<PAGE>
As filed with the Securities and Exchange Commission on January 13, 2000
Registration No. 333-76019
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE
AMENDMENT NO. 7
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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
<CAPTION>
Title of Each Class of Proposed Maximum Proposed Maximum
Securities Amount to be Offering Price Per Aggregate Offering Amount of
to be Registered Registered(1) Unit(2) Price(1)(2) Registration Fee(3)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share........ 10,350,000 $17.00 $175,950,000 $46,451
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 1,350,000 shares of common stock that the underwriters have the
option to purchase to cover over-allotment, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
(3) $8,896 of such fee was paid in connection with the original filing of the
Registration Statement on April 9, 1999 and $3,764 of such fee was paid in
connection with the filing of Amendment No. 3 on July 21, 1999.
----------------
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 JANUARY 13, 2000
9,000,000 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 $15.00 and $17.00
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 10.
-----------
<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 1,350,000 shares of common stock to cover over-allotments. The
underwriters can exercise this right at any time within thirty days after the
offering.
The underwriters expect to deliver the shares of common stock to investors on
February , 2000.
Banc of America Securities LLC Lehman Brothers
-----------
The date of this prospectus is , 2000.
<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............................................................. 10
Use of Proceeds.......................................................... 19
The Reclassification..................................................... 19
Capitalization........................................................... 20
Dividend Policy.......................................................... 21
Dilution................................................................. 21
Selected Historical Financial Data....................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 35
Management............................................................... 50
Principal Stockholders................................................... 60
Certain Relationships and Related Transactions........................... 62
Description of Indebtedness.............................................. 69
Description of Capital Stock............................................. 73
Shares Eligible for Future Sale.......................................... 77
Underwriting............................................................. 79
Experts.................................................................. 81
Legal Matters............................................................ 81
Change in Independent Accountants........................................ 81
Where You Can Find More Information...................................... 81
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 assumes: (1) no exercise of the underwriters'
over-allotment option and (2) 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 increase by approximately 3.4% in calendar
1999 as compared to calendar 1998 and 25.7% in calendar 2000. 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
19.9% and are expected to grow at a compound annual growth rate of 22.3%
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. In addition, we
recently announced our Meta-Probe X system, which utilizes X-ray reflectometry
to provide precise, non-contact, non-destructive measurement of metallic thin
films, including copper seed and barrier layers. Our other Fab Productivity
Enhancement(TM) initiatives include:
. Continuing to combine 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 61 U.S. and
foreign patents. In addition, we have filed applications for 27 additional U.S.
and foreign patents. We believe we have superior technical resources including
a staff of 47 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., Taiwan Semiconductor Manufacturing
Corp., Toshiba Corporation and the UMC Group. International sales represented
approximately 55%, 69% and 61% of our net revenues in fiscal 1998 and 1999, and
for the six-month period ended September 30, 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-
5
<PAGE>
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 that
represented approximately 87% of our outstanding voting power at such time. Our
senior management team currently owns approximately 21% of our outstanding
common stock and holds options to acquire an additional 12% of our common
stock. Such equity ownership represents a significant economic commitment to,
and participation in, the continued success of Therma-Wave. We intend to use
substantially all of the net proceeds from this offering to repay the $115.0
million in aggregate principal amount of 10 5/8% senior notes we issued in
connection with the recapitalization. We will use any remaining net proceeds,
if any, for general corporate purposes, including working capital.
Recent Operating Results
For the third fiscal quarter, revenues were $32.0 million with net income of
$0.6 million, including interest charges of $3.5 million. This represents a
revenue increase of 23% and 86%, respectively, compared to the prior fiscal
quarter and the same quarter last year. Net income improved $1.6 million versus
the prior fiscal quarter and $2.9 million versus the third quarter last year.
For the first nine months of fiscal 2000, revenues were $79.0 million, up
66% from the prior year period. The Company's net loss improved to $2.7
million, including interest charges of $10.5 million. This represented an
improvement of $10.7 million in net income versus last fiscal year.
Both gross margin and operating income improved as well. Gross margin at 49%
was up slightly compared to the prior quarter and the same quarter a year ago.
Operating income jumped to $4.1 million for the quarter, up 78% versus the
prior quarter and up $3.5 million versus operating income last year. Gross
margin for the nine months ended December 31, 1999 was 46%, up from 44% for the
same period a year ago, while operating income improved to $7.4 million versus
a loss of $5.5 million for the same period last fiscal year. The margin
improvements over the prior periods were mostly due to higher volume, cost
reductions implemented last year and to steadily decreasing manufacturing costs
associated with the manufacturing scale-up of new products.
Orders for the third quarter of fiscal 2000 totaled $36.9 million, up 8%
compared to the prior fiscal quarter, and an increase of 201% over the same
quarter a year ago. Book to bill ratio was 1.15 to 1 for the quarter. Backlog
increased to $33.6 million at December 31, 1999, an increase of $4.9 million in
the quarter. Orders were higher from all regions, especially Asia.
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.
6
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered by Therma-Wave............. 9,000,000 shares
Common Stock to be outstanding after this
offering....................................... 21,839,254 shares
Use of proceeds................................. To repay our outstanding 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 November 30, 1999 and excludes: (1) 2,884,414 shares of
common stock issuable upon the exercise of outstanding options granted under
our stock option plans, of which 1,314,698 were then exercisable, at exercise
prices ranging from $4.00 to $15.89 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) 748,739 shares of common stock issuable upon the conversion of
our mandatorily redeemable convertible preferred stock. 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 January 27, 2000. See "The Reclassification."
7
<PAGE>
Summary Historical Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year September 30,
---------------------------------------------- -----------------
1995 1996 1997 1998 1999 1998 1999
------- ------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data (1):
Net revenues............ $55,675 $79,293 $109,493 $115,459 $ 66,207 $ 30,442 $47,054
Gross margin............ 30,651 44,266 59,698 59,776 29,380 12,580 21,150
Operating income
(loss)................. 9,498 13,578 23,369 11,942 (4,677) (6,132) 3,307
Income (loss) before
income taxes........... 7,487 11,965 22,108 (429) (18,080) (12,760) (3,346)
Net income (loss)....... $ 7,487 $ 7,281 $ 13,101 $ (1,033) $(15,730) $(11,100) $(3,346)
Net income (loss)
attributable to common
stockholders (2)....... $ 7,487 $ 7,281 $ 13,101 $ (1,771) $(16,562) $(11,514) $(3,758)
Net income (loss) per
share (3):
Basic.................. $ 0.25 $ 0.16 $ 0.29 $ (0.27) $ (1.86) $ (1.26) $(0.50)
Diluted................ $ 0.24 $ 0.16 $ 0.29 $ (0.27) $ (1.86) $ (1.26) $(0.50)
Weighted average number
of shares outstanding:
Basic.................. 30,412 45,515 45,515 13,540 9,397 9,290 9,518
Diluted................ 31,497 45,515 45,515 13,540 9,397 9,290 9,518
Pro Forma Statement of
Operations Data (4):
Pro forma net income
(loss)................. $ (2,736) $ 3,145
Pro forma net income
(loss) per share:
Basic ................. $ (0.13) $ 0.15
Diluted................ $ (0.13) $ 0.14
Pro forma weighted
average common shares
outstanding:
Basic ................. 20,735 21,005
Diluted................ 20,735 22,693
Other Financial Data:
EBITDA (excluding non-
recurring charges)
(5).................... $12,496 $17,185 $ 27,113 $ 19,723 $ 974 $ (2,869) $ 5,553
Cash provided by
operating activities... 1,876 5,867 11,860 8,113 745 (3,903) (6,430)
Cash used in investing
activities............. (2,048) (4,965) (1,575) (2,900) (1,389) (472) (1,293)
Cash provided by (used
in) financing
activities............. 5,701 (1,541) (1,234) (1,532) 467 39 585
Capital expenditures.... 1,616 4,361 1,091 2,900 862 277 1,038
</TABLE>
<TABLE>
<CAPTION>
March 31, September 30, 1999
-------------------------- ----------------------
As
1997 1998 1999 Actual Adjusted (6)
------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.. $16,741 $ 20,422 $ 20,245 $ 13,107 $14,179
Working capital............ 38,720 43,348 31,394 29,719 35,543
Total assets............... 68,620 89,762 72,352 73,805 67,336
Long-term debt............. 23,100 115,000 115,000 115,000 --
Mandatorily redeemable
convertible preferred
stock (2)................. -- 14,515 15,347 15,759 15,759
Stockholders' equity (net
capital deficiency)....... 20,145 (70,990) (86,971) (90,144) 23,139
</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.
Footnotes to table appear on following page.
8
<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
September 30, 1999 of $15,759 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, and for the six months ended September 30, 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) the portion of this offering and the application of the net
proceeds therefrom necessary to redeem the outstanding senior notes 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 and the six
months ended September 30, 1998 does not include $4,188, $1,057 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, $(83) and $(3,926) for fiscal 1998 and 1999 and the six
months ended September 30, 1998, 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 9,000,000 shares of common stock and the
application of the net proceeds as described under "Use of Proceeds."
9
<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 such losses may 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, our significant
leverage and other factors, we may remain unprofitable. Although we intend to
significantly reduce our leverage using the net proceeds of this offering, we
cannot predict how long we will continue to experience 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 recent 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 increase by
approximately 3.4% in calendar 1999 as compared to calendar 1998. Although the
semiconductor industry is recovering, we cannot assure you that:
. the semiconductor industry will continue to improve;
. the semiconductor industry will not experience other, possibly more
severe and prolonged, downturns in the future; or
. the current recovery will continue to result in increased demand for
capital equipment by the semiconductor industry.
The end of the current recovery or any future downturn in the semiconductor
industry will have a material adverse effect on our business, financial
condition and results of operations.
Our quarterly operating results have historically and may, in the future, vary
significantly. This may result in volatility in the market price for our
shares.
Our quarterly operating results have historically and may, in the future,
vary significantly. Some of the factors that may influence our operating
results 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,
10
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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 the six months ended September 30, 1999, sales to Intel
Corporation and Samsung accounted for approximately 14% and 13% of our net
revenues, respectively, and sales to our top five customers in the aggregate
accounted for approximately 46% of our net revenues. 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."
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,
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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.
We license and will continue to license certain technology used in our
products from third parties. Our inability to acquire any third-party licenses,
or integrate the related third-party technologies into our products, could
result in delays in our product developments and enhancements until equivalent
technologies can be identified, licensed or integrated. We may also require new
licenses in the future as our business grows and technology evolves. We cannot
assure you that these licenses wil be available to us on commercially
reasonable terms, if at all.
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 are currently involved in four litigation proceedings with KLA-Tencor
Corporation regarding our thin-film thickness measuring technology and our
optical measurement systems. We cannot assure you that we will prevail in any
of these proceedings or any of our other ongoing litigation proceedings. We may
be required to initiate additional 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 additional 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. See "Business--Legal Proceedings."
We operate in the highly competitive semiconductor capital equipment industry
and compete against larger companies.
We operate in the highly competitive semiconductor capital equipment
industry and face competition from a number of competitors, some of which have
greater financial, engineering, manufacturing and marketing resources and
broader product offerings than Therma-Wave. We cannot assure you that our
products will be able to compete successfully with the products of our
competitors. Many of our competitors are investing heavily in the development
of new products aimed at applications we currently serve. Our competitors in
each product area can be expected to continue to improve the design and
performance of their products and to introduce new products with competitive
prices and performance characteristics. In addition, we believe that our
competitors sometimes provide demonstration systems to semiconductor
manufacturers at no cost. We could be required to employ similar promotions in
order to remain competitive if this practice becomes more pervasive in the
industry.
Competitive conditions in our industry may require us to reduce our prices.
Due to competitive conditions in our industry, we have 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.
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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.
We may incur significant indebtedness in the future under our senior bank
credit facility, which could require the use of a substantial portion of our
excess cash flow and may limit our access to additional capital.
Upon completion of this offering, we will be able to borrow a maximum of
$21.5 million, subject to a borrowing base, under our bank credit facility. In
addition, subject to the restrictions in our senior bank credit facility and,
in the event that we do not repay all of the senior notes with the net proceeds
of the offering, 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 would be required
to be dedicated to the repayment of indebtedness and will not be
available for other purposes;
. our future ability to obtain additional debt financing for working
capital, capital expenditures, acquisitions or other purposes may be
limited; and
. our level of indebtedness has in the past, and could in the future,
limit our flexibility in reacting to changes in the industry, general
economic conditions and our ability to withstand a prolonged downturn in
the semiconductor and/or semiconductor capital equipment industries.
Most of our competitors currently operate on a less leveraged basis and have
significantly greater operating and financing flexibility than we do.
A breach of any of the restrictive covenants in our senior notes indenture
and/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
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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 in the event that we do not repay all of the senior notes with the
net proceeds of the offering. 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 continuing to
combine 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 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.
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, Schwartz,
Christie, Smith, Opsal and Willenborg. In addition, we maintain and are the
named beneficiary under
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key-man life insurance policies for Messrs. Rosencwaig, Opsal and Willenborg in
the amounts of $500,000, $250,000 and $100,000, 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 absolute dollar terms.
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, and in recent months due to the increase in demand for semiconductor
capital equipment, 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%, 33%
and 51% of total net revenues for fiscal 1998 and 1999, and for the six-month
period ended September 30, 1999, respectively. Companies in the Asia Pacific
region, including Japan, Korea and Taiwan, each of which accounts for a
significant portion of our business in that region, have experienced weaknesses
in their currency, banking and
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equity markets over the last 24 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 continued
to adversely affect them in 1998. Although we have recently experienced
increased sales and new orders from customers in the Asia Pacific region, we
cannot assure you that turbulence in the Asian markets will not adversely
affect our sales in the future.
We are subject to operational, financial, political and foreign exchange risks
due to our significant level of international sales.
International sales accounted for approximately 55%, 69% and 61% of our
total revenues for fiscal 1998 and 1999, and for the six-month period ended
September 30, 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
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. our contingency plan related to a failure of our, or a third-party's,
Year 2000 remediation efforts may not prove to be adequate.
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 substantially 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 substantially all of the net proceeds of this offering to
repay indebtedness. As a result, a limited amount 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.
We cannot assure you that we will be successful in our efforts to repurchase
all of our outstanding 10 5/8% senior notes using the net proceeds of this
offering or, if successful, the price we will be required to pay to repurchase
a portion of the senior notes.
We intend to use substantially all of the net proceeds of this offering to
repay all of our outstanding senior notes. Under the terms of the indenture
relating to the senior notes, we have the right 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. We currently do not have a contractual right to redeem the remaining
65% of the outstanding senior notes. Following the completion of the offering,
we intend to commence a tender offer to repurchase all of the senior notes not
otherwise redeemed. We cannot assure you that our tender offer will be accepted
by all of the holders of the senior notes, or if accepted, the price that we
will be required to pay to repurchase the remaining 65% of the senior notes.
Investment funds affiliated with 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 41% of our outstanding common stock. If
the underwriters' over-allotment is exercised in full, these funds will hold
approximately 39% 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, these investment funds 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:
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. 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."
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 $14.94 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, we expect that:
. 9,000,000 shares of common stock, or 10,350,000 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
. 12,839,254 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 12,718,859 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.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of 9,000,000 shares of
common stock in this offering will be approximately $132.4 million. If the
underwriters' over-allotment option is exercised in full, our net proceeds will
be approximately $152.5 million assuming an initial public offering price of
$16.00 per share, the midpoint of the range set forth on the cover of this
prospectus. We intend to use substantially all of the net proceeds to redeem or
repurchase our outstanding senior notes and to pay the redemption premium and
accrued and unpaid interest thereon. We will use any remaining net proceeds, if
any, for general corporate purposes, including working capital.
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. Following the completion of the
offering, we intend to seek to repurchase the senior notes not otherwise
redeemed. The price at which we will offer to repurchase such senior notes will
be based on market conditions. Pending such uses, 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 ($19.085) 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 September 30, 1999, the Preference Amount was $25.042 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."
Assuming an initial public offering price of $16.00 per share, the midpoint
of the range set forth on the cover page of this prospectus, and a closing date
of January 27, 2000 for this offering, an aggregate of 2,645,107 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."
