginning of the period, or the issuance
of the stock, if later. Each share of Class L Stock will be reclassified into
one share of Class A Stock plus an additional number of shares of Class A
Stock (determined by dividing the preference amount for such share by the
assumed initial public offering price of $9.00 per share). Each share of Class
B Stock will then be reclassified into one share of Class A Stock.
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.
F-11
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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>
3. NET INCOME (LOSS) PER SHARE
The following tables set forth the computation of net income (loss) per
share of common stock:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Numerator (in thousands):
Net income (loss).................................. $13,101 $(1,033) $(15,730)
Less: Preferred stock dividend..................... -- (738) (832)
Less: Income attributable to Class L Stock......... -- (1,947) (944)
------- ------- --------
$13,101 $(3,718) $(17,506)
======= ======= ========
Denominator (in thousands):
Common Stock....................................... 37,231 4,551 --
Class A Stock...................................... -- 6,494 7,422
Class B Stock (vested)............................. -- 31 264
------- ------- --------
Weighted average shares outstanding used for basic
and diluted income (loss) per share............... 37,231 11,076 7,686
======= ======= ========
</TABLE>
F-12
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes securities outstanding as of each period end
which were not included in the calculation of diluted net loss per share since
their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
March 31,
------------------------
1997 1998 1999
---- --------- ---------
<S> <C> <C> <C>
Class B Stock Subject to Repurchase (unvested)........ -- 972,605 627,482
Mandatorily Redeemable Convertible Preferred Stock.... -- 612,469 612,469
Stock Options......................................... -- 1,444,145 1,454,474
</TABLE>
The stock options outstanding at March 31, 1998 and 1999, had a weighted
average exercise price of $13.07, and $11.78, respectively. Upon the completion
of an initial public offering, Class L Stock is convertible into one share of
Class A Stock plus an additional number of shares of Class A Stock (determined
by dividing the preference amount for such share by the assumed initial public
offering price).
4. 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).
F-13
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
5. 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)
======= ======= ========
The components of the provision (benefit) for income taxes are as follows
(in thousands):
<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>
F-14
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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.
F-15
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. 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>
7. 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
------- ---------
<S> <C> <C>
Fiscal Year
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>
F-16
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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.
8. 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 0.818 of 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 0.818 of 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
F-17
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 7,422,149 shares of Class A Common; 1,091,944 shares
of Class B Common; 824,683 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 ($23.331) 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 March
31, 1999, 140,445 shares of Class B Stock were repurchased by the Company. As
of March 31, 1999, 287,125 shares of Class B Stock were vested and
627,482 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 3,061,365 shares of Class A Stock and 3,061,365 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.
F-18
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.......................... 6,122,730 -- --
Granted............................. (1,502,163) 1,502,163 13.04
Exercised........................... -- -- --
Canceled............................ 58,018 (58,018) 12.32
---------- ---------
Balance at March 31, 1998............ 4,678,585 1,444,145 13.07
Granted............................. (261,842) 261,842 5.43
Exercised........................... -- -- --
Canceled............................ 251,512 (251,512) 12.57
---------- ---------
Balance at March 31, 1999............ 4,668,255 1,454,475 $11.78
========== =========
</TABLE>
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:
$4.89.................................... 220,860 9.32 $ 4.89
$7.33-$8.56.............................. 346,223 8.75 $ 7.46
$10.92-$19.43............................ 887,392 8.13 $15.18
---------
1,454,475
=========
</TABLE>
At March 31, 1999, there were 91,266 vested shares and 978,658 shares were
exercisable.
Pro forma information regarding net loss and net loss per share 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.
F-19
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 and pro forma basic and diluted net loss per share under
SFAS No. 123 would have been $(1,856,000) and $(0.34) for the year ended March
31, 1998 and $(16,717,000) and $(2.30) 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 $0.55 and $1.17 per share, respectively.
9. 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.
10. 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.
11. 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.