19
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of Therma-Wave as of September 30, 1999 on an actual basis and
on an as adjusted basis to reflect: (1) the Reclassification and (2) the sale
by us of 9,000,000 shares of common stock pursuant to this offering, assuming
an offering price of $16.00 per share, the midpoint of the range set forth on
the cover of this prospectus, and the application of the net proceeds therefrom
as described under "Use of Proceeds." This table should be read in conjunction
with the "Selected Historical Financial Data" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
September 30, 1999
----------------------
Actual As Adjusted
--------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents............................... $ 13,107 $ 14,179
========= ========
Long-term obligations:
Bank Credit Facility.................................. $ -- $ --
Senior Notes (1)...................................... 115,000 --
Other long-term obligations........................... 3,322 3,322
--------- --------
Total long-term obligations......................... 118,322 3,322
Mandatorily redeemable convertible preferred stock (2).. 15,759 15,759
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; 21,780,070 shares issued and outstanding
on an as adjusted basis.............................. -- 218
Class A common stock, $0.01 par value, 20,000,000
shares authorized; 9,073,532 shares issued and
outstanding on an actual basis and no shares
authorized, issued and outstanding on an as adjusted
basis................................................ 91 --
Class B common stock, $0.01 par value, 4,000,000
shares authorized; 1,120,448 shares issued and
outstanding on an actual basis and no shares
authorized, issued and outstanding on an as adjusted
basis................................................ 11 --
Class L common stock, $0.01 par value, 2,000,000
shares authorized; 1,008,170 shares issued and
outstanding on an actual basis and no shares
authorized, issued and outstanding on an as adjusted
basis................................................ 10 --
Additional paid-in capital............................ 19,356 151,670
Accumulated deficit (3) .............................. (108,762) (127,899)
Other................................................. (850) (850)
--------- --------
Total stockholders' equity (net capital
deficiency)........................................ (90,144) 23,139
--------- --------
Total capitalization................................ $ 43,937 $ 42,220
========= ========
</TABLE>
- --------
(1) Assumes all net proceeds are used to redeem 35% of the senior notes at a
redemption price of 110.625% of the aggregate principal amount thereof and
to repurchase the remaining 65% of the senior notes at a price based on
market conditions.
(2) We issued shares of preferred stock as part of the recapitalization. The
fair value of the preferred stock at September 30, 1999 of $15,759
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 September 30, 1999 includes
an extraordinary charge of $19,137 relating to the redemption or repurchase
of all of our outstanding senior notes and the elimination of the deferred
financing costs associated with the senior notes.
20
<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 September 30, 1999 was $(97.7)
million, or $(7.64) 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 September 30, 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 $16.00 per share the midpoint of the range set
forth on the cover page of this prospectus, and the receipt and application of
the net proceeds therefrom, pro forma net tangible book value as of September
30, 1999 would have been approximately $23.1 million, or $1.06 per share. This
represents an immediate increase in pro forma net tangible book value of $8.70
per share to the current stockholders and an immediate dilution in pro forma
net tangible book value of $14.94 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................ $16.00
Pro forma net tangible book value (deficiency) per share at
September 30, 1999.......................................... $ (7.64)
Increase per share attributable to new investors............. 8.70
-------
Pro forma net tangible book value per share after this
offering...................................................... 1.06
------
Net tangible book value dilution per share to new
investors (1)................................................. $14.94
======
</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 September 30,
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 $16.00 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>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 12,780,070 59% $ 19,468,000 12% $ 1.52
New investors............. 9,000,000 41 144,000,000 88 $16.00
---------- --- ------------ ---
Total................... 21,780,070 100% $163,468,000 100%
========== === ============ ===
</TABLE>
As of September 30, 1999, there were an aggregate of: (1) 2,608,187 shares
of common stock issuable upon the exercise of outstanding options granted under
our stock plans, of which 1,246,484 were then exercisable, at exercise prices
ranging from $4.00 to $15.89 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)
748,739 shares of common stock issuable upon the conversion of our Series A
mandatorily redeemable convertible preferred stock. See "Management--Stock
Plans."
21
<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. The
summary historical financial data as of September 30, 1999 and for the six-
month periods ended September 30, 1998 and 1999 have been derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus, which, in the opinion of management, reflect all adjustments
(consisting of normal recurring adjustments) necessary for the fair
presentation of the financial condition and results of operations for such
periods. 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.
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year September 30,
---------------------------------------------- -----------------
1995 1996 1997 1998 1999 1998 1999
------- ------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data (1):
Net revenues............ $55,675 $79,293 $109,493 $115,459 $ 66,207 $ 30,442 $47,054
Cost of revenues........ 25,024 35,027 49,795 55,683 36,827 17,862 25,904
------- ------- -------- -------- -------- -------- -------
Gross margin............ 30,651 44,266 59,698 59,776 29,380 12,580 21,150
Operating expenses:
Research and
development........... 5,942 10,072 13,050 19,057 15,130 8,522 8,941
Selling, general and
administrative........ 13,299 18,704 22,004 24,589 17,870 9,133 8,902
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 1,057 --
------- ------- -------- -------- -------- -------- -------
Total operating
expenses.............. 21,153 30,688 36,329 47,834 34,057 18,712 17,843
------- ------- -------- -------- -------- -------- -------
Operating income
(loss)................. 9,498 13,578 23,369 11,942 (4,677) (6,132) 3,307
Interest expense........ 1,998 1,722 1,621 12,930 14,060 6,949 7,013
Interest income......... (102) (247) (346) (753) (651) (377) (285)
Other (income) expense,
net.................... 115 138 (14) 194 (6) 56 (75)
------- ------- -------- -------- -------- -------- -------
Income (loss) before
provision for income
taxes.................. 7,487 11,965 22,108 (429) (18,080) (12,760) (3,346)
Provision (benefit) for
income taxes........... -- 4,684 9,007 604 (2,350) (1,660) --
------- ------- -------- -------- -------- -------- -------
Net income (loss)....... $ 7,487 $ 7,281 $ 13,101 $ (1,033) $(15,730) $(11,100) $(3,346)
======= ======= ======== ======== ======== ======== =======
Net income (loss)
attributable to common
stockholders (2)....... $ 7,487 $ 7,281 $ 13,101 $ (1,771) $(16,562) $(11,514) $(3,758)
======= ======= ======== ======== ======== ======== =======
Net income (loss) per
share (3):
Basic.................. $ 0.25 $ 0.16 $ 0.29 $ (0.27) $ (1.86) $ (1.26) $ (0.50)
Diluted................ $ 0.24 $ 0.16 $ 0.29 $ (0.27) $ (1.86) $ (1.26) $ (0.50)
Weighted average common
shares outstanding:
Basic.................. 30,412 45,515 45,515 13,540 9,397 9,290 9,518
Diluted................ 31,497 45,515 45,515 13,540 9,397 9,290 9,518
Pro Forma Statement of
Operations Data (4):
Pro forma net income
(loss)................. $ (2,736) $ 3,145
Pro forma net income
(loss) per share:
Basic.................. $ (0.13) $ 0.15
Diluted................ $ (0.13) $ 0.14
Pro forma weighted
average common shares
outstanding:
Basic.................. 20,735 21,005
Diluted................ 20,735 22,693
Other Financial Data:
EBITDA (excluding non-
recurring
charges) (5)........... $12,496 $17,185 $ 27,113 $ 19,723 $ 974 $ (2,869) $ 5,553
Cash provided by (used
in) operating
activities............. 1,876 5,867 11,860 8,113 745 (3,903) (6,430)
Cash used in investing
activities............. (2,048) (4,965) (1,575) (2,900) (1,389) (472) (1,293)
Cash provided by (used
in) financing
activities............. 5,701 (1,541) (1,234) (1,532) 467 39 585
Capital expenditures.... 1,616 4,361 1,091 2,900 862 277 1,038
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
March 31, September 30, 1999
------------------------------------------- ----------------------
As
1995 1996 1997 1998 1999 Actual Adjusted (6)
------- ------- ------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 8,329 $ 7,690 $16,741 $ 20,422 $ 20,245 $13,107 $14,179
Working capital......... 17,240 23,740 38,720 43,348 31,394 29,719 35,543
Total assets............ 45,081 53,056 68,620 89,762 72,352 73,805 67,336
Long-term debt.......... 23,100 23,100 23,100 115,000 115,000 115,000 --
Mandatorily redeemable
convertible preferred
stock (2).............. -- -- -- 14,515 15,347 15,759 15,759
Stockholders' equity
(net capital
deficiency)............ (379) 6,903 20,145 (70,990) (86,971) (90,144) 23,139
</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 September 30, 1999 of $15,759
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, and for the six months ended September 30, 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) The portion of this offering and the application of the net
proceeds therefrom necessary to redeem the outstanding senior notes 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 and the six
months ended September 30, 1998 does not include $4,188, $1,057 and $1,057,
in recapitalization and other non-recurring expenses, respectively.
Including such non-recurring charges, EBITDA would have been reduced to
$15,537, $(83) and $(3,926) for fiscal 1998 and 1999 and the six months
ended September 30, 1998, 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 9,000,000 shares of common stock and the
application of the net proceeds as described under "Use of Proceeds."
23
<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 currently sell 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 six months ended September 30, 1999,
we derived approximately 80% of our revenues from system sales, 13% from sales
of replacement and spare parts, including associated labor, and 7% from 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 55%, 69% and 61% of our
total revenues for fiscal 1998 and 1999 and the six months ended September 30,
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.
We expect to incur in the fourth quarter of fiscal 2000 a non-recurring
extraordinary charge for early debt extinguishment of approximately $18.6
million, net of tax, relating primarily to the premium on the redemption or
repurchase of our senior notes.
24
<PAGE>
Recent Operating Results
For the third fiscal quarter, revenues were $32.0 million with net income of
$0.6 million, including interest charges of $3.5 million. This represents a
revenue increase of 23% and 86%, respectively, compared to the prior fiscal
quarter and the same quarter last year. Net income improved $1.6 million versus
the prior fiscal quarter and $2.9 million versus the third quarter last year.
For the first nine months of fiscal 2000, revenues were $79.0 million, up
66% from the prior year period. The Company's net loss improved to $2.7
million, including interest charges of $10.5 million. This represented an
improvement of $10.7 million in net income versus last fiscal year.
Both gross margin and operating income improved as well. Gross margin at 49%
was up slightly compared to the prior quarter and the same quarter a year ago.
Operating income jumped to $4.1 million for the quarter, up 78% versus the
prior quarter and up $3.5 million versus operating income last year. Gross
margin for the nine months ended December 31, 1999 was 46%, up from 44% for the
same period a year ago, while operating income improved to $7.4 million versus
a loss of $5.5 million for the same period last fiscal year. The margin
improvements over the prior periods were mostly due to higher volume, cost
reductions implemented last year and to steadily decreasing manufacturing costs
associated with the manufacturing scale-up of new products.
Orders for the third quarter of fiscal 2000 totaled $36.9 million, up 8%
compared to the prior fiscal quarter, and an increase of 201% over the same
quarter a year ago. Book to bill ratio was 1.15 to 1 for the quarter. Backlog
increased to $33.6 million at December 31, 1999, an increase of $4.9 million in
the quarter. Orders were higher from all regions, especially Asia.
25
<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 historical
financial data for the six-month periods ended September 30, 1998 and 1999 were
derived from our unaudited consolidated financial statements which, in the
opinion of management, reflect all adjustments (consisting only of normal
recurring adjustments) necessary for the fair presentation of the financial
condition and results of operations for such periods. The information contained
in this table should be read in conjunction with "Selected Historical Financial
Data," and the Consolidated Financial Statements and accompanying notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six-Month
Period Ended
Fiscal Year September 30,
--------------------- ---------------
1997 1998 1999 1998 1999
----- ----- ----- ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data (1):
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................... 45.5 48.2 55.6 58.7 55.1
----- ----- ----- ------ ------
Gross margin......................... 54.5 51.8 44.4 41.3 44.9
Operating expenses:
Research and development expenses.. 11.9 16.5 22.9 28.0 19.0
Selling, general and administrative
expenses.......................... 20.1 21.3 27.0 30.0 18.9
Amortization of goodwill and
purchased intangibles............. 1.2 -- -- -- --
Recapitalization and other non-
recurring expenses................ -- 3.6 -- -- --
Expenses relating to operating cost
improvements...................... -- -- 1.6 3.5 --
----- ----- ----- ------ ------
Total operating expenses......... 33.2 41.4 51.5 61.5 37.9
----- ----- ----- ------ ------
Operating income (loss).............. 21.3 10.4 (7.1) (20.2) 7.0
Interest expense..................... 1.5 11.2 21.2 22.8 14.9
Interest income...................... (0.4) (0.6) (1.0) (1.2) (0.6)
Other expense, net................... -- 0.2 -- 0.2 (0.2)
----- ----- ----- ------ ------
Income (loss) before provision for
income taxes........................ 20.2 (0.4) (27.3) (42.0) (7.1)
Provision (benefit) for income
taxes............................... 8.2 0.5 (3.5) (5.5) --
----- ----- ----- ------ ------
Net income (loss).................... 12.0% (0.9%) (23.8%) (36.5%) (7.1%)
===== ===== ===== ====== ======
Other Financial Data:
EBITDA (excluding non-recurring
charges) (2)........................ 24.8% 17.1% 1.5% (9.4%) 11.8%
Cash provided by operating
activities.......................... 10.8% 7.0% 1.1% (12.8%) (13.7%)
Cash used in investing activities.... (1.4%) (2.5%) (2.1%) (1.6%) (2.7%)
Cash provided by (used in) financing
activities.......................... (1.1%) (1.3%) 0.7% 0.1% 1.2%
Capital expenditures................. 1.0% 2.5% 1.3% 1.0% 2.2%
</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 and the six months
ended September 30, 1998 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%, (0.1%) and (12.9%) for fiscal 1998
and 1999 and the six months ended September 30, 1998, respectively.
26
<PAGE>
Six Months Ended September 30, 1999 Compared to Six Months Ended September 30,
1998
Net Revenues. Net revenues were $47.1 million for the six months ended
September 30, 1999, an increase of 55% from the same period in the prior fiscal
year. The increase in revenue is the result of the improvement in the
semiconductor capital equipment industry, which is primarily related to the
growth of semiconductor manufacturers and the recovery of economic conditions
in the Asia Pacific region. Revenues have increased primarily due to increased
unit sales of both our Therma-Probe and Opti-Probe products. Revenue from spare
parts and service contracts have also increased as our customer base continues
to expand. New orders for the second quarter were up substantially from the
prior quarter and resulted in a strengthened backlog.
Net revenues attributable to international sales for the six months ended
September 30, 1998 and 1999 accounted for 66% and 61% of our total revenues for
such periods, respectively. Due to significant demand from customers in Taiwan
and stronger economic conditions in the Asia Pacific region, sales to customers
in Asia represented approximately 33% and 51% of total net revenues for the six
months ended September 30, 1998 and 1999, respectively.
Historically, we have experienced volatility from Asian markets. Although we
have recently experienced increased sales and received an increased level of
orders from customers in the Asia Pacific region, turbulance in the Asian
markets could adversely affect our sales in the future.
Gross Margin. Gross margin was 45% for the six months ended September 30,
1999, an increase from 41% for the same period in the prior fiscal year. The
increase in gross margin is due to the improvement in the semiconductor
industry, higher volume and a favorable sales mix. The increase in gross margin
was slightly offset by higher manufacturing costs associated with the
manufacturing scale-up of new products.
Research and Development ("R&D") Expenses. R&D expenses were $8.9 million
for the six months ended September 30, 1999, an increase of 5% from the same
period in the prior fiscal year. The increase from the prior period is the
result of additional resources dedicated to new products expected to be
released in the next nine to fifteen months. We believe that technical
leadership is essential to our success and expect to continue to commit
significant resources to R&D projects. In the future we expect our R&D expenses
to increase in absolute dollar terms.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses were
$8.9 million for the six months ended September 30, 1999, a decrease of 3% from
the same period in the prior fiscal year. The decrease in the six months ended
September 30, 1999 from the same period of the prior fiscal year resulted from
reductions in headcount.
Expenses Relating to Operating Cost Improvements. On June 22, 1998 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 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 in Texas,
Arizona and Osaka, Japan were closed and fixed assets were consolidated. Total
cash outlays for the six months ended September 30, 1999 and 1998 were $100,000
and $689,000, respectively.
Interest Expense. Interest expense for the six months ended September 30,
1999 was $7.0 million. This amount is comparable to prior periods.
Provision for Income Taxes. Our tax benefit for the six months ended
September 30, 1998 reflected the tax benefit rate of 13% based upon our loss
carryback potential. For the six months ended September 30, 1998, we recorded a
benefit for income taxes of $1.7 million. For fiscal 2000, we have not recorded
any tax benefit since we have fully utilized our loss carryback ability.
27
<PAGE>
Net Loss. We experienced a net loss of $3.3 million for the six months ended
September 30, 1999. For the six months ended September 30, 1999, the net loss
improved $7.8 million from the same period of the prior fiscal year.
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 24 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 experienced increased sales and new
orders from customers in the Asia Pacific region, turbulence in the Asian
markets could adversely affect our sales in the future.
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 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 absolute dollar terms.
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Selling, General and Administrative Expenses. SG&A expenses were $24.6
million and $17.9 million for fiscal 1998 and 1999, respectively. Compared to
the corresponding period of fiscal 1998, SG&A expenses decreased $6.7 million,
or 27.3%. SG&A expenses as a percentage of net revenues increased to 27.0% in
fiscal 1999 from 21.3% in fiscal 1998 primarily due to lower revenue levels.
The decrease in SG&A expenses was due primarily to the decrease in sales
commissions as a result of lower revenues and the decrease in headcount because
of the operating cost improvement program. During fiscal 1999, the decline in
overall revenues exceeded the benefits generated from the operating cost
improvement program.
Recapitalization and Other Non-Recurring Expenses. Recapitalization and
other non-recurring expenses were $4.2 million, which consisted mainly of non-
cash charges related to the arrangements for our executive officers in
connection with the recapitalization.
Expenses Relating to Operating Cost Improvements. On June 22 and September
24, 1998, we announced and implemented an operating cost improvement program
aimed at bringing operating expenses 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 was $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 was $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.
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<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,
. availability and cost of component, sub assemblies, and production
capacity,
. 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.
30
<PAGE>
The following table sets forth our unaudited operating results for our last
ten 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 Fiscal Year 2000
---------------------------------- ---------------------------------- ------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
(in thousands)
<S> <C> <C> <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 $21,141 $ 25,913
Gross margin............ 14,942 15,148 15,091 14,595 6,267 6,313 8,204 8,596 8,913 12,237
Operating income
(loss)................. 2,540 2,313 3,168 3,921 (3,546) (2,586) 608 847 1,003 2,304
Net income (loss)....... 311 (671) (186) (487) (6,090) (5,010) (2,281) (2,349) (2,339) (1,007)
Other Financial Data:
EBITDA (excluding non-
recurring charges)
(1).................... $ 6,257 $ 4,149 $ 4,385 $ 4,932 $(1,876) $ (993) $ 1,823 $ 2,019 $ 2,137 $ 3,416
Cash provided by (used
in):
Operating activities... (969) 4,817 (506) 4,771 (3,533) (370) (3,752) 8,400 (2,619) (3,811)
Investing activities... (1,939) (936) (818) 793 (250) (222) (279) (638) (538) (755)
Financing activities... 184 (284) 404 (1,836) (30) 69 593 (165) (147) 732
</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 does
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 September 30, 1999, our backlog was $28.7 million compared to $22.8
million at September 30, 1998 and $16.0 million at March 31, 1999. 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 used in operating activities was $3.9 million and $6.4 million for
the six months ended September 30, 1998 and 1999, respectively. The increase in
cash flow used in operating activities from the six months ended September 30,
1999 is mainly due to the increase in accounts receivable and inventories,
partially offset by the tax refund of $8.3 million, and the increase in
operating income.
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.
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Purchases of property and equipment were $1.0 million and $0.3 million for
the six months ended September 30, 1999 and 1998, respectively.
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 $2.5
million.
In May 1997, we issued $115.0 million in aggregate principal amount of
senior notes that, together with a $20.1 million equity contribution, was used
to finance the recapitalization. In the recapitalization, we used $26.9 million
to repay outstanding borrowings, $96.9 million to redeem a portion of our
common stock, $11.0 million to pay related fees and expenses and $0.3 million
for general working capital purposes.
In conjunction with the recapitalization, we entered into a senior credit
facility with various lending institutions, and Bankers Trust Company, as
agent. The bank credit facility bears interest, at our option, at (1) the base
rate plus 1.75% or (2) the eurodollar rate plus 3.00%. Our borrowings under the
bank credit facility are secured by substantially all of our assets, a pledge
of all of the capital stock of any domestic subsidiaries and a pledge of 65% of
the capital stock of our first-tier foreign subsidiaries. The bank credit
facility matures on May 16, 2002.
During the quarter ended June 30, 1998, we amended the bank credit facility
to have our borrowing availability subject to a borrowing base formula, which
provided 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. The second amendment
also provided that if we had not consummated a qualified initial public
offering by the end of December 31, 1999, then the loan commitment amount would
be reduced by $5.0 million to $25.0 million. 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 September 30, 1999, there
was $3.5 million outstanding under a letter of credit and $26.5 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 ($13.1 million as of September 30, 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 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 September 30, 1999, our cash included money market securities and
commercial paper. 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.
32
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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
September 30, 1999 was $80.5 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.
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 have systematically performed a global risk
assessment, conducted testing and remediation (renovation and implementation),
developed contingency plans to mitigate unknown risk, and communicated with
employees, suppliers and customers to raise awareness of the Year 2000 problem.
Internal Infrastructure Readiness Program. We have conducted an assessment
of internal applications and computer hardware. All critical software
applications have been made Year 2000 compliant. All software remediation is
now complete. The Year 2000 compliance evaluation of hardware, including
network fabric, telecommunications equipment, workstations and other items is
complete.
In addition to applications and information technology hardware, we have
tested and developed 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
100% of our key suppliers, most of which indicate that they have implemented
remediation plans. Based on our assessment of each supplier's progress to
adequately address the Year 2000 issue, we developed a supplier action list and
contingency plans. We revisited key suppliers during the third calendar quarter
of 1999 to ensure that supplier commitments have been met. Alternate sources
were evaluated and we do not believe that further action is necessary.
33
<PAGE>
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 Schematize 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.
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 was 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 completed this program in the third calendar
quarter of 1999.
Our total Year 2000 incremental costs were approximately $140,000. Through
September 30, 1999, we spent approximately $138,000 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 some of 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. As of the date hereof, we are not aware of, and we have not
experienced, any problems with our internal computer systems that are related
to the Year 2000 issue. 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, and for the six months ended
September 30, 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.
34
<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 0.25 microns to 0.18
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 19.9% to approximately $1.7
billion in 1998 and are expected to increase at a compound annual growth rate
of 22.3% to approximately $3.8 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
35
<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]
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<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
37
<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 Product Announcement
We believe the semiconductor industry is rapidly moving towards the use of
copper rather than aluminum conductor layers in semiconductors for improved
device performance and enhanced fab productivity. We recently announced our
Meta-Probe X measurement system, which uses X-ray reflectometry technology to
provide fast, noncontact, and nondestructive measurement of metal and opaque
thin films including copper seed and barrier layers. The Meta-Probe X provides
information on three key thin film parameters -- thickness, density and surface
roughness. The patented Meta-Probe X technology measures on both product and
test wafers, and features a simple, cost effective design. We believe that
existing metal film metrology systems are unable to perform some measurements
with the required precision and repeatability and that more advanced
measurement systems will be required. We expect to begin beta testing of the
Meta-Probe X at customer locations in mid-2000.
Other 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
continuing to combine 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.
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<PAGE>
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.
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.
Competitive Strengths
. Technologically Advanced Capabilities and Products. We have focused
heavily on the development and protection of our proprietary technology
and currently hold 61 U.S. and foreign patents. In addition, we have
filed applications for 27 additional U.S. and foreign patents. We
believe we have superior technical resources, including a staff of 47
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, Siemens AG,
STMicroelectronics N.V., Taiwan Semiconductor Manufacturing Corp.,
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
39
<PAGE>
personnel. International sales represented approximately 55%, 69% and
61% of our net revenues in fiscal 1998 and 1999 and for the six-month
period ended September 30, 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.
. 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 47 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
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<PAGE>
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 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 September 30, 1999, 401 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 September 30, 1999, 706 Opti-Probe
systems have been installed in major semiconductor fabrication facilities
worldwide. By September 30, 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 September 30,
1999, have sold 39 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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<PAGE>
New Product Announcement
We believe the semiconductor industry is rapidly moving towards the use of
copper rather than aluminum conductor layers in semiconductors for improved
device performance and enhanced fab productivity. We recently announced our
Meta-Probe X measurement system, which uses X-ray reflectometry technology to
provide fast, noncontact, and nondestructive measurement of metal and opaque
thin films including copper seed and barrier layers. The Meta-Probe X provides
information on three key thin film parameters--thickness, density and surface
roughness. The patented Meta-Probe X technology measures on both product and
test wafers, and features a simple, cost effective design. We believe that
existing metal film metrology systems are unable to perform some measurements
with the required precision and repeatability and that more advanced
measurement systems will be required. We expect to begin beta testing of the
Meta-Probe X at customer locations in mid-2000.
Other New Product Initiatives
We are currently pursuing several other new Fab Productivity Enhancement(TM)
product initiatives. We are continuing to combine 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.
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.
Lucent Technologies Toshiba Corporation
Samsung UMC Group
</TABLE>
Sales to Intel and Samsung represented approximately 14% and 13%,
respectively, of our net revenues for the six months ended September 30, 1999.
Sales to Intel and AMD represented approximately 23% and 18%, respectively, 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%, 53% and 46% of our net revenues
in fiscal 1997, 1998 and 1999 and the six months ended September 30, 1999,
respectively.
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.
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<PAGE>
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.
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 September 30, 1999, our research,
development and engineering staff was comprised of 71 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 $8.9 million for the
six months ended September 30, 1999, $15.1 million in fiscal 1999, $19.1
million in fiscal 1998, and $13.1 million in fiscal 1997,
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<PAGE>
or 19%, 23%, 17%, and 12% of net revenues for those periods, respectively. We
expect engineering and research and development expenditures will continue to
represent a substantial percentage of our revenues for the foreseeable future.
Manufacturing
Our manufacturing strategy is to produce high quality, cost effective
assemblies and systems. We currently perform the majority of our system
assembly activities in-house. In order to lower production costs in the future,
we intend to perform only those manufacturing activities that add significant
value or that require unique technology or specialized knowledge. As a result,
we expect to rely increasingly on subcontractors and turnkey suppliers to
fabricate components, build assemblies and perform other activities in a cost
effective manner.
Our principal manufacturing activities include assembly and test work, both
of which are conducted at our facility in Fremont, California. Assembly
activities include inspection, subassembly and final assembly. Test activities
include modular testing, system integration and final test. Components and
subassemblies, such as lasers, robots and stages, are acquired from third party
vendors and integrated into our finished systems. These components and
subassemblies are obtained from a limited group of suppliers, and occasionally
from a single source supplier. While we use standard components and
subassemblies wherever possible, most mechanical parts, metal fabrications and
critical components are engineered and manufactured to our specifications. We
have not entered into any formal agreements with such limited source suppliers,
other than long-term purchase orders and, in some cases, volume pricing
agreements. Those parts coming from a limited group of suppliers are monitored
by management to ensure that adequate supplies are available to maintain
manufacturing schedules and to reduce our dependence on these suppliers should
supply lines become interrupted. The partial or complete loss of such suppliers
could increase our manufacturing costs or delay product shipments while we
qualify new suppliers. Additionally, any such loss could require us to redesign
products, thereby having a material adverse effect on our 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 we
have. 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
46
<PAGE>
manufactured by KLA-Tencor Corporation, Kokusai Electric Ltd. and Bio-Rad
Semiconductor Systems. Our Therma-Probe systems are the semiconductor
industry's predominant non-contact, non-destructive ion implant metrology
systems for product wafers. Several years ago, Jenoptik GmbH introduced a
competitive product to our Therma-Probe systems, which utilized thermal wave
technology. In November 1997, we received a favorable verdict for patent
infringement by Jenoptik in the United States. As a result of the settlement of
this litigation, Jenoptik has agreed not to sell any of such products in the
United States and to pay us a royalty fee for systems sold in Japan. To date,
the sale of these products by Jenoptik has not had a material impact on our
market position. Our Opti-Probe systems primarily compete with thin film
metrology systems manufactured by KLA-Tencor, Rudolph Technologies, Nanometrics
and Dai Nippon Screen.
In recent years, there has been significant merger and acquisition activity
among our competitors and potential competitors. Acquisitions by our
competitors and potential competitors could allow them to expand their product
offerings, which could afford such competitors and potential competitors an
advantage in meeting customers' demands. The greater resources, including
financial, marketing and support resources, of competitors engaged in these
acquisitions could permit them to accelerate the development and
commercialization of new products and the marketing of existing products to
their larger installed bases. Accordingly, such business combinations and
acquisitions could have a detrimental impact on both our market share and the
pricing of our products, which could result in a material adverse effect on our
business and results of operations.
Patents and Proprietary Rights
We believe the success of our business depends as much on the technical
competence, creativity and marketing abilities of our employees as on the
protection derived from our patents and other proprietary 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 September 30, 1999, we owned 33 U.S. patents with expiration
dates ranging from 2004 to 2017 and had filed applications for 15 additional
U.S. patents. In addition, we owned 28 foreign patents with expiration dates
ranging from 2004 to 2017 and had filed applications for 12 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 September 30, 1999, we owned seven registered trademarks in the U.S.
and two in Japan and had filed 12 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
47
<PAGE>
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.
We also lease sales and customer support offices in California, Florida,
Texas, Japan, Korea, Taiwan and the United Kingdom.
Employees
As of September 30, 1999, we employed 352 persons, including 71 in
engineering, research and development, 90 in manufacturing, 143 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 November 9, 1999, the U.S. Patent Office issued a ruling
allowing us to proceed with this action against Rudolph.
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
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<PAGE>
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 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.
On October 25, 1999, we commenced an action against KLA-Tencor for patent
infringement with respect to two of our patents relating to optical measurement
systems that include a calibrating ellipsometer. In addition to the
infringement claims, we also filed claims against KLA-Tencor for engaging in a
pattern of conduct designed to disparage and improperly damage us.
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 infringe 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.
49
<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.......... 59 Chairman of the Board and Chief Technology
Officer
Martin M. Schwartz........ 55 President, Chief Executive Officer and
Director
L. Ray Christie........... 55 Vice President, Chief Financial Officer and
Secretary
David Mak................. 42 Vice President, Factory Operations
Jon L. Opsal.............. 58 Vice President, Research and Development
Raymond Osofsky........... 49 Vice President, Engineering
W. Lee Smith.............. 51 Vice President, Product Management and
Strategic Marketing
David Willenborg.......... 49 Vice President, Marketing/Software Projects
G. Leonard Baker, Jr ..... 57 Director
David Dominik............. 43 Director
Adam W. Kirsch............ 38 Director
Ian K. Loring............. 33 Director
</TABLE>
We anticipate that three 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
50
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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, Product Management and 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.
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<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. The three additional directors not otherwise
affiliated with us or any of our stockholders that are appointed by the board
will be in the class of directors whose term expires at the 2000 annual meeting
of our stockholders. Messrs. Schwartz, Dominik and Loring 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 ($) ($) (1) Options (#) Compensation ($)
----------------- ------ -------- -------- ------------ ------------ ----------------
<C> <S> <C> <C> <C> <C> <C>
Allan Rosencwaig................ 1999 $429,236 $ -- -- -- $63,245(2)
Chairman and 1998 417,508 318,623(3) -- 671,875 41,285(2)
Chief Technology Officer (6) 1997 332,846 243,989(4) -- -- 1,898(5)
Martin M. Schwartz (6).......... 1999 161,042 -- -- 200,000 --
President and
Chief Executive Officer
Jon L. Opsal.................... 1999 192,532 -- -- -- 1,262(7)
Vice President, 1998 186,482 68,247(3) -- 127,656 792(7)
Research and Development 1997 168,184 56,637(4) -- -- --
David Willenborg................ 1999 164,592 -- -- -- 6,910(7)
Vice President, 1998 160,368 52,930(3) -- 100,781 4,335(7)
Marketing 1997 154,479 50,778(4) -- -- --
David Mak....................... 1999 164,739 -- -- -- --
Vice President, 1998 154,830 58,767(3) -- 38,649 --
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.
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<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>
Potential Realizable
Value at Assumed
Number of Annual Rate of Stock
Securities % of Total Market Price Appreciation for
Underlying Options Exercise or Price on Option Term (d)
Options Granted in Base Price Date of Expiration -----------------------
Name Granted (a) Fiscal Year ($/Share) Grant (b) Date (c) 5%($) 10%($)
---- ----------- ----------- ----------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allan Rosencwaig........ -- -- -- -- -- -- --
Martin M. Schwartz (e).. 200,000 62.5% $4.00 $4.00 8/3/08 $503,000 $1,275,000
Jon L. Opsal............ -- -- -- -- -- -- --
David Willenborg........ -- -- -- -- -- -- --
David Mak............... -- -- -- -- -- -- --
</TABLE>
- --------
(a) All options listed in the table vest in five equal installments beginning
on the first anniversary of their grant date.
(b) Market price on the date of grant was determined by our board of directors
based upon a good faith estimate.
(c) Options will expire on the earlier of 90 days after the date of termination
of employment or the date indicated above.
(d) Amounts reflect assumed rates of appreciation set forth in the executive
compensation disclosure rules of the SEC. Actual gains, if any, on stock
option exercises depend on future performance of our stock and overall
market conditions. At an annual rate of appreciation of 5% per year for the
option term, the price of the Class B common stock would be approximately
$6.52 per share. At an annual rate of appreciation of 10% per year for the
option term, the price of the Class B common stock would be approximately
$10.37 per share.
(e) Mr. Schwartz joined Therma-Wave in August 1998.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table sets forth information for the named executives officers
concerning stock option exercises during our last fiscal year and options
outstanding at the end of the last fiscal year:
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
at Fiscal Year End Fiscal Year End ($) (a)
--------------------- -----------------------
Shares Acquired Value Unexercisable/ Unexercisable/
Name on Exercise Realized ($) Exercisable Exercisable
---- --------------- ------------ --------------------- -----------------------
<S> <C> <C> <C> <C>
Allan Rosencwaig........ -- -- 0/671,875 $ 0/0
Martin M. Schwartz (b).. -- -- 200,000/0 600,000/0
Jon L. Opsal............ -- -- 0/127,656 0/0
David Willenborg........ -- -- 0/100,781 0/0
David Mak............... -- -- 0/38,649 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.
53
<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 three
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."