F-20
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
12. SUBSEQUENT EVENT
On July 16, 1999, the Board of Directors declared a one-for-0.818 reverse
stock split of the common stock, which occurred immediately prior to the
effectiveness of the registration statement of which these financial statements
form a part. All references throughout these accompanying financial statements
to the number of shares, per share amounts and stock option data have been
restated, giving retroactive effect to the stock split.
F-21
<PAGE>
[pictures of an Opti-Probe(R) system and a Therma-Probe(R) system]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,300,000 Shares
[THERMA-WAVE(R) LOGO]
----------------
Prospectus
, 1999
----------------
Banc of America Securities LLC
Lehman Brothers
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following is a statement of estimated expenses, to be paid solely by
Therma-Wave, of the issuance and distribution of the securities being
registered hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 12,660
NASD filing fee................................................. 5,054
Nasdaq National Market listing fee.............................. 88,500
Blue Sky fees and expenses (including attorneys' fees and
expenses)...................................................... 10,000
Printing expenses............................................... 180,000
Accounting fees and expenses.................................... 375,000
Transfer agent's fees and expenses.............................. 3,000
Legal fees and expenses......................................... 350,000
Miscellaneous expenses.......................................... 5,786
----------
Total......................................................... $1,030,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
General Corporation Law
We are incorporated under the laws of the State of Delaware. Section 145
("Section 145") of the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended (the "General Corporation Law"), inter
alia, provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director, employee
or agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the corporation's best interests and, with respect
to any criminal action or proceeding, had no reasonable cause to believe that
his conduct was illegal. A Delaware corporation may indemnify any persons who
are, were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reasons of
the fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable
to the corporation. Where an officer, director, employee or agent is successful
on the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability
II-1
<PAGE>
asserted against him and incurred by him in any such capacity, arising out of
his status as such, whether or not the corporation would otherwise have the
power to indemnify him under Section 145.
Certificate of Incorporation and By-Laws
Our Certificate of Incorporation and By-laws provides for the
indemnification of officers and directors to the fullest extent permitted by
the General Corporation Law.
Item 15. Recent Sales of Unregistered Securities.
During the last three years, Therma-Wave has issued the following securities
without registration under the Securities Act of 1933, as amended (the
"Securities Act"):
(1) Therma-Wave completed the recapitalization on May 16, 1997. In connection
with the recapitalization, Therma-Wave issued:
(a) an aggregate of 5,693,309 shares of common stock to the Bain Capital
Funds and Sutter Hill (which were later converted into an aggregate of
5,942,145 shares of Class A common stock and an aggregate of 660,239
shares of Class L common stock) for an aggregate of $17.1 million;
(b) an aggregate of (i) 1,226,331 shares of Class A common stock; (ii)
111,459 shares of Class L common stock; and (iii) 923,317 shares of
Class B common stock to the management investors for an aggregate of
$2.9 million;
(c) an aggregate of (i) 416,716 shares of Class A common stock; (ii) 46,302
shares of Class L common stock; and (iii) 750,000 shares of Series A
mandatorily redeemable convertible preferred stock to the Existing
Stockholders in exchange for their 4,990,824 shares of common stock;
(d) an aggregate of (i) 8,060 shares of Class A common stock and (ii) 896
shares of Class L common stock to the Existing Stockholders in exchange
for an aggregate of 1,261 shares of Series A mandatorily redeemable
convertible preferred stock; and
(e) 52,090 shares of Class A common stock and 5,788 shares of Class L
common stock to Antares International Partners for an aggregate of
$150,000.
(2) To finance a portion of the recapitalization, Therma-Wave sold an aggregate
of $115.0 million aggregate principal amount of 10 5/8% Senior Notes due
2004 to BT Securities Corporation pursuant to a Purchase Agreement, dated
May 16, 1997.
(3) On July 15, 1997, Therma-Wave sold an aggregate of 168,611 shares of Class
B common stock to certain employees of Therma-Wave for an aggregate of
$48,440.