54
<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
55
<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 3,000,000 shares of
Class A common stock and 2,311,212 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 November 30, 1999, an aggregate of 1,120,615
shares of Class B common stock, a portion of which is subject to repurchase,
were outstanding, and options to purchase an aggregate of 1,354,831 shares of
Class B common stock were outstanding, with exercise prices ranging from $4.00
to $15.89 per share, under the 1997 Stock Plan.
1997 Employee Stock Purchase and Option Plan
On October 31, 1997, the Board of Directors approved the 1997 Employee Stock
Purchase and Option Plan, or the "1997 Employee Stock Plan," which authorizes
the granting of stock options and the sale of Class A common stock or Class B
common stock to current or future employees, directors, consultants or advisors
of Therma-Wave or its subsidiaries. The 1997 Employee Stock Plan authorizes the
granting of stock options up to an aggregate of 689,375 shares of Class A
common stock and 1,378,163 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.
56
<PAGE>
Options to purchase an aggregate of 1,226,208 shares of Class B common stock
were outstanding as of November 30, 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 53,125 shares of Class A common stock and 53,125 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 46,375 shares of Class B common stock
were outstanding as of November 30, 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.
57
<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.
58
<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.
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of November 30, 1999,
regarding the beneficial ownership of our shares after giving effect to the
Reclassification, assuming an offering price of $16.00 per share, the midpoint
of the range set forth on the cover page of this prospectus, and a Class L
common stock Preference Amount of $25.979 per share, (a) prior to the offering
of 9,000,000 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
-----------------
Prior to After
Number of the the
Name and Address Shares Offering Offering
- ---------------- --------- -------- --------
<S> <C> <C> <C>
Principal Stockholders:
Bain Capital Funds (1)............................ 7,151,085 55.7% 32.7%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Sutter Hill Ventures (2).......................... 2,121,171 16.5 9.7
755 Page Mill Road
Palo Alto, California 94304
Toray Industries, Inc. (3)........................ 1,097,913 8.2 4.9
8-1, Mihama 1-chome
Urayasu, Chiba 279, Japan
Shimadzu Corporation (4).......................... 321,496 2.5 1.5
1, Nishinokyo-Kuwabaracho
Nakagyo-ku, Kyoto 604, Japan
Directors and Executive Officers:
Allan Rosencwaig (5).............................. 2,626,590 19.4 11.7
Martin M. Schwartz (6)............................ 40,000 * *
Jon L. Opsal (7).................................. 285,568 2.2 1.3
David Willenborg (8).............................. 367,262 2.8 1.7
David Mak (9) .................................... 77,298 * *
G. Leonard Baker, Jr. (10)........................ 2,121,171 16.5 9.7
David Dominik (11)................................ 2,104,928 16.4 9.6
Adam W. Kirsch (11)............................... 2,104,928 16.4 9.6
Ian K. Loring (11)................................ 2,104,928 16.4 9.6
All directors and executive officers as a group
(12 persons)..................................... 7,920,132 56.8 50.1
</TABLE>
- --------
* Less than one percent.
(1) Includes: 1,400,157 shares of common stock held by Bain Capital Fund V,
L.P. ("Fund V"); 3,646,000 shares of common stock held by Bain Capital
Fund V-B, L.P. ("Fund V-B"); 777,307 shares of common stock held by BCIP
Associates ("BCIP"); and 1,327,621 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 1,097,913 shares of common stock included in the table represent: (i)
518,763 shares of common stock and (ii) 579,150 shares of preferred stock,
each of which is convertible into a share of common stock at any time at
the option of the holder thereof.
(4) The 321,496 shares of common stock included in the table represent: (i)
151,907 shares of common stock and (ii) 169,589 shares of preferred stock,
each of which is convertible into a share of common stock at any time at
the option of the holder thereof.
(5) The 2,626,590 shares of common stock in the table include: (i) 671,875
shares of common stock which are subject to vesting; and (ii) 671,875
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.
60
<PAGE>
(6) The 40,000 shares of common stock in the table represent 40,000 shares of
common stock that can be acquired upon the exercise of outstanding
options.
(7) The 285,568 shares of common stock in the table include: (i) 127,656
shares of common stock which are subject to vesting; and (ii) 127,656
shares of common stock that can be acquired upon the exercise of
outstanding options.
(8) The 367,262 shares of common stock in the table include (i) 100,781 shares
of common stock which are subject to vesting; and (ii) 100,781 shares of
common stock that can be acquired upon the exercise of outstanding
options.
(9) The 77,298 shares of common stock in the table include: (i) 38,649 shares
of common stock which are subject to vesting; and (ii) 38,649 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.
61
<PAGE>
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.
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.
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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
$8.93, $10.68, $12.43, $14.18 and $15.89 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................. 1,954,715 $2,497,608 671,875
Anthony W. Lin (1)............... 180,078 125,611 127,656
Jon L. Opsal..................... 157,914 85,183 127,656
W. Lee Smith..................... 153,395 119,636 100,781
David Willenborg................. 266,482 325,890 100,781
</TABLE>
- --------
(1) Mr. Lin purchased 25,531 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 September 30, 1999, Mr. Lin
holds 77,952 shares of common stock.
(2) The number of shares presented gives effect to the Reclassification,
assuming an offering price of $16.00 per share, the midpoint of the range
set forth on the cover page of this prospectus, and a Class L common stock
Preference Amount of $25.979 per share.
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
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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 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.
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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 September 30, 1999, except
the loans to Mr. Lin, which were repaid in August 1998 in connection with his
resignation.
Advisory Agreement
In connection with the recapitalization, we entered into an Advisory
Agreement with Bain Capital, pursuant to which Bain Capital agreed to provide:
. general executive and management services;
. identification, support, negotiation and analysis of acquisitions and
dispositions;
. support, negotiation and analysis of financial alternatives;
. finance, marketing and human resource functions; and
. other services agreed upon by Therma-Wave and Bain Capital.
In exchange for such services, Bain Capital receives:
. an annual management fee of $1.0 million, plus reasonable out-of-pocket
expenses (payable quarterly); and
. a transaction fee in connection with the consummation of each additional
acquisition by us of an additional business in an amount equal to 1% of
the aggregate transaction value.
In connection with the recapitalization, Bain Capital received a transaction
fee of $1.8 million. We paid fees to Bain Capital under the Advisory Agreement
of $750,000 in fiscal 1998, $1.0 million in fiscal 1999 and $523,000 for the
six months ended September 30, 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.
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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 109,658 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.
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
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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 2,669,750 shares of the
Investors' common stock at an exercise price equal to $0.235 per share. Such
options become exercisable upon:
. any sale by the Investors of all or a portion of the 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.
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."
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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 provided 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. The second amendment also provided that if we had not consummated a
qualified initial public offering by the end of December 31, 1999, then the
loan commitment amount would be reduced by $5.0 million to $25.0 million. 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 September 30, 1999, there was
$3.5 million of an outstanding letter of credit and $26.5 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
September 30, 1999, we had outstanding 9,073,532 shares of Class A common
stock, 1,120,448 shares of Class B common stock, 1,008,170 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 $16.00
per share, the midpoint of the range set forth on the cover page of this
prospectus, and a Class L common stock Preference Amount of $25.979 per share,
we will have 21,839,254 shares of common stock (23,189,254 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 September 30, 1999, we had
41 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, plus all accrued and unpaid
dividends and each share is convertible into one share of common stock
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<PAGE>
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 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 cannot 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
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attempting to obtain control of Therma-Wave and could increase the likelihood
that incumbent directors will retain their positions.
The restated certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The restated certificate and the by-laws provide
that, except as otherwise required by law, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the board
of directors or by 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
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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.
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 $16.00 per share, the
midpoint of the range set forth on the cover page of this prospectus, and a
Class L common stock Preference Amount of $25.979 per share, 21,839,254 shares
of common stock outstanding. In addition, 1,314,698 shares of common stock are
issuable upon the exercise of currently exercisable outstanding stock options.
Of the shares outstanding after the offering, 9,000,000 shares of common stock,
or 10,350,000 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 12,718,859 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 338,462 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 3,700,000 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 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.
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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 and Lehman Brothers Inc., 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 12,718,859 shares of
common stock, assuming an offering price of $16.00 per share, the midpoint of
the range set forth on the cover page of this prospectus, and a Class L common
stock Preference Amount of $25.979 per share, will have limited rights to
require us to register their shares of common stock under the Securities Act at
our expense.
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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. ..........................................
Fidelity Capital Markets, a division of National Financial
Services Corporation..........................................
---
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
1,350,000 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 9,000,000 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 1,350,000 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 and Lehman Brothers
Inc. At any time and without notice, Banc of America Securities LLC and Lehman
Brothers Inc. may jointly decide to release all or any portion of the
securities from these lock-up agreements.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information through the Internet,
intranet and other proprietary electronic technology.
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 400,000 shares of
common stock offered by this prospectus for sale at the initial public offering
price to persons having business relationships with us. The
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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 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 $1,500,000.
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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 109,658 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,
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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.
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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
Therma-Wave, Inc. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 and September
30, 1999 .............................................................. F-22
Condensed Consolidated Statements of Operations for the six months ended
September 30, 1998 and 1999............................................ F-23
Condensed Consolidated Statements of Cash Flows for the six months ended
September 30, 1998 and 1999............................................ F-24
Notes to Unaudited Condensed Consolidated Financial Statements.......... F-25
</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
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
F-3
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 20,422 $ 20,245
Accounts receivable, net of allowance for doubtful
accounts of $3,016 and $1,911 at March 31, 1998 and
1999, respectively...................................... 22,098 12,180
Inventory................................................ 21,292 15,369
Deferred income taxes.................................... 7,693 2,254
Other current assets..................................... 245 7,505
-------- ---------
Total current assets.................................... 71,750 57,553
Property and equipment, net.............................. 6,241 4,513
Deferred financing costs, net............................ 9,956 8,349
Other assets............................................. 1,815 1,937
-------- ---------
Total assets............................................ $ 89,762 $ 72,352
======== =========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable......................................... $ 4,019 $ 4,034
Accrued liabilities...................................... 22,198 20,495
Deferred revenue ........................................ 2,111 1,556
Capital lease obligations, current portion............... 74 74
-------- ---------
Total current liabilities............................... 28,402 26,159
Long term debt............................................ 115,000 115,000
Capital lease obligations, long-term portion.............. 315 201
Deferred income taxes..................................... 1,716 2,254
Deferred rent and other................................... 804 362
Commitments and contingencies (Note 7)
Mandatorily redeemable convertible preferred stock, $0.01
par value; 1,000,000 shares authorized; 748,739 shares
issued and outstanding at March 31, 1998 and
1999 (aggregate liquidation preference of $15,347)....... 14,515 15,347
Stockholders' equity (net capital deficiency)
Class A common stock, $0.01 par value; 20,000,000 shares
authorized; 9,073,532 shares issued and outstanding at
March 31, 1998 and 1999................................. 91 91
Class B common stock, $0.01 par value; 4,000,000 shares
authorized; 1,289,785 and 1,118,092 shares issued and
outstanding at March 31, 1998 and 1999, respectively.... 13 11
Class L common stock, $0.01 par value; 2,000,000 shares
authorized; 1,008,170 shares issued and outstanding at
March 31, 1998 and 1999................................. 10 10
Additional paid-in capital............................... 20,625 19,754
Accumulated deficit...................................... (89,686) (105,416)
Notes receivable from stockholders....................... (288) (241)
Accumulated other comprehensive loss..................... (1,755) (1,180)
-------- ---------
Total stockholders' equity (net capital deficiency)..... (70,990) (86,971)
-------- ---------
Total liabilities and stockholders' equity (net capital
deficiency)............................................. $ 89,762 $ 72,352
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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....................................... $ 0.29 $ (0.27) $ (1.86)
Diluted..................................... $ 0.29 $ (0.27) $ (1.86)
Weighted average number of shares outstanding:
Basic....................................... 45,515 13,540 9,397
Diluted..................................... 45,515 13,540 9,397
Pro forma basic and diluted net loss per share
(unaudited).................................. $ (1.41)
Weighted average number of shares outstanding
in pro forma basic and diluted net loss per
share calculation (unaudited)................ 11,735
</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......... -- $ -- 45,515,339 $ 45 -- $ -- -- $ -- -- $ -- $ 60,465
Net income....... -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustments...... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
income..........
Repayment of
notes receivable
from
shareholders..... -- -- -- -- -- -- -- -- -- -- --
------- ------- ----------- ----- --------- ----- --------- ----- --------- ----- --------
Balance at March
31, 1997......... -- -- 45,515,339 45 -- -- -- -- -- -- 60,465
Net loss......... -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustments...... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
loss............
Recapitalization
Transactions:.... -- -- 8,614,997 9 -- -- -- -- -- -- 17,102
Conversion of
outstanding
Common Stock into
shares of Class A
and Class L
Common Stock..... -- -- (8,614,997) (9) 7,264,236 73 -- -- 807,138 8 (72)
Conversion of
outstanding
Common Stock into
shares of
Preferred Stock,
Class A and Class
L Common Stock... 750,000 13,800 (6,101,252) (6) 509,433 5 -- -- 56,604 1 (8,100)
Redemption of
Common Stock..... -- -- (39,414,087) (39) -- -- -- -- -- -- (52,835)
Issuances of
Class A, B and L
Common Stock..... -- -- -- -- 1,290,010 13 1,334,875 13 143,333 1 3,328
Conversion of
Preferred Stock
into Class A
Common Stock..... (1,261) (23) -- -- 9,853 -- -- -- 1,095 -- 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........... -- -- -- -- -- -- (45,090) -- -- -- (11)
------- ------- ----------- ----- --------- ----- --------- ----- --------- ----- --------
Balance at March
31, 1998......... 748,739 14,515 -- -- 9,073,532 91 1,289,785 13 1,008,170 10 20,625
Net loss......... -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustments...... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
loss............
Preferred stock
dividends........ -- 832 -- -- -- -- -- -- -- -- (832)
Repurchased
shares........... -- -- -- -- -- -- (171,693) (2) -- -- (39)
------- ------- ----------- ----- --------- ----- --------- ----- --------- ----- --------
Balance at March
31, 1999......... 748,739 $15,347 -- $ -- 9,073,532 $ 91 1,118,092 $ 11 1,008,170 $ 10 $ 19,754
======= ======= =========== ===== ========= ===== ========= ===== ========= ===== ========
<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 August 6, 1999. 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.
Net Income (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
F-10
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Net Loss Per Share
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 $16.00 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....................................... 45,515 5,563 --
Class A Stock...................................... -- 7,939 9,074
Class B Stock (vested)............................. -- 38 323
------- ------- --------
Weighted average shares outstanding used for basic
and diluted income (loss) per share............... 45,515 13,540 9,397
======= ======= ========
</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)........ -- 1,189,004 767,084
Mandatorily Redeemable Convertible Preferred Stock.... -- 748,739 748,739
Stock Options......................................... -- 1,765,458 1,778,086
</TABLE>
The stock options outstanding at March 31, 1998 and 1999, had a weighted
average exercise price of $10.69, and $9.64, 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 one share of Class A Common Stock at the option of the holder.
Dividends on each share of the Preferred Stock shall be cumulative and accrue
at the rate of 6% per annum. The Preferred Stock has a scheduled redemption on
May 17, 2004, and is otherwise redeemable by the Company at any time from time
after the earlier of (a) June 30, 1998 or (b) an initial public offering. Each
share of Preferred Stock is convertible into one share of Class A Common Stock
(as adjusted for stock splits, stock dividends, recapitalizations and similar
transactions). The Preferred Stock entitles the holder to one vote for each
share of Class A Common Stock issuable upon conversion of the Preferred Stock.
Upon any
F-17
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
liquidation, dissolution or winding up of the Company, each holder of the
Preferred Stock shall be entitled to be paid before any distribution or payment
is made upon any capital stock or other equity securities of the Company.
We issued shares of Preferred Stock as part of the Recapitalization. The
fair value of the Preferred Stock at March 31, 1999 of $15,347 represents the
liquidation value plus accrued dividends.
Common Stock
Immediately after the Recapitalization, the outstanding equity securities of
the Company consisted of 9,073,532 shares of Class A Common; 1,334,875 shares
of Class B Common; 1,008,170 shares of Class L Common; and 748,739 shares of
Preferred Stock. The shares of Class A Stock and Class L Stock each entitle the
holder to one vote per share on all matters to be voted upon by the
stockholders of the Company and are otherwise identical, except that the shares
of Class L Stock are entitled to a preference over Class A Stock with respect
to any distribution by the Company to holders of its capital stock equal to the
original cost of such share ($19.085) plus an amount which accrues on a daily
basis at a rate of 12% per annum, compounded annually. The Class B Stock is
identical to the Class A Stock except that the Class B Stock is non-voting and
is convertible into Class A Stock at any time following an initial public
offering by the Company at the option of the holder.