The sales and issuances listed above in paragraphs (1)(a), (1)(b), (1)(e),
(2) and (3) were deemed exempt from registration under the Securities Act by
virtue of Section 4(2) thereof, as transactions not involving a public
offering. The issuance of securities listed in paragraphs (1)(c) and(1)(d) were
deemed exempt from registration under the Securities Act by virtue of Section
3(a)(9). Certain defined terms used herein not otherwise defined have the
meanings ascribed to them in the prospectus, which forms a part of this
Registration Statement.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
**1.1 Form of Underwriting Agreement.
*2.1 Recapitalization Agreement, dated as of December 18, 1996, by and
among Bain Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP
Associates, BCIP Trust Associates, L.P., Toray Industries, Inc., Toray
Industries (America), Inc. and Shimadzu Corporation as amended by
Amendment No. 1 and Supplement to Recapitalization Agreement, dated
May 16, 1997, by and among Therma-Wave, Inc., Toray Industries, Inc.,
Toray Industries (America), Inc., Shimadzu Corporation and Bain
Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP Trust
Associates and BCIP Trust Associates, L.P.
*3.1 Restated Certificate of Incorporation of Therma-Wave.
*3.2 Amended and Restated By-Laws of Therma-Wave.
**3.3 Form of Restated Certificate of Incorporation of Therma-Wave.
**3.4 Form of Amended and Restated By-Laws of Therma-Wave.
*4.1 Purchase Agreement, dated as of May 16, 1997, by and among Therma-Wave
and BT Securities Corporation.
*4.2 Indenture, dated as of May 15, 1997, by and among Therma-Wave and IBJ
Schroder Bank & Trust Company, as trustee.
*4.3 Form of 10 5/8% Senior Notes.
*4.4 Form of Series B 10 5/8% Senior Notes.
*4.5 Registration Rights Agreement, dated as of May 15, 1997, by and among
Therma-Wave and BT Securities Corporation, as Initial Purchaser.
**4.6 Form of certificate representing shares of Common Stock.
**5.1 Opinion of Kirkland & Ellis.
*10.1 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and Dr. Allan Rosencwaig.
*10.2 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and David L. Willenborg.
*10.3 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and W. Lee Smith.
*10.4 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and Jon L. Opsal.
*10.5 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and Anthony W. Lin.
*10.6 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Dr. Allan Rosencwaig.
*10.7 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and David L. Willenborg.
*10.8 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and W. Lee Smith.
*10.9 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Jon L. Opsal.
*10.10 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Anthony W. Lin.
*10.11 Stockholders Agreement, dated as of May 16, 1997, by and among Therma-
Wave and certain stockholders named therein.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*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.
**10.24 Form of Therma-Wave, Inc. 1999 Equity Incentive Plan.
**10.25 First Amendment to Credit Agreement, dated as of June 30, 1998,
between Therma-Wave and Bankers Trust Company, as agent, incorporated
herein by reference to Exhibit 10.1 of Therma-Wave's Quarterly Report
on Form 10-Q for the quarter ended July 5, 1998.
**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.
**10.28 Form of 1999 Employee Stock Purchase Plan.
10.29 Second Amendment to Credit Agreement, dated as of August 3, 1999,
between Therma-Wave and Bankers Trust Company, as agent.
*21.1 Subsidiaries of Therma-Wave.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Independent Accountants.
23.3 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in Part II to the Registration Statement
previously filed).
**27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated herein by reference to the same numbered exhibit to Therma-
Wave's Registration Statement on Form S-4 (Registration No. 333-29871).
** Previously filed.
+ Therma-Wave agrees to furnish supplementally to the Commission a copy of
any omitted schedule or exhibit to such agreement upon request by the
Commission.
II-4
<PAGE>
(b) Financial Statement Schedule.
<TABLE>
<CAPTION>
Index
-----
<S> <C>
Report of Independent Accountants on Financial Statement Schedule.. S-1
Schedule II--Valuation and Qualifying Accounts..................... S-2
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions,
are inapplicable or not material, or the information called for thereby is
otherwise included in the financial statements and therefore has been omitted.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters
at closing specified in the underwriting agreement certificates in such
denominations and registered in such manner as requested by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933 (the "Securities Act"), the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 20 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Therma-Wave,
Inc. has duly caused this Pre-Effective Amendment No. 5 to Registration
Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fremont, State of California, on August 13,
1999.
Therma-Wave, Inc.
By: /s/ Allan Rosencwaig
-------------------------------------
Allan Rosencwaig
Chairman of the Board
* * * *
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 5 to Registration Statement on Form S-1 has been
signed by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Allan Rosencwaig Chairman of the Board and August 13, 1999
______________________________________ Chief Technology Officer
Allan Rosencwaig
* President, Chief Executive August 13, 1999
______________________________________ Officer and Director
Martin M. Schwartz (Principal Executive
Officer)
* Vice President and Chief August 13, 1999
______________________________________ Financial Officer
L. Ray Christie (Principal Financial and
Accounting Officer)
* Director August 13, 1999
______________________________________
G. Leonard Baker, Jr.
* Director August 13, 1999
______________________________________
David Dominik
* Director August 13, 1999
______________________________________
Adam W. Kirsch
* Director August 13, 1999
______________________________________
Ian K. Loring
</TABLE>
* The undersigned, by signing his name hereto, does hereby sign and execute
this Pre-Effective Amendment No. 5 to Registration Statement on Form S-1 on
behalf of the above named officers and directors of Therma-Wave pursuant to
the Power of Attorney executed by such officer and/or director on the
Registration Statement on Form S-1 previously filed with the SEC on April 9,
1999 or July 21, 1999, as applicable.
By: /s/ Allan Rosencwaig
---------------------------- August 13, 1999
Allan Rosencwaig
Attorney-in-Fact
II-6
<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 F-2 of the consolidated financial statements in this Registration
Statement on Form S-1 also included an audit of the Financial Statement
Schedule for the year ended March 31, 1999 listed in Item 16(b) in this
Registration Statement on Form S-1. 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
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
THERMA-WAVE, INC.
(in thousands)
<TABLE>
<CAPTION>
Additions
---------------------
Charged to
Balance at Charged to Other
Beginning Costs and Accounts-- Deductions-- Balance at
Description of Period Expenses Describe Describe End of Period
- ----------- ---------- ---------- ---------- ------------ -------------
<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>
S-2
<PAGE>
EXHIBIT 10.29
SECOND AMENDMENT
----------------
SECOND AMENDMENT (this "Amendment"), dated as of August 3, 1999, among
THERMA-WAVE, INC., a Delaware corporation (the "Borrower"), the lenders party to
the Credit Agreement referred to below (each a "Bank" and, collectively, the
"Banks") and BANKERS TRUST COMPANY, as Agent (the "Agent"). All capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings provided such terms in the Credit Agreement referred to below.
W I T N E S S E T H:
-------------------
WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit
Agreement, dated as of May 16, 1997 (as amended, modified or supplemented
through, but not including, the date hereof, the "Credit Agreement"); and
WHEREAS, the Borrower has requested, and the Banks are willing to grant
(subject to the terms and conditions hereof), certain amendments to the Credit
Agreement as set forth herein;
NOW, THEREFORE, it is agreed:
1. Section 3.03(d) of the Credit Agreement is hereby amended by (i)
deleting the word "or" appearing at the end of sub-clause (ii) of the second
parenthetical contained therein and inserting a comma in lieu thereof and (ii)
inserting the following new sub-clause (iv) at the end of such second
parenthetical:
"or (iv) from the Qualified IPO".
2. Section 3.03 of the Credit Agreement is hereby further amended by
inserting the following new clause (h) at the end thereof:
"(h) In addition to any other mandatory commitment reductions pursuant
to Section 3.03, on each of December 31, 1999 and June 30, 2000 the Total
Revolving Loan Commitment shall be permanently reduced by an amount equal
to $5,000,000, although no reduction pursuant to this clause (h) shall be
required on any such date to the extent that the Borrower has consummated
the Qualified IPO prior to December 31, 1999 (in case of the $5,000,000
reduction to occur on such date) or June 30, 2000 (in the case of the
additional $5,000,000 reduction to occur on such date)".