All unvested shares of Class B Stock are subject to repurchase by the
Company if the holder is no longer employed by the Company. Such shares vest
over five years from the date of issuance. During the fiscal year ended March
31, 1999, 171,693 shares of Class B Stock were repurchased by the Company. As
of March 31, 1999, 351,008 shares of Class B Stock were vested and
767,084 shares of Class B Stock were subject to repurchase by the Company at
the paid-in amount.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations in accounting for its employee stock awards because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123") requires use of option valuation models
for use in valuing employee stock options. Under APB No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
During fiscal year 1998, the Company adopted several stock option plans (the
"Plans") whereby the Board of Directors may grant incentive stock options and
nonstatutory stock options to employees, directors or consultants. The Company
has reserved 3,742,500 shares of Class A Stock and 3,742,500 shares of Class B
Stock for issuance under the Plans. Unless terminated sooner, the Plans will
terminate automatically in May 2007. Vesting provisions for stock options
granted under the Plans are determined by the Board of Directors. Unless the
Board of Directors specifically determines otherwise at the time of the grant,
the option shall vest 25% on each of the first four anniversaries from the date
of grant. Stock options expire no later than ten years from the date of grant.
Common shares issued on exercise of options prior to vesting are subject to
repurchase by the Company if the holder is no longer employed by the Company.
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.......................... 7,485,000 -- --
Granted............................. (1,836,384) 1,836,384 10.67
Exercised........................... -- -- --
Canceled............................ 70,926 (70,926) 10.08
---------- ---------
Balance at March 31, 1998............ 5,719,542 1,765,458 10.69
Granted............................. (320,100) 320,100 4.44
Exercised........................... -- -- --
Canceled............................ 307,472 (307,472) 10.28
---------- ---------
Balance at March 31, 1999............ 5,706,914 1,778,086 $9.64
========== =========
</TABLE>
The following table summarizes information about stock options outstanding
as of March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Life Price
----------- ----------- --------
<S> <C> <C> <C>
Range of exercise prices:
$4.00.................................... 270,000 9.32 $ 4.00
$6.00-$7.00.............................. 423,255 8.75 $ 6.10
$8.93-$15.89............................. 1,084,831 8.13 $12.42
---------
1,778,086
=========
</TABLE>
At March 31, 1999, there were 111,572 vested shares and 1,196,403 shares
were exercisable.
Pro forma information regarding net loss 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 $(0.28) for the year ended March
31, 1998 and $(16,717,000) and $(1.88) for the year ended March 31, 1999,
respectively.
The weighted average fair value of options granted during the years ended
March 31, 1998 and 1999 with exercise prices equal to the market price at the
date of grant is $0.45 and $0.96 per share, respectively.
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.
F-21
<PAGE>
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1999
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 20,245 $ 13,107
Accounts receivable, net............................. 12,180 23,668
Inventories.......................................... 15,369 19,864
Other current assets................................. 9,759 2,948
--------- ---------
Total current assets................................ 57,553 59,587
Property and equipment, net.......................... 4,513 4,217
Deferred financing costs, net........................ 8,349 7,541
Other assets......................................... 1,937 2,460
--------- ---------
Total assets........................................ $ 72,352 $ 73,805
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable..................................... $ 4,034 $ 8,749
Other current liabilities............................ 22,125 21,119
--------- ---------
Total current liabilities........................... 26,159 29,868
Long term debt....................................... 115,000 115,000
Other liabilities.................................... 2,817 3,322
--------- ---------
Total liabilities................................... 143,976 148,190
Commitments and contingencies.........................
Mandatorily redeemable preferred stock................ 15,437 15,759
Stockholders' equity (net capital deficiency).........
Common stock--Class A................................ 91 91
Common stock--Class B................................ 11 11
Common stock--Class L................................ 10 10
Additional paid-in capital........................... 19,754 19,356
Notes receivable from stockholders................... (241) (241)
Accumulated deficit.................................. (105,416) (108,762)
Other comprehensive loss............................. (1,180) (609)
--------- ---------
Total stockholders' equity (net capital
deficiency)........................................ (86,971) (90,144)
--------- ---------
Total liabilities and stockholders' equity (net
capital deficiency).................................$..72,352 $ 73,805
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-22
<PAGE>
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
September 30,
-----------------
1998 1999
-------- -------
<S> <C> <C>
Net revenue................................................ $ 30,442 $47,054
Cost of revenue............................................ 17,862 25,904
-------- -------
Gross margin............................................... 12,580 21,150
Operating expenses:
Research and development................................. 8,522 8,941
Selling, general administrative.......................... 9,133 8,902
Expenses relating to operating cost improvements......... 1,057 --
-------- -------
Total operating expenses............................... 18,712 17,843
-------- -------
Operating income (loss).................................... (6,132) 3,307
Other income (expense):
Interest expense......................................... (6,949) (7,013)
Interest income.......................................... 377 285
Other, net............................................... (56) 75
-------- -------
(6,628) (6,653)
-------- -------
Loss before income taxes................................... (12,760) (3,346)
Benefit for income taxes................................... (1,660) --
-------- -------
Net loss................................................... (11,100) (3,346)
Accretion of preferred stock dividend...................... 414 412
-------- -------
Net loss available to common stockholders.................. $(11,514) $(3,758)
======== =======
Net loss per share:
Basic and Diluted........................................ $ (1.26) $ (0.50)
Weighted average number of shares of outstanding:
Basic and Diluted........................................ 9,290 9,518
Pro forma net loss per share:
Basic and Diluted........................................ $ (0.31)
Weighted average number of shares outstanding in pro forma
net loss per share calculation:
Basic and Diluted........................................ 12,005
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-23
<PAGE>
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
September 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Operating activities:
Net loss................................................. $(11,100) $ (3,346)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 2,206 2,246
Amortization of deferred financing costs................ 800 808
Non-cash expenses relating to operating cost
improvements........................................... 100 --
Changes in assets and liabilities:
Accounts receivable.................................... 4,895 (11,488)
Inventories............................................ (475) (5,178)
Other assets........................................... (121) 6,314
Other liabilities...................................... (208) 4,214
-------- --------
Net cash used by operating activities................. (3,903) (6,430)
Investing activities:
Purchases of property and equipment...................... (277) (1,038)
Other.................................................... (195) (255)
-------- --------
Net cash used in investing activities................. (472) (1,293)
Net cash provided used in financing activities............. 39 585
-------- --------
Net decrease in cash and cash equivalents................. (4,336) (7,138)
Cash and cash equivalents at beginning of period.......... 20,422 20,245
-------- --------
Cash and cash equivalents at end of period................ $ 16,086 $ 13,107
======== ========
Supplementary disclosures:
Cash paid for interest................................... $ 6,236 $ 6,172
======== ========
Cash paid for taxes...................................... $ 273 $ --
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-24
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and include the accounts of Therma-Wave, Inc. and its
wholly owned subsidiaries. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
rules and regulations. In our opinion, the financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position at September 30, 1999, and the
operating results and cash flows for the six months ended September 30, 1999
and 1998. These financial statements and notes should be read in conjunction
with our audited financial statements and notes thereto for the year ended
March 31, 1999.
The results of operations for the interim periods are not necessarily
indicative of the results of operations that may be expected for any other
period or for the fiscal year, which ends on April 2, 2000.
The second quarters of fiscal years 2000 and 1999 and the fiscal year 1999
ended on October 3, 1999, October 4, 1998 and April 4, 1999, respectively. For
presentation purposes, the accompanying financial statements have been shown as
ending on the last day of the month.
2. Inventories
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 1999
--------- --------------
<S> <C> <C>
Purchased materials................................. $ 6,678 $ 7,169
Systems in process.................................. 5,302 9,776
Finished systems.................................... 3,389 2,919
------- -------
$15,369 $19,864
======= =======
</TABLE>
3. Expenses Relating to Operating Cost Improvements
On June 22, 1998 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
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 in Texas, Arizona and 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 $25,000
at September 30, 1999 primarily represented cash payments and will be utilized
during the remainder of fiscal 2000. Expenses relating to operating cost
improvements are summarized as follows:
<TABLE>
<CAPTION>
Provision
Provision Quarter Ended Balance
Quarter Ended September 30, Utilized Balance September 30,
June 30, 1998 1998 in FY99 March 31, 1999 Utilized 1999
------------- ------------- -------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Severance............... $406 $431 $(762) $ 75 $ (75) $ --
Facilities.............. 76 44 (70) 50 (25) 25
Other................... 100 -- (100) -- -- --
---- ---- ------ ---- ------ -----
$582 $475 $(932) $125 $(100) $ 25
</TABLE>
F-25
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." The statement established standards for the reporting
and display of comprehensive income and its components. The adoption of this
statement had no significant impact on our net loss or stockholders' equity.
SFAS 130 requires unrealized gains or losses on available-for-sale securities
and foreign currency translation adjustments to be included in comprehensive
loss. The difference between net loss and comprehensive loss is due to foreign
currency translation adjustments. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
During the six months ended September 30, 1998 and 1999, comprehensive loss
amounted to approximately $11,007,000 and $2,775,000, respectively.
5. 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 $16.00 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 and all shares of Class A Stock will be
reclassified into Common Stock.
Unaudited pro forma stockholders' equity (net capital deficiency) at
September 30, 1999, as adjusted for the above, would be as follows:
<TABLE>
<S> <C>
Preferred Stock, $0.01 par value; 5,000,000 shares authorized,
no shares issued and outstanding............................... $ --
Common Stock, $0.01 par value; 35,000,000 shares authorized,
12,780,070 shares issued and outstanding....................... 128
Class A common stock, $0.01 par value; no shares authorized,
issued or outstanding.......................................... --
Class B common stock, $0.01 par value; no shares authorized,
issued or outstanding.......................................... --
Class L common stock, $0.01 par value; no shares authorized,
issued or outstanding.......................................... --
Additional paid-in capital...................................... 19,340
Accumulated deficit............................................. (108,762)
Other........................................................... (850)
---------
$ (90,144)
=========
</TABLE>
6. Net Income (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 six months ended September 30, 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
F-26
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 six months ended September 30, 1998 and 1999, all potential common
shares were anti-dilutive and excluded from the diluted net loss per share
calculation.
The following tables set forth the computation of net loss per share of
common stock:
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-----------------
1998 1999
-------- -------
<S> <C> <C>
Numerator (in thousands):
Net loss................................................ $(11,100) $(3,346)
Less: Preferred stock dividend.......................... (414) (412)
Less: Income attributable to Class L Stock.............. (158) (1,041)
-------- -------
$(11,672) $(4,799)
======== =======
Denominator (in thousands):
Class A Stock........................................... 9,074 9,074
Class B Stock (vested).................................. 216 444
-------- -------
Weighted average shares outstanding used for basic and
diluted income (loss) per share........................ 9,290 9,518
======== =======
</TABLE>
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>
September 30,
-------------------
1998 1999
--------- ---------
<S> <C> <C>
Class B Stock Subject to Repurchase (unvested).......... 901,936 676,476
Mandatorily Redeemable Convertible Preferred Stock...... 748,739 748,739
Stock Options........................................... 1,754,591 2,608,187
</TABLE>
The stock options outstanding at September 30, 1998 and 1999, had a weighted
average exercise price of $12.42, and $11.50, 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).
7. Unaudited Pro Forma Net Loss Per Share
Unaudited pro forma basic and diluted net loss per share for the six months
ended September 30, 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 $16.00 per share). Each share of Class B Stock
will then be reclassified into one share of Class A Stock.
F-27
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Recently Issued Accounting Statements
In June 1997, the Financial Accounting Standards Board ("FASB"') issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes new requirements for the annual reporting of information regarding
operating segments, products, services, geographic areas and major customers.
We adopted SFAS No. 131 effective March 31, 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the
statement of operations or as a deferred item, depending on the type of hedge
relationship that exists with respect to such derivative. We currently do not
hold any derivative instruments that are affected by the adoption of SFAS No.
133.
F-28
<PAGE>
[pictures of an Opti-Probe(R) system and a Therma-Probe(R) system]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9,000,000 Shares
[THERMA-WAVE(R) LOGO]
----------------
Prospectus
, 2000
----------------
Lehman Brothers
Banc of America Securities LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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............. $ 46,451
NASD filing fee................................................. 18,095
Nasdaq National Market listing fee.............................. 95,000
Blue Sky fees and expenses (including attorneys' fees and
expenses)...................................................... 10,000
Printing expenses............................................... 350,000
Accounting fees and expenses.................................... 500,000
Transfer agent's fees and expenses.............................. 3,000
Legal fees and expenses......................................... 450,000
Miscellaneous expenses.......................................... 27,454
----------
Total......................................................... $1,500,000
==========
</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 6,960,035 shares of common stock to the Bain Capital
Funds and Sutter Hill (which were later converted into an aggregate of
7,264,236 shares of Class A common stock and an aggregate of 807,138
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)
136,258 shares of Class L common stock; and (iii) 1,128,749 shares of
Class B common stock to the management investors for an aggregate of
$2.9 million;
(c) an aggregate of (i) 509,433 shares of Class A common stock; (ii) 56,604
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 6,101,252 shares of common stock;
(d) an aggregate of (i) 9,853 shares of Class A common stock and (ii) 1,095
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) 63,679 shares of Class A common stock and 7,075 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 206,126 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.
10.30 1997 Employee Stock Purchase and Option Plan.
10.31 1997 Special Employee Stock Purchase and Option Plan.
*21.1 Subsidiaries of Therma-Wave.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Independent Accountants.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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-5
<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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Therma-Wave,
Inc. has duly caused this Pre-Effective Amendment No. 7 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 January 13,
2000.
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. 7 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 January 13, 2000
______________________________________ Chief Technology Officer
Allan Rosencwaig
* President, Chief Executive January 13, 2000
______________________________________ Officer and Director
Martin M. Schwartz (Principal Executive
Officer)
* Vice President and Chief January 13, 2000
______________________________________ Financial Officer
L. Ray Christie (Principal Financial and
Accounting Officer)
* Director January 13, 2000
______________________________________
G. Leonard Baker, Jr.
* Director January 13, 2000
______________________________________
David Dominik
* Director January 13, 2000
______________________________________
Adam W. Kirsch
* Director January 13, 2000
______________________________________
Ian K. Loring
</TABLE>
* The undersigned, by signing his name hereto, does hereby sign and execute
this Pre-Effective Amendment No. 7 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.
<TABLE>
<S> <C>
January 13, 2000
By: /s/ Allan Rosencwaig
------------------------------
Allan Rosencwaig
Attorney-in-Fact
</TABLE>
II-7
<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 3.3
RESTATED CERTIFICATE OF INCORPORATION
OF
THERMA-WAVE, INC.
ARTICLE ONE
The name of the Corporation is Therma-Wave, Inc.
ARTICLE TWO
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle,
19801. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE THREE
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
A. AUTHORIZED SHARES
-----------------
The total number of shares of capital stock which the Corporation has
authority to issue is 41,000,000 shares, consisting of:
(1) 1,000,000 shares of Series A Convertible Preferred Stock, par
value $.01 per share ("Series A Preferred");
------------------
(2) 5,000,000 shares of Preferred Stock, par value $.01 per share
("Preferred Stock"); and
---------------
(3) 35,000,000 shares of Common Stock, par value $.01 per share
("Common Stock").
------------
<PAGE>
The Series A Preferred, Preferred Stock and the Common Stock shall have the
rights, preferences and limitations set forth below. Capitalized terms used but
not otherwise defined in Part A, Part B, Part C or Part D of this Article IV are
defined in Part E.
B. SERIES A PREFERRED
------------------
Section 1. Dividends.
---------
1A. General Obligation. When and as declared by the Corporation's
------------------
Board of Directors and to the extent permitted under the General Corporation Law
of Delaware, the Corporation shall pay preferential dividends in cash to the
holders of the Series A Preferred (the "Series A Preferred") as provided in this
------------------
Section 1. Dividends on each share of the Series A Preferred (a "Share") shall
-----
be cumulative and accrue at the rate of 6% per annum of the sum of the
Liquidation Value thereof plus all accumulated and unpaid dividends thereon from
and including the date of issuance of such Share to and including the first to
occur of (i) the date on which the Liquidation Value of such Share (plus all
accrued and unpaid dividends thereon) is paid to the holder thereof in
connection with the liquidation of the Corporation or the redemption of such
Share by the Corporation, (ii) the date on which such Share is converted into
shares of Conversion Stock hereunder or (iii) the date on which such share is
otherwise acquired by the Corporation. Such dividends shall accrue whether or
not they have been declared and whether or not there are profits, surplus or
other funds of the Corporation legally available for the payment of dividends.
The date on which the Corporation initially issues any Share shall be deemed to
be its "date of issuance" regardless of the number of times transfer of such
Share is made on the stock records maintained by or for the Corporation and
regardless of the number of certificates which may be issued to evidence such
Share.
1B. Dividend Reference Dates. To the extent not paid on May 16 of
------------------------
each year, beginning May 16, 1998 (the "Dividend Reference Date"), all dividends
-----------------------
which have accrued on each Share outstanding during the year ending upon each
such Dividend Reference Date shall be accumulated and shall remain accumulated
dividends with respect to such Share until paid to the holder thereof.
1C. Distribution of Partial Dividend Payments. Except as otherwise
-----------------------------------------
provided herein, if at any time the Corporation pays less than the total amount
of dividends then accrued with respect to the Series A Preferred, such payment
shall be distributed pro rata among the holders thereof based upon the number of
Shares held by each such holder.
Section 2. Liquidation. Upon any liquidation, dissolution or winding
-----------
up of the Corporation (whether voluntary or involuntary), each holder of Series
A Preferred shall be entitled to be paid, before any distribution or payment is
made upon any Junior Securities, an amount in cash equal to the greater of (a)
the aggregate Liquidation Value of all Shares held by such holder (plus all
accrued and unpaid dividends thereon, which for all purposes hereof shall
include dividends
2
<PAGE>
which have accrued since the last Dividend Reference Date) and (b) the amount
that such holder would have received had such holder converted such Shares into
shares of Class A Common immediately prior to such liquidation, dissolution or
winding up, and the holders of Series A Preferred shall not be entitled to any
further payment. If upon any such liquidation, dissolution or winding up of the
Corporation the Corporation's assets to be distributed among the holders of the
Series A Preferred are insufficient to permit payment to such holders of the
aggregate amount which they are entitled to be paid under this Section 2, then
the entire assets available to be distributed to the Corporation's stockholders
shall be distributed pro rata among such holders based upon the aggregate
Liquidation Value (plus all accrued and unpaid dividends) of the Series A
Preferred held by each such holder. Not less than 30 days prior to the payment
date stated therein, the Corporation shall mail written notice of any such
liquidation, dissolution or winding up to each record holder of Series A
Preferred, setting forth in reasonable detail the amount of proceeds to be paid
with respect to each Share and each share of Common Stock in connection with
such liquidation, dissolution or winding up.
Section 3. Priority of Series A Preferred on Dividends and
-----------------------------------------------
Redemptions. So long as any Series A Preferred remains outstanding, without the
- -----------
prior written consent of the holders of a majority of the outstanding shares of
Series A Preferred, the Corporation shall not, nor shall it permit any
Subsidiary to, redeem, purchase or otherwise acquire directly or indirectly any
Junior Securities, nor shall the Corporation directly or indirectly pay or
declare any dividend or make any distribution upon any Junior Securities;
provided that the Corporation may repurchase shares of Common Stock from former
employees of the Corporation and its Subsidiaries to the extent permitted by the
Corporation's agreements related to the Corporation's indebtedness, including
without limitation any indenture, whether entered into in connection with
transactions contemplated by the Recapitalization Agreement or thereafter, and
including any extensions or refinancings thereof.
Section 4. Redemptions.
-----------
4A. Scheduled Redemption. On May 17, 2004 (the "Scheduled Redemption
-------------------- --------------------
Date"), the Corporation shall redeem all outstanding Shares of Series A
- ----
Preferred at a price per Share equal to the Liquidation Value thereof (plus
accrued and unpaid dividends thereon).
4B. Optional Redemptions. The Corporation may, at any time and from
--------------------
time to time after the first to occur of (i) June 30, 1998 and (ii) the
Corporation's initial Public Offering, redeem all or any portion of the Shares
of Series A Preferred then outstanding at a price per Share equal to the
Liquidation Value thereof (plus all accrued and unpaid dividends thereon). Any
partial redemption pursuant to this paragraph shall be for a number of Shares,
the aggregate Liquidation Value of which, together with accrued and unpaid
dividends thereon, is at least $5,000,000, and redemptions made pursuant to this
paragraph shall not relieve the Corporation of its obligation to redeem Shares
on the Scheduled Redemption Dates.
3
<PAGE>
4C. Redemption Payments. For each Share which is to be redeemed
-------------------
hereunder, the Corporation shall be obligated on the Redemption Date to pay to
the holder thereof (upon surrender by such holder at the Corporation's principal
office of the certificate representing such Share) an amount in cash equal to
the Liquidation Value of such Share (plus all accrued and unpaid dividends
thereon). If the funds of the Corporation legally available for redemption of
Shares on any Redemption Date are insufficient to redeem the total number of
Shares to be redeemed on such date, those funds which are legally available
shall be used to redeem the maximum possible number of Shares pro rata among the
holders of the Shares to be redeemed based upon the aggregate Liquidation Value
of such Shares held by each such holder (plus all accrued and unpaid dividends
thereon). At any time thereafter when additional funds of the Corporation are
legally available for the redemption of Shares, such funds shall immediately be
used to redeem the balance of the Shares which the Corporation has become
obligated to redeem on any Redemption Date but which it has not redeemed.
4D. Notice of Redemption. Except as otherwise provided herein, the
--------------------
Corporation shall mail written notice of each redemption of any Series A
Preferred (other than a redemption at the request of a holder or holders of
Series A Preferred) to each record holder thereof not more than 60 nor less than
30 days prior to the date on which such redemption is to be made. In case fewer
than the total number of Shares represented by any certificate are redeemed, a
new certificate representing the number of unredeemed Shares shall be issued to
the holder thereof without cost to such holder within five business days after
surrender of the certificate representing the redeemed Shares.
4E. Determination of the Number of Each Holder's Shares to be
---------------------------------------------------------
Redeemed. The number of Shares of Series A Preferred to be redeemed from each
- --------
holder thereof in redemptions hereunder shall be the number of Shares determined
by multiplying the total number of Shares to be redeemed times a fraction, the
numerator of which shall be the total number of Shares then held by such holder
and the denominator of which shall be the total number of Shares then
outstanding.
4F. Dividends After Redemption Date. No Share shall be entitled to
-------------------------------
any dividends accruing after the date on which the Liquidation Value of such
Share (plus all accrued and unpaid dividends thereon) is paid to the holder of
such Share. On such date, all rights of the holder of such Share shall cease,
and such Share shall no longer be deemed to be issued and outstanding.
4G. Redeemed or Otherwise Acquired Shares. Any Shares which are
-------------------------------------
redeemed or otherwise acquired by the Corporation shall be canceled and retired
to authorized but unissued shares and shall not be reissued, sold or
transferred.
4H. Special Redemptions.
-------------------
(i) If, in connection with or after any Public Offering, any member
of the Bain Group receives any proceeds in respect of Common Stock owned by such
member, the Corporation
4
<PAGE>
shall give prompt written notice to the holders of the Series A Preferred of
such event. The holder or holders of a majority of the Series A Preferred then
outstanding may require the Corporation to redeem all outstanding shares of
Series A Preferred at a price per Share equal to the Liquidation Value thereof
(plus all accrued and unpaid dividends thereon) by giving written notice to the
Corporation of such election within 30 days after the receipt of such notice
from the Corporation. Upon receipt of such election, the Corporation shall be
obligated to redeem the outstanding Shares of Series A Preferred on a date fixed
by the Corporation, which date shall be not more than 30 days after the
Corporation's receipt of such notice.
(ii) If a Change in Ownership has occurred or the Corporation
obtains knowledge that a Change in Ownership is proposed to occur, the
Corporation shall give prompt written notice of such Change in Ownership
describing in reasonable detail the material terms and date of consummation
thereof to each holder of Series A Preferred. The holder or holders of a
majority of the Series A Preferred then outstanding may require the Corporation
to redeem all outstanding shares of Series A Preferred at a price per Share
equal to the Liquidation Value thereof (plus all accrued and unpaid dividends
thereon) by giving written notice to the Corporation of such election prior to
the later of (a) 30 days after receipt of the Corporation's notice and (b) five
days prior to the consummation of the Change in Ownership (the "Expiration
----------
Date").
- ----
Upon receipt of such election, the Corporation shall be obligated to
redeem the outstanding Shares of Series A Preferred on the later of (a) the
occurrence of the Change in Ownership or (b) five days after the Corporation's
receipt of such election(s). If any proposed Change in Ownership does not
occur, all requests for redemption in connection therewith shall be
automatically rescinded.
The term "Change in Ownership" means any sale or transfer or series of
-------------------
sales or transfers by the Bain Group (other than to any Affiliate of any member
of the Bain Group) of at least 25% of the Common Stock purchased by the Bain
Group pursuant to the Recapitalization Agreement, determined on the basis of the
cost of such Common Stock.
(iii) If a Fundamental Change is proposed to occur, the Corporation
shall give written notice of such Fundamental Change describing in reasonable
detail the material terms and date of consummation thereof to each holder of
Series A Preferred not more than 45 days nor less than 20 days prior to the
consummation of such Fundamental Change, and the Corporation shall give each
holder of Series A Preferred prompt written notice of any material change in the
terms or timing of such transaction. The holder or holders of a majority of the
Series A Preferred then outstanding may require the Corporation to redeem all
outstanding Shares of Series A Preferred at a price per Share equal to the
Liquidation Value thereof (plus all accrued and unpaid dividends thereon) by
giving written notice to the Corporation of such election prior to the later of
(a) five days prior to the consummation of the Fundamental Change or (b) 30 days
after receipt of notice from the Corporation.
5
<PAGE>
Upon receipt of such election, the Corporation shall be obligated to
redeem the outstanding Shares of Series A Preferred upon the consummation of
such Fundamental Change. If any proposed Fundamental Change does not occur, all
requests for redemption in connection therewith shall be automatically
rescinded.
The term "Fundamental Change" means any sale or transfer of all or
------------------
substantially all of the assets of the Corporation and its Subsidiaries on a
consolidated basis in any transaction or series of related transactions.
(iv) Redemptions made pursuant to this paragraph 4H shall not
relieve the Corporation of its obligation to redeem Series A Preferred on the
Scheduled Redemption Dates pursuant to paragraph 4A above.
4I. Partial Redemptions. Notwithstanding anything to the
-------------------
contrary contained herein, any redemption by the Corporation of less then all of
the Shares of Series A Preferred then held by each holder must be a number of
Shares of Series A Preferred sufficient, in the good faith opinion of counsel to
the holder, to not be treated as a dividend under Section 302 of the Internal
Revenue Code of 1986, as amended (or any comparable successor provision), as to
such holder.
Section 5. Voting Rights. The holders of the Series A Preferred
-------------
shall be entitled to notice of all stockholders meetings in accordance with the
Corporation's bylaws, and the holders of the Series A Preferred shall be
entitled to vote on all matters submitted to the stockholders for a vote
together with the holders of the Common Stock voting together as a single class
with each share of Common Stock entitled to one vote per share and each Share of
Series A Preferred entitled to one vote for each share of Common Stock issuable
upon conversion of the Series A Preferred as of the record date for such vote
or, if no record date is specified, as of the date of such vote.
Section 6. Conversion.
----------
6A. Conversion Procedure.
--------------------
(i) At any time, any holder of Series A Preferred may convert all
of the Series A Preferred held by such holder into shares of Conversion Stock.
Each Share of Series A Preferred shall be convertible into one share of
Conversion Stock (as such amount is adjusted for stock splits, stock dividends,
recapitalizations and similar transactions).
(ii) Except as otherwise provided herein, each conversion of Series
A Preferred shall be deemed to have been effected as of the close of business on
the date on which the certificate or certificates representing the Series A
Preferred to be converted have been surrendered for conversion at the principal
office of the Corporation. At the time any such conversion has been effected,
the rights of the holder of the Shares converted as a holder of Series A
Preferred (including the right to receive accrued and unpaid dividends on the
Series A Preferred) shall cease and the
6
<PAGE>
Person or Persons in whose name or names any certificate or certificates for
shares of Conversion Stock are to be issued upon such conversion shall be deemed
to have become the holder or holders of record of the shares of Conversion Stock
represented thereby.
(iii) The conversion rights of any Share subject to redemption
hereunder shall terminate on the Redemption Date for such Share unless the
Corporation has failed to pay to the holder thereof the Liquidation Value of
such Share (plus all accrued and unpaid dividends thereon).
(iv) Notwithstanding any other provision hereof, if a conversion of
Series A Preferred is to be made in connection with a Public Offering, a Change
in Ownership, a Fundamental Change or other transaction affecting the
Corporation, the conversion of any Shares of Series A Preferred may, at the
election of the holder thereof, be conditioned upon the consummation of such
transaction, in which case such conversion shall not be deemed to be effective
until such transaction has been consummated.
(v) As soon as possible after a conversion has been effected, the
Corporation shall deliver to the converting holder a certificate or certificates
representing the number of shares of Conversion Stock issuable by reason of such
conversion in such name or names and such denomination or denominations as the
converting holder has specified.
(vi) The issuance of certificates for shares of Conversion Stock
upon conversion of Series A Preferred shall be made without charge to the
holders of such Series A Preferred for any issuance tax in respect thereof or
other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Conversion Stock. Upon conversion of each
Share of Series A Preferred, the Corporation shall take all such actions as are
necessary in order to insure that the Conversion Stock issuable with respect to
such conversion shall be validly issued, fully paid and nonassessable, free and
clear of all taxes, liens, charges and encumbrances with respect to the issuance
thereof.
(vii) The Corporation shall not close its books against the transfer
of Series A Preferred or of Conversion Stock issued or issuable upon conversion
of Series A Preferred in any manner which interferes with the timely conversion
of Series A Preferred. The Corporation shall assist and cooperate with any
holder of Shares required to make any governmental filings or obtain any
governmental approval prior to or in connection with any conversion of Shares
hereunder (including, without limitation, making any filings required to be made
by the Corporation).
(viii) The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Conversion Stock, solely for the
purpose of issuance upon the conversion of the Series A Preferred, such number
of shares of Conversion Stock issuable upon the conversion of all outstanding
Series A Preferred. All shares of Conversion Stock which are so issuable shall,
when issued, be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens and charges. The Corporation shall take all such actions
as may be necessary to assure that all such shares of Conversion Stock may be so
issued without violation of any applicable
7
<PAGE>
law or governmental regulation or any requirements of any domestic securities
exchange upon which shares of Conversion Stock may be listed (except for
official notice of issuance which shall be immediately delivered by the
Corporation upon each such issuance). The Corporation shall not take any action
which would cause the number of authorized but unissued shares of Conversion
Stock to be less than the number of such shares required to be reserved
hereunder for issuance upon conversion of the Series A Preferred.
6B. Notices. The Corporation shall give written notice to all
-------
holders of Series A Preferred at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any dividend
or distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock or (c) for determining rights to vote with
respect to any dissolution or liquidation.
Section 7. Reorganization, Reclassification, Consolidation, Merger
-------------------------------------------------------
or Sale. Any recapitalization, reorganization, reclassification, consolidation,
- -------
merger, sale of all or substantially all of the Corporation's assets or other
transaction, in each case which is effected in such a manner that the holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change." Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions to insure that each of the holders of Series A Preferred shall
thereafter have the right to acquire and receive, in lieu of or in addition to
(as the case may be) the shares of Conversion Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's Series A
Preferred, such shares of stock, securities or assets as such holder would have
received in connection with such Organic Change if such holder had converted its
Series A Preferred immediately prior to such Organic Change.
Section 8. Registration of Transfer. The Corporation shall keep at
------------------------
its principal office a register for the registration of Series A Preferred. Upon
the surrender of any certificate representing Series A Preferred at such place,
the Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
Shares represented by the surrendered certificate. Each such new certificate
shall be registered in such name and shall represent such number of Shares as is
requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate, and dividends
shall accrue on the Series A Preferred represented by such new certificate from
the date to which dividends have been fully paid on such Series A Preferred
represented by the surrendered certificate.
Section 9. Replacement. Upon receipt of evidence reasonably
-----------
satisfactory to the Corporation (an affidavit of the registered holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing Shares of Series A Preferred, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor or an original party to the
Recapitalization Agreement its own agreement shall be satisfactory), or, in the
8
<PAGE>
case of any such mutilation upon surrender of such certificate, the Corporation
shall (at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of Shares of such class
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate, and dividends
shall accrue on the Series A Preferred represented by such new certificate from
the date to which dividends have been fully paid on such lost, stolen, destroyed
or mutilated certificate.
Section 10. Amendment and Waiver. No amendment, modification or
--------------------
waiver shall be binding or effective with respect to any provision of Sections 1
to 11 of this Part B without the prior written consent of the holders of a
majority of the Series A Preferred outstanding at the time such action is taken;
provided that no change in the terms hereof may be accomplished by merger or
consolidation of the Corporation with another corporation or entity unless the
Corporation has obtained the prior written consent of the holders of a majority
of the Series A Preferred then outstanding.
Section 11. Notices. Except as otherwise expressly provided
-------
hereunder, all notices referred to herein shall be in writing and shall be
delivered by registered or certified mail, return receipt requested and postage
prepaid, or by reputable overnight courier service, charges prepaid, and shall
be deemed to have been given when so mailed or sent (i) to the Corporation, at
its principal executive offices and (ii) to any stockholder, at such holder's
address as it appears in the stock records of the Corporation (unless otherwise
indicated by any such holder).
C. PREFERRED STOCK
---------------
The Preferred Stock may be issued from time to time and in one or more
series. The Board of Directors of the Corporation is authorized to determine or
alter the powers, preferences and rights, and the qualifications, limitations
and restrictions granted to or imposed upon any wholly unissued series of
Preferred Stock, and within the limitations or restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series of Preferred Stock, to increase or decrease
(but not below the number of shares of any such series of Preferred Stock then
outstanding) the number of shares of any such series of Preferred Stock, and to
fix the number of shares of any series of Preferred Stock. In the event that
the number of shares of any series of Preferred Stock shall be so decreased, the
shares constituting such decrease shall resume the status which such shares had
prior to the adoption of the resolution originally fixing the number of shares
of such series of Preferred Stock subject to the requirements of applicable law.