3. Section 7.01(e) of the Credit Agreement is hereby amended by deleting
the words "and 8.08 through and including 8.11," appearing therein and
inserting the words ", 8.08 and 8.09" in lieu thereof.
4. The table appearing in Section 8.09(a) of the Credit Agreement is
hereby deleted in its entirety and the following new table is inserted in lieu
thereof:
<PAGE>
<TABLE>
<CAPTION>
"Fiscal Quarter
Ending Closest To Amount
----------------- ------
<S> <C>
June 30, 1999 $(2,500,000)
September 30, 1999 $ (500,000)
December 31, 1999 $ 1,500,000
March 31, 2000 $ 2,000,000
June 30, 2000 $ 2,500,000
September 30, 2000 $ 3,250,000
December 31, 2000 $ 4,250,000
March 31, 2001 $ 5,500,000
June 30, 2001 $ 6,000,000
September 30, 2001 $ 6,500,000
December 31, 2001 $ 6,500,000
March 31, 2002 $ 6,500,000
June 30, 2002 $ 7,000,000".
</TABLE>
5. Section 8.09(b) of the Credit Agreement is hereby deleted in its
entirety and the following new Section 8.09(b) is inserted in lieu thereof:
"(b) The Borrower will not permit Consolidated EBITDA for the period
from April 4, 1999 to the last day of a fiscal quarter of the Borrower set
forth below (in each case taken as one accounting period) to be less than
the amount set forth opposite such fiscal quarter below:
<TABLE>
<CAPTION>
"Fiscal Quarter
Ending Closest To Amount
----------------- ------
<S> <C>
June 30, 1999 $ 750,000
September 30, 1999 $1,600,000
December 31, 1999 $2,400,000
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C>
March 31, 2000 $ 3,600,000
June 30, 2000 $ 5,000,000
September 30, 2000 $ 7,000,000
December 31, 2000 $ 9,200,000
March 31, 2001 $12,600,000
June 30, 2001 $16,000,000
September 30, 2001 $19,500,000
December 31, 2001 $23,100,000
March 31, 2002 $27,700,000
June 30, 2002 $33,100,000".
</TABLE>
6. The text of Section 8.10 of Credit Agreement is hereby deleted in its
entirety and the following new text is inserted in lieu thereof:
"[Intentionally omitted.]"
7. The text of Section 8.11 of the Credit Agreement is hereby deleted in
its entirety and the following new text is inserted in lieu thereof:
"[Intentionally omitted.]"
8. Section 8.12 of the Credit Agreement is hereby amended by inserting the
following parenthetical at the end of clause (v) thereof:
"(it being understood that if the Amended and Restated Stockholders
Agreement is entered into, then in no event shall any provision of
Section 5 of the Amended and Restated Stockholders Agreement be
amended, modified or waived in any manner which would allow any action
described therein to be taken without the consent of Bain Capital and
its Related Parties)".
9. From and after the earlier of (i) the time that the Amended and
Restated Stockholders Agreement is entered into and (ii) the consummation of the
Qualified IPO, the definition of "Change of Control Event" appearing in Section
10 of the Credit Agreement shall be hereby deleted in its entirety and the
following new definition of "Change of Control Event" shall be inserted in lieu
thereof:
-3-
<PAGE>
"Change of Control Event" shall mean (a) (i) prior to the Qualified
IPO, (x) Bain Capital and its Related Parties shall cease to own on a fully
diluted basis in the aggregate at least 51% of the economic interest in the
Borrower's capital stock, or (y) Bain Capital and its Related Parties shall
cease to have the right to elect (and shall not have exercised their right
to elect) at least one half of the Borrower's directors or (ii) from and
after the Qualified IPO, (x) any Person or "group" (within the meaning of
Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as in
effect on August 3, 1999), other than Bain Capital and its Related Parties,
shall (A) have acquired beneficial ownership of 30% or more on a fully
diluted basis of the voting and/or economic interest in the Borrower's
capital stock or (B) have obtained the power (whether or not exercised) to
elect a majority of the Borrower's directors or (y) the Board of Directors
of the Borrower shall cease to consist of a majority of Continuing
Directors or (z) any Person or "group" (within the meaning of Rules 13d-3
and 13d-5 under the Securities Exchange Act of 1934, as in effect on August
3, 1999) either (x) shall have acquired a greater beneficial ownership
interest or voting interest (in either case, on a fully diluted basis) in
the Borrower's capital stock than that owned by Bain Capital and its
Related Parties or (y) shall have the ability to designate a greater number
of the directors of the Borrower than that designated by Bain Capital and
its Related Parties or (b) a "change of control", "change of ownership" or
similar event shall occur as provided in the Senior Note Indenture or in
the Seller Preferred Stock.