D. COMMON STOCK
------------
Section 1. Dividends. Except as otherwise provided by the
---------
Delaware General Corporation Law or this Restated Certificate of Incorporation
(the "Restated Certificate"), the holders of Common Stock: (i) subject to the
--------------------
rights of holders of the Series A Preferred and any series of Preferred Stock,
shall share ratably in all dividends payable in cash, stock or otherwise and
other distributions, whether in respect of liquidation or dissolution (voluntary
or involuntary) or otherwise
9
<PAGE>
and (ii) are subject to all the powers, rights, privileges, preferences and
priorities of the Series A Preferred and any series of Preferred Stock as
provided herein or in any resolution or resolutions adopted by the Board of
Directors pursuant to authority expressly vested in it by the provisions of Part
C of this Article Four.
Section 2. Conversion Rights. The Common Stock shall not be
-----------------
convertible into, or exchangeable for, shares of any other class or classes or
of any other series of the same class of the Corporation's capital stock.
Section 3. Preemptive Rights. No holder of Common Stock shall have
-----------------
any preemptive, subscription, redemption, conversion or sinking fund rights with
respect to the Common Stock, or to any obligations convertible (directly or
indirectly) into stock of the Corporation whether now or hereafter authorized.
Section 4. Voting Rights. Except as otherwise provided by the
-------------
Delaware General Corporation Law or the Restated Certificate and subject to the
rights of holders of the Series A Preferred and any series of Preferred Stock,
all of the voting power of the stockholders of the Corporation shall be vested
in the holders of the Common Stock, and each holder of Common Stock shall have
one vote for each share held by such holder on all matters voted upon by the
stockholders of the Corporation.
Section 5. Registration or Transfer. The Corporation shall keep at
------------------------
its principal office (or such other place as the Corporation reasonably
designates) a register for the registration of Common Stock. Upon the surrender
of any certificate representing shares of any class of Common Stock at such
place, the Corporation shall, at the request of the registered holder of such
certificate, execute and deliver a new certificate or certificates in exchange
therefor representing in the aggregate the number of shares of such class
represented by the surrendered certificate, and the Corporation forthwith shall
cancel such surrendered certificate. Each such new certificate will be
registered in such name and will represent such number of shares of such class
as is requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate. The issuance of
new certificates shall be made without charge to the holders of the surrendered
certificates for any issuance tax in respect thereof or other cost incurred by
the Corporation in connection with such issuance.
Section 6. Replacement. Upon receipt of evidence reasonably
-----------
satisfactory to the Corporation (an affidavit of the registered holder will be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing one or more shares of any class of Common Stock, and
in the case of any such loss, theft or destruction, upon receipt of indemnity
reasonably satisfactory to the Corporation (provided that if the holder is a
financial institution or other institutional investor or an original party to
the Recapitalization Agreement, its own agreement will be satisfactory), or, in
the case of any such mutilation upon surrender of such certificate, the
Corporation shall (at its expense) execute and deliver in lieu of such
certificate a new certificate of
10
<PAGE>
like kind representing the number of shares of such class represented by such
lost, stolen, destroyed or mutilated certificate and dated the date of such
lost, stolen, destroyed or mutilated certificate.
Section 7. Notices. All notices referred to herein shall be in
-------
writing, shall be delivered personally or by first class mail, postage prepaid,
and shall be deemed to have been given when so delivered or mailed to the
Corporation at its principal executive offices and to any stockholder at such
holder's address as it appears in the stock records of the Corporation (unless
otherwise specified in a written notice to the Corporation by such holder).
Section 8. Fractional Shares. In no event will holders of
-----------------
fractional shares be required to accept any consideration in exchange for such
shares other than consideration which all holders of Common Stock are required
to accept.
Section 5. Reclassification of Existing Common Stock.
-----------------------------------------
(i) Reclassification. Immediately prior to the effectiveness of the
----------------
Registration Statement on Form S-1 (Reg. No. 333-76019) (the "Effective Time"),
--------------
each outstanding share of common stock of the Corporation shall, without any
action by the holder thereof, be reclassified as follows:
(A) each outstanding share of Class A Common Stock, par value
$.01 per share (the "Class A Common") into one share of
--------------
Common Stock;
(B) each outstanding share of Class B Common Stock, par value
$.01 per share (the "Class B Common") into one share of
--------------
Common Stock; and
(C) each outstanding share of Class L Common Stock, par value
$.01 per share (the "Class L Common" and, together with the
--------------
Class A Common and Class B Common, the "Existing Common
---------------
Stock") into a number of shares of Common Stock equal to the
-----
sum of (i) one and (ii) the result of (x) the Unreturned
Cost plus Unpaid Yield of such share of Class L Common
divided by (y) the price per share of the Common Stock paid
by investors in the Public Offering (in each case before
giving effect to any stock split declared in connection with
such Public Offering).
Prior to the effectiveness of the reclassification of the Existing Common
Stock set forth above (the "Reclassification"), the Existing Common Stock shall
----------------
continue to have the rights, preferences and limitations set forth in the
Corporation's Restated Certificate of Incorporation as in effect immediately
prior to the filing of this Restated Certificate.
(ii) Fractional Shares. Notwithstanding the foregoing, in the event
-----------------
that the Reclassification would result in any holder of shares of Common Stock
holding a share of Common
11
<PAGE>
Stock that is not an integral multiple of one, the effect of the
Reclassification shall be such that the number of such holder's shares of Common
Stock issued as a result of the Reclassification with fractions of 0.50 and
greater being rounded up to the next higher integral multiple of one and
fractions less than 0.50 being rounded down to the next lower integral multiple
of one. No consideration will be paid in lieu of fractions that are rounded
down.
(iv) As soon as possible after a conversion has been effected, the
Corporation shall deliver to the converting holder a certificate or certificates
representing the number of shares of Common Stock issuable by reason of such
conversion in such name or names and such denomination or denominations as the
converting holder has specified.
(v) The issuance of certificates for shares of Common Stock upon
conversion of the Existing Common Stock shall be made without charge to the
holders of such Existing Common Stock for any issuance tax in respect thereof or
other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Common Stock. Upon conversion of each share
of the Existing Common Stock , the Corporation shall take all such actions as
are necessary in order to insure that the Common Stock, issuable with respect to
such conversion shall be validly issued, fully paid and nonassessable, free and
clear of all taxes, liens, charges and encumbrances with respect to the issuance
thereof.
(vi) The Corporation shall not close its books against the transfer
of the Existing Common Stock or of Common Stock issued or issuable upon
conversion of the Existing Common Stock in any manner which interferes with the
timely conversion of the Existing Common Stock. The Corporation shall assist and
cooperate with any holder of shares required to make any governmental filings or
obtain any governmental approval prior to or in connection with any conversion
of shares hereunder (including, without limitation, making any filings required
to be made by the Corporation).
(vii) All shares of Common Stock which are so issuable shall, when
issued, be duly and validly issued, fully paid and nonassessable and free from
all taxes, liens and charges. The Corporation shall take all such actions as may
be necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Common
Stock may be listed (except for official notice of issuance which shall be
immediately delivered by the Corporation upon each such issuance). The
Corporation shall not take any action which would cause the number of authorized
but unissued shares of Common Stock to be less than the number of such shares
required to be reserved hereunder for issuance upon conversion of the existing
Common Stock.
E. DEFINITIONS
-----------
"Affiliate" means, with respect to any Person, any other Person,
---------
entity or investment fund controlling, controlled by or under common control
with such Person and, in the case of a Person which is a partnership, any
partner of such Person.
12
<PAGE>
"Bain Group" means, collectively, Bain Capital Fund V, L.P., Bain
----------
Capital Fund V-B, L.P., BCIP Associates, BCIP Trust Associates, L.P., and
Randolph Street Partners.
"Change in Ownership" has the meaning set forth in paragraph 4H of
-------------------
Part B hereof.
"Common Stock" means, collectively, the Corporation's Common Stock and
------------
any other class of capital stock of the Corporation hereafter authorized which
is not limited to a fixed sum or percentage of par or stated value in respect to
the rights of the holders thereof to participate in dividends or in the
distribution of assets upon any liquidation, dissolution or winding up of the
Corporation, other than the Series A Preferred.
"Conversion Stock" means shares of the Corporation's Common Stock, par
----------------
value $.01 per share; provided that if there is a change such that the
securities issuable upon conversion of the Series A Preferred are issued by an
entity other than the Corporation or there is a change in the type or class of
securities so issuable, then the term "Conversion Stock" shall mean the
securities issuable upon conversion of the Series A Preferred.
"Cost" of each share of Class L Common shall be equal to $19.085 per
----
share (as proportionally adjusted for all stock splits, stock dividends and
other recapitalizations affecting the Class L Common).
"Distribution" means each distribution made by the Corporation to
------------
holders of Common Shares, whether in cash, property, or securities of the
Corporation and whether by dividend, liquidating distributions or otherwise;
provided that neither of the following shall be a Distribution: (a) any
redemption or repurchase by the Corporation of any Common Shares for any reason
or (b) any recapitalization or exchange of any Common Shares, or any subdivision
(by stock split, stock dividend or otherwise) or any combination (by stock
split, stock dividend or otherwise) of any outstanding Common Shares.
"Fundamental Change" has the meaning set forth in paragraph 4H of Part
------------------
B hereof.
"General Corporation Law" means the General Corporation Law of the
-----------------------
State of Delaware, as amended from time to time.
"Junior Securities" means any capital stock or other equity securities
-----------------
of the Corporation, except for the Series A Preferred.
"Liquidation Value" of any Share of Series A Preferred as of any
-----------------
particular date shall be equal to $18.40.
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
13
<PAGE>
"Public Offering" means any offering by the Corporation of its capital
---------------
stock or equity securities to the public pursuant to an effective registration
statement under the Securities Act of 1933, as then in effect, or any comparable
statement under any similar federal statute then in force; provided that for
purposes of paragraph 4H of Part B hereof, a Public Offering shall not include
an offering made in connection with a business acquisition or combination or an
employee benefit plan.
"Recapitalization Agreement" means the Recapitalization Agreement
--------------------------
dated as of December 18, 1996 among the Corporation, the Bain Group, Toray
Industries, Inc., Toray Industries (America), Inc. and Shimadzu Corporation.
"Redemption Date" as to any Share means the date specified in the
---------------
notice of any redemption at the Corporation's option or at the holder's option
or the applicable date specified herein in the case of any other redemption;
provided that no such date shall be a Redemption Date unless the Liquidation
Value of such Share (plus all accrued and unpaid dividends thereon and any
required premium with respect thereto) is actually paid in full on such date,
and if not so paid in full, the Redemption Date shall be the date on which such
amount is fully paid.
"Subsidiary" means any corporation of which a majority of the shares
----------
of outstanding capital stock possessing the voting power (under ordinary
circumstances) in electing the board of directors are, at the time as of which
any determination is being made, owned by the Corporation either directly or
indirectly through Subsidiaries.
"Unpaid Yield" of any share of Class L Common means an amount equal to
------------
the excess, if any, of (a) the aggregate Yield accrued on such share, over (b)
the aggregate amount of Distributions made by the Corporation that constitute
payment of Yield on such share.
"Unreturned Cost" of any share of Class L Common means an amount equal
---------------
to the excess, if any, of (a) the Cost of such share, over (b) the aggregate
amount of Distributions made by the Corporation that constitute a return of the
Cost of such share.
"Yield" means, with respect to each outstanding share of Class L
-----
Common for each calendar year, the amount accruing on such share each day during
such year at the rate of 12% per annum of the sum of (a) such share's Unreturned
Cost, plus (b) Unpaid Yield thereon for all prior years. In calculating the
amount of any Distribution to be made to the Class L Common during a calendar
year, the portion of a Class L Common share's Yield for such portion of such
year elapsing before such Distribution is made shall be taken into account.
ARTICLE FIVE
The Corporation is to have perpetual existence.
ARTICLE SIX
14
<PAGE>
Elections of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
ARTICLE SEVEN
The number of directors which constitute the entire Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation.
ARTICLE EIGHT
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
ARTICLE NINE
(a) To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as it may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
(b) The corporation may indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
the Corporation or any predecessor of the Corporation or serves or served at any
other enterprise as a director, officer or employee at the request of the
Corporation or any predecessor to the Corporation.
(c) Neither any amendment nor repeal of this Article, nor the adoption of
any provision of this Restated Certificate inconsistent with this Article, shall
eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, proceeding, suit or claim accruing or
arising, or that, but for this Article, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
ARTICLE TEN
Section 1. Classification of Directors. At each annual meeting of
---------------------------
stockholders, directors of the Corporation shall be elected to hold office until
the expiration of the term for which they are elected, and until their
successors have been duly elected and qualified; except that if any such
election shall be not so held, such election shall take place at stockholders'
meeting called and held in accordance with the Delaware General Corporation Law.
The directors of the Corporation shall be divided into three classes as nearly
equal in size as is practicable, hereby designated Class I, Class II and Class
III. The term of office of the initial Class I directors shall expire at the
next succeeding annual meeting of stockholders, the term of office of the
initial Class II directors shall expire at the second succeeding annual meeting
of stockholders and the term of office of the initial Class III directors shall
expire at the third succeeding annual meeting of the stockholders. For the
purposes
15
<PAGE>
hereof, the initial Class I, Class II and Class III directors shall be those
directors elected by the stockholders of the Corporation in connection with the
adoption of this Restated Certificate. At each annual meeting after the first
annual meeting of stockholders, directors to replace those of a Class whose
terms expire at such annual meeting shall be elected to hold office until the
third succeeding annual meeting and until their respective successors shall have
been duly elected and qualified. If the number of directors is hereafter
changed, any newly created directorships or decrease in directorships shall be
so apportioned among the classes as to make all classes as nearly equal in
number as practicable.
Section 2. Vacancies. Vacancies occurring on the Board of Directors
---------
for any reason may be filled by vote of a majority of the remaining members of
the Board of Directors, although less than a quorum, at any meeting of the Board
of Directors. A person so elected by the Board of Directors to fill a vacancy
shall hold office until the next succeeding annual meeting of stockholders of
the Corporation and until his or her successor shall have been duly elected and
qualified.
ARTICLE ELEVEN
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE TWELVE
Beginning immediately following the consummation of the Corporation's
initial public offering of its Common Stock pursuant to an effective
registration statement under the Securities Act: (i) the stockholders of the
Corporation may not take any action by written consent in lieu of a meeting, and
must take any actions at a duly called annual or special meeting of stockholders
and the power of stockholders to consent in writing without a meeting is
specifically denied and (ii) special meetings of stockholders of the Corporation
may be called only by either the Board of Directors pursuant to a resolution
adopted by the affirmative vote of the majority of the total number of directors
then in office or by the chief executive officer of the Corporation.
ARTICLE THIRTEEN
Notwithstanding any other provisions of this Restated Certificate or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of the capital stock required by
law or this Restated Certificate, the affirmative vote of the holders of at
least two-thirds (2/3) of the combined voting power of all of the then
outstanding shares of the Corporation eligible to be cast in the election of
directors shall be required to alter, amend or repeal Articles Ten or Twelve
hereof, or this Article Thirteen, or any provision thereof or hereof, unless
such amendment shall be approved by a majority of the directors of the
Corporation not affiliated or associated with any person or entity holding (or
which has announced an intention to
16
<PAGE>
obtain) twenty percent (20%) or more of the voting power of the Corporation's
outstanding capital stock (other than the Bain Group).
ARTICLE FOURTEEN
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
17
<PAGE>
EXHIBIT 10.30
THERMA-WAVE, INC.
-----------------
1997 EMPLOYEE STOCK PURCHASE AND OPTION PLAN
--------------------------------------------
1. Purpose of Plan. This 1997 Employee Stock Purchase and Option
---------------
Plan (the "Plan") of Therma-Wave, Inc. (the "Company") is designed to provide
---- -------
incentives to such present and future employees, directors, consultants or
advisers of the Company or its subsidiaries ("Participants"), as may be selected
------------
in the sole discretion of the Company's board of directors, through the grant of
Options by the Company to Participants or through the sale of Common Stock to
Participants. Only those Participants who are employees of the Company and its
Subsidiaries shall be eligible to receive incentive stock options. This is
intended to be a stock purchase and option plan for purposes of Section 408 of
the California General Corporation Law and is intended to comply with the
provisions of Section 25102(o) of the California Corporate Securities Law of
1968, as amended.
2. Definitions. Certain terms used in this Plan have the meanings
-----------
set forth below:
"Board" means the Company's board of directors.
-----
"Class A Common" means the Company's Class A Common Stock, par value
--------------
$.01 per share.
"Class B Common" means the Company's Class B Common Stock, par value
--------------
$.01 per share.
"Class L Common" means the Company's Class L Common Stock, par value
--------------
$.01 per share.
"Code" means the Internal Revenue Code of 1986, as it may be amended
----
form time to time.