10. The definition of "Test Period" appearing in Section 10 of the Credit
Agreement is hereby amended by deleting the text "Sections 8.02(p), 8.10 and
8.11," appearing in clause (i) thereof and inserting the text "Section 8.02(p),"
in lieu thereof.
11. Section 10 of the Credit Agreement is hereby further amended by
inserting the following new definitions in the appropriate alphabetical order:
"Amended and Restated Stockholders Agreement" shall mean the Amended
and Restated Stockholders Agreement to be entered into by and among the
Borrower and the various shareholders of the Borrower party thereto
substantially in the form attached hereto.
"Continuing Directors" shall mean the directors of the Borrower on
August 3, 1999 and each other director if such director's nomination for
the election to the Board of Directors of the Borrower is recommended by a
majority of the then Continuing Directors.
"Qualified IPO" shall mean the initial bona fide underwritten sale to
the public of common stock of the Borrower pursuant to a registration
statement (other than on Form S-8 or any other form relating to securities
issuable under any benefit plan of the Borrower or any of its Subsidiaries,
as the case may be) that is declared effective by the SEC and such offering
results in gross cash proceeds to the Borrower (exclusive of underwriter's
discounts and commissions and other expenses) of at least $25,000,000.
12. In order to induce the Banks to enter into this Amendment, the
Borrower hereby represents and warrants that (i) the representations, warranties
and agreements contained in Section 6 of the Credit Agreement are true and
correct in all material respects on and as of the First Amendment Effective Date
(as defined below), both before and after giving effect to this
-4-
<PAGE>
Amendment and (ii) there exists no Default or Event of Default on the Second
Amendment Effective Date, both before and after giving effect to this Amendment.
13. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other provision of any other Credit Document.
14. This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Agent.
15. This Amendment and the rights and obligations of the parties hereunder
shall be construed in accordance with and governed by the law of the State of
New York.
16. This Amendment shall become effective as of the date first above
written on the date (the "Second Amendment Effective Date") when the Borrower
and the Required Banks shall have signed a counterpart hereof (whether the same
or different counterparts) and shall have delivered (included by way of
facsimile transmission) the same to the Agent at the Notice Office.
17. From and after the Second Amendment Effective Date, all references in
the Credit Agreement and each of the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as amended
hereby.
***
-5-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
THERMA-WAVE, INC.
By: /s/ Martin M. Schwartz
---------------------------
Name: Martin M. Schwartz
Title: President & CEO
BANKERS TRUST COMPANY
Individually and as Agent
By: /s/ [Signature Illegible]
---------------------------
Name:
Title: Vice President
FLEET BANK, N.A.
By:
---------------------------
Name:
Title:
-6-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 1, 1998, in the Pre-Effective Amendment No. 5 to
the Registration Statement (Form S-1 No. 333-76019) and related Prospectus of
Therma-Wave, Inc. for the registration of common stock.
Our audits also included the financial statement schedule of Therma-Wave, Inc.
listed in Item 16(b). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
San Jose, California
August 13, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 (No.
333-76019) of our reports dated April 27, 1999, except as to Note 12, which is
as of August 5, 1999, relating to the financial statements and financial
statement schedule of Therma-Wave, Inc., which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PricewaterhouseCoopers LLP
San Jose, California
August 13, 1999