"Committee" means the Committee appointed by the Board pursuant to
---------
Section 5 of the Plan. If the Board does not appoint or ceases to maintain a
Committee, the term "Committee" shall refer to the Board.
---------
"Common Stock" means the Class A Common, the Class B Common and the
------------
Class L Common.
"Continuous Employment" means the absence of any interruption or
---------------------
termination of service as an employee, director or consultant by the Company or
any Subsidiary. Continuous Employment shall not be considered interrupted during
any period of (i) any leave of absence approved by the Company or (ii) transfers
between locations of the Company or between the
<PAGE>
Company and any parent, Subsidiary or successor of the Company. A leave of
absence approved by the Company shall include sick leave, military leave or any
other personal leave approved by an authorized representative of the Company.
For purposes of Incentive Stock Options, no such leave may exceed ninety (90)
days, unless reemployment upon expiration of such leave is guaranteed by statute
or contract.
"Covered Employee" means any individual whose compensation is subject to
----------------
the limitations on tax deductibility provided by Section 162(m) of the Code and
any Treasury Regulations promulgated thereunder in effect at the close of the
taxable year of the Company in which an Option has been granted to such
individual.
"Employee" means any person, including officers, employed by the Company or
--------
any Subsidiary.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Fair Market Value" means (i) the closing price of a share of Common Stock
-----------------
on the principal exchange on which the Common Stock is traded, or (ii) if the
Common Stock is not traded on an exchange but is quoted on the NASDAQ National
Market or successor quotation system, the closing price on the NASDAQ National
Market or such successor quotation system, or (iii) if the Common Stock is not
traded on an exchange or quoted on the NASDAQ National Market or a successor
quotation system, the fair market value of a share of Common Stock as determined
by the Company's Board of Directors in good faith, based upon such factors as
they deem relevant. Notwithstanding the preceding, for federal, state and local
income tax reporting purposes, fair market value shall be determined by the
Committee in accordance with uniform and nondiscriminatory standards adopted by
it from time to time. Such determination shall be conclusive and binding on all
persons.
"Grant Date" means the date that the Committee authorizes the grant of an
----------
Option or the sale of Common Stock.
"Non-Employee Director" means a director of the Company who qualifies as a
---------------------
Non-Employee Director as such term is defined in Section 240.1b-3(b)(3) of the
General Rules and Regulations promulgated under the Exchange Act (the "General
-------
Rules and Regulations").
- ---------------------
"Option" means any option enabling the holder thereof to purchase any class
------
of Common Stock from the Company granted by the Board pursuant to the provisions
of this Plan. Options to be granted under this Plan may be incentive stock
options within the meaning of Section 422 of the Code ("Incentive Stock
---------------
Options") or in such other form, consistent with this Plan, as the Board may
- -------
determine.
"Option Shares" means any shares of Common Stock issued hereunder upon
-------------
exercise of Options.
-2-
<PAGE>
"Outside Director" means a director of the Company who qualifies as an
----------------
Outside Director as such term is used in Section 162(m) of the Code and defined
in any applicable Treasury Regulations promulgated thereunder.
"Registration Date" means the effective date of the first registration of
-----------------
any class of the Company's equity securities pursuant to Section 12 of the
Exchange Act.
"Section 162(m) Effective Date" means the first date as of which the
-----------------------------
limitations on the tax deductibility of certain compensation provided by Section
162(m) of the Code and any Treasury Regulations promulgated thereunder are
applicable to Options granted under the Plan.
"Section 16 Person" means a person who, with respect to the Option Shares,
-----------------
is subject to Section 16 of the Exchange Act.
"Subsidiary" means any corporation of which shares of stock having a
----------
majority of the general voting power in electing the board of directors are, at
the time as of which any determination is being made, owned by the Company
either directly or through its Subsidiaries.
"Termination of Service" means (a) in the case of an Employee, a cessation
----------------------
of the employee-employer relationship between an employee and the Company or a
Subsidiary for any reason, including, but not by way of limitation, a
termination by resignation, discharge, death, disability, or the disaffiliation
of a Subsidiary, but excluding any such termination where there is a
simultaneous reemployment by the Company or a Subsidiary; and (b) in the case of
a Consultant, a cessation of the service relationship between a Consultant and
the Company or a Subsidiary for any reason, including, but not by way of
limitation, a termination by resignation, discharge, death, disability, or the
disaffiliation of a Subsidiary, but excluding any such termination where there
is a simultaneous re-engagement of the Consultant by the Company or a
Subsidiary.
3. Grant of Options. The Board shall have the right and power to grant to
----------------
any Participant Options at any time prior to the termination of this Plan in
such quantity, at such price, on such terms and subject to such conditions that
are consistent with this Plan and established by the Board. Options granted
under this Plan shall be subject to such terms and conditions and evidenced by
agreements as shall be determined from time to time by the Board.
4. Sale of Common Stock. The Board shall have the power and authority to
--------------------
sell to any Participant any class or classes of Common Stock at any time prior
to the termination of this Plan in such quantity, as such price, on such terms
and subject to such conditions that are consistent with this Plan and
established by the Board. Common Stock sold under this Plan shall be subject to
such terms and evidenced by agreements as shall be determined from time to time
by the Board.
5. Administration of the Plan. The Board shall have the power and
--------------------------
authority to prescribe, amend and rescind rules and procedures governing and
administration of this Plan, including, but not limited to the full power and
authority (i) to interpret the terms of this Plan, the terms of any Options
granted under this Plan, and the rules and procedures established by the Board
-3-
<PAGE>
governing any such Options and (ii) to determine the rights of any person under
this Plan, or the meaning of requirements imposed by the terms of this Plan or
any rule or procedure established by the Board. Each action of the Board shall
be final and binding on all persons.
The Board may appoint a Committee consisting of not less than two (2)
members of the Board to administer the Plan, subject to such terms and
conditions as the Board may prescribe. Once appointed, the Committee shall
continue to serve until otherwise directed by the Board. From time to time, the
Board may increase the size of the Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies however caused, and remove all members of
the Committee and, thereafter, directly administer the Plan. Members of the
Board or Committee who are either eligible for Options or have been granted
Options may vote on any matters affecting the administration of the Plan or the
grant of Options pursuant to the plan, except that no such member shall act upon
the granting of an Option to himself, but any such member may be counted in
determining the existence of a quorum at any meeting of the Board or the
Committee during which action is taken with respect to the granting of an Option
to him or her. Notwithstanding the foregoing, after the Section 162(m) Effective
Date, the Plan and all Option grants shall be administered and approved by a
Committee comprised solely of two or more Outside Directors.
The Committee shall meet at such times and places and upon such notice
as the chairperson determines. A majority of the Committee shall constitute a
quorum. Any acts by the Committee may be taken at any meeting at which a quorum
is present and shall be by a majority vote of those members entitled to vote.
Additionally, any acts reduced to writing or approved in writing by all of the
members of the Committee shall be valid acts of the Committee.
6. Limitation on the Aggregate Number of Shares. The number of
--------------------------------------------
shares of Common Stock issued under this Plan (including the number of shares of
Common Stock with respect to which Options may be granted under this Plan (and
which may be issued upon the exercise or payment thereof)) shall not exceed, in
the aggregate, 800,000 shares of Class B Common (as such number is equitably
adjusted pursuant to Section 14 hereof). If any Options expire unexercised or
unpaid or are canceled, terminated or forfeited in any manner without the
issuance of Common Stock or payment thereunder, the shares with respect to which
such Options were granted shall again be available under this Plan. Similarly,
if any shares of Common Stock issued hereunder upon exercise of Options are
repurchased hereunder, such shares shall again be available under this Plan for
reissuance as Options. Shares of Common Stock to be issued upon exercise of the
Options or shares of Common Stock to be sold directly hereunder may be either
authorized and unissued shares, treasury shares, or a combination thereof, as
the Board shall determine.
Notwithstanding the foregoing, the total number of shares subject to
the Plan shall not exceed the applicable percentage of total outstanding shares
of capital stock of the Company as calculated in accordance with the conditions
and exclusions of Section 260.140.45 of the Rules of the California Corporations
Commissioner based on the shares of the Company that are outstanding at the time
the calculation is made, unless a higher percentage is approved by at least
two-thirds (2/3) of the total outstanding shares of capital stock of the Company
entitled to vote on the matter.
-4-
<PAGE>
The foregoing limitation shall cease to apply to the Plan at such time as, in
the opinion of legal counsel to the Company, such rule is no longer deemed to
apply to the offer or sale of shares subject to the Plan by the Company.
7. Eligibility. Nonstatutory Stock Options under the Plan may be
-----------
granted to Participants whom the Committee, in its sole discretion, may
designate from time to time. Incentive Stock Options may be granted only to
Employees. A Participant who has been granted an Option, if he or she is
otherwise eligible, may be granted an additional Option or Options. However, the
aggregate Fair Market Value of the shares subject to one or more Incentive Stock
Options that are exercisable for the first time by an Optionee during any
calendar year (under all stock option plans of the Company and its parents and
Subsidiaries) shall not exceed $100,000 (determined as of the Grant Date). After
the Section 162(m) Effective Date, Options under the Plan shall be granted to
Covered Employees upon satisfaction of the conditions to such grants provided
pursuant to Section 162(m) and any Treasury Regulations promulgated thereunder.
Neither the establishment nor the operation of the Plan shall confer
upon any Participant or any other person any right with respect to continuation
of employment or other service with the Company or any Subsidiary, nor shall the
Plan interfere in any way with the right of the Participant or the right of the
Company (or any Subsidiary) to terminate such employment or service at any time.
8. Term of Option. Unless the Committee determines otherwise, the
--------------
term of each Option granted under the Plan shall be ten (10) years from the
Grant Date. The term of the Option shall be set forth in the Option Agreement.
No Option shall be exercisable after the expiration of ten (10) years from the
Grant Date, provided that no Option granted to any Participant who, at the date
such Option is granted, owns (within the meaning of Section 424(d) of the Code)
more than ten percent (10%) of the total combined voting power of all classes of
the stock of the Company or any Subsidiary shall be exercisable after the
expiration of five (5) years from the Grant Date. The Board may, in its
discretion, provide at the time that an Incentive Stock Option is granted that
such Incentive Stock Option may be exercised for a period ending no later than
either (x) the termination of this Plan in the event of the Participant's death
while an employee of the Company or a Subsidiary, or (y) the date which is three
months after termination of the Participant's employment for any other reason.
The Board's discretion to extend the period during which an Incentive Stock
Option is exercisable shall only apply if and to the extent that (i) the
Participant was entitled to exercise such Option on the date of termination, and
(ii) such Option would not have expired had the Participant continued to be
employed by the Company or a Subsidiary. To the extent that the aggregate Fair
Market Value of stock with respect to which Incentive Stock Options are
exercisable for the first time by any individual during any calendar year
exceeds $100,000, such Options shall be treated as Options which are not
Incentive Stock Options.
-5-
<PAGE>
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Option Price. Except as provided in subsections (b) and
------------
(c) below, the exercise price for the shares to be issued pursuant to any Option
shall be such price as is determined by the Committee, which shall in no event
be less than: (i) in the case of Incentive Stock Options, the Fair Market Value
of such shares on the Grant Date; or (ii) in the case of Nonstatutory Stock
Options, 85% of such Fair Market Value.
(b) Ten Percent Shareholders. No Option shall be granted
------------------------
to any Participant who, at the date such Option is granted, owns (within the
meaning of Section 424(d) of the Code) more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any parent or
Subsidiary, unless the exercise price for the shares to be issued pursuant to
such Option is at least equal to 110% of the Fair Market Value of such shares on
the Grant Date.
(c) Section 162(m) Limitations. After the Section 162(m)
--------------------------
Effective Date, the exercise price of any Option granted to a Covered Employee
shall be at least equal to the Fair Market Value of the shares on the Grant
Date.
(d) Consideration. The consideration to be paid for the
-------------
Option Shares shall be payment in cash or by check, cashier's check, certified
check or wire transfer, unless payment in some other manner, including by
promissory note, other shares of the Company's Common Stock or such other
consideration and method of payment for the issuance of the Option Shares as may
be permitted under Sections 408 and 409 of the California General Corporation
Law, is authorized by the Committee at the time of the grant of the Option. Any
cash or other property received by the Company from the sale of Common Stock
pursuant to the Plan shall constitute part of the general assets of the Company.
10. Exercise of Option.
------------------
(a) Vesting Period. Any Option granted hereunder shall be
--------------
exercisable at such times and under such conditions as determined by the
Committee and as shall be permissible under the terms of the Plan, which shall
be specified in the option agreement evidencing the Option. Unless the
Committee specifically determines otherwise at the time of the grant of the
Option, each Option shall vest and become exercisable, cumulatively, as to
twenty-five percent (25%) of the shares subject to the Option on each of the
first four anniversaries of the Grant Date until all of the Option Shares
subject to the option have vested, subject to the Participant's Continuous
Employment. An Option may not be exercised for fractional shares or for less
than ten (10) shares.
(b) Exercise Procedures. An Option shall be deemed to be
-------------------
exercised when written notice of such exercise has been given to the Company in
accordance with the terms of the Option by the person entitled to exercise the
Option and full payment for the Option Shares with respect to which the Option
is exercised has been received by the Company. After the Registration Date, in
lieu of delivery of a cash payment for the purchase price of the Option Shares
with respect to which the Option is exercised, the Participant may deliver to
the Company a sell order to a broker
-6-
<PAGE>
for the Option Shares being purchased and an agreement to pay (or have the
broker remit payment for) the purchase price for the Option Shares being
purchased on or before the settlement date for the sale of such shares to the
broker. As soon as practicable following the exercise of an Option in the manner
set forth above, the Company shall issue or cause its transfer agent to issue
stock certificates representing the Option Shares purchased. Until the issuance
of such stock certificates (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Option Shares notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other rights for which the record date
is prior to the date of the transfer by the Participant of the consideration for
the purchase of the Option Shares, except as provided in Section 14 of the Plan.
(c) Exercise of Option With Stock. If a Participant is permitted to
-----------------------------
exercise an Option by delivering shares of the Company's Common Stock, the
Option agreement covering such Option may include provisions authorizing the
Participant to exercise the Option, in whole or in part, by (i) delivering whole
shares of the Company's Common Stock previously owned by such Participant
(whether or not acquired through the prior exercise of a stock option) having a
Fair Market Value equal to the Option price; or (ii) directing the Company to
withhold from the Option Shares that would otherwise be issued upon exercise of
the Option that number of whole Option Shares having a Fair Market Value equal
to the Option price. Shares of the Company's Common Stock so delivered or
withheld shall be valued at their Fair Market Value at the close of the last
business day immediately preceding the date of exercise of the Option, as
determined by the Committee. Any balance of the Option price shall be paid in
cash. Any shares delivered or withheld in accordance with this provision shall
again become available for purposes of the Plan and for Options subsequently
granted thereunder. After the Registration Date, any exercise of an Option under
Section 9(c)(i) or 9(c)(ii) above by a Section 16 Person shall comply with the
relevant requirements of Section 240.16b-1 et. seq. of the General Rules and
Regulations.
(d) Termination of Status as Employee Director or Consultant. If a
--------------------------------------------------------
Participant shall cease to be an employee, director, consultant or advisor for
any reason other disability or death, he or she may, but only within thirty (30)
days (or such other period of time as is determined by the Committee) after the
date of Termination of Service, exercise his or her Option to the extent that he
or she was entitled to exercise it at the date of Termination of Service,
subject to the condition that no Option shall be exercised after the expiration
of the Option period.
(e) Disability of Optionee. If a Participant shall cease to be an
----------------------
employee, director, consultant or advisor due to disability, and such Optionee
was in Continuous Employment as an employee, director or consultant from the
Grant Date until the date of Termination of Service, the Option may be exercised
at any time within six (6) months following the date of Termination of Service,
but only to the extent of the accrued right to exercise at the time of
Termination of Service, subject to the condition that no option shall be
exercised after the expiration of the Option period.
(f) Death of Participant. In the event of the death during the Option
--------------------
period of a Participant who is at the time of his or her death, an employee,
director,
-7-
<PAGE>
consultant or advisor and who was in Continuous Employment as such from the
Grant Date until the date of death, the Option may be exercised at any time
within six (6) months following the date of death by the Participant's estate or
by a person who acquired the right to exercise the Option by bequest,
inheritance or otherwise as a result of the Participant's death, but only to the
extent of the accrued right to exercise at the time of death, subject to the
condition that no option shall be exercised after the expiration of the Option
period.
(g) Tax Withholding. The Company shall be entitled, if
---------------
necessary or desirable, to withhold from the Participant (or secure payment
--------------------
from the Participant in lieu of withholding) the amount of any withholding or
-----------
other tax due from the Company with respect to any amount payable and/or shares
issuable under this Plan, and the Company may defer such payment or issuance
unless indemnified to its satisfaction.
11. Listing, Registration and Compliance with Laws and Regulations.
--------------------------------------------------------------
Each Option shall be subject to the requirement that if at any time the Board
shall determine, in its discretion, that the listing, registration or
qualification of the shares subject to the Option upon any securities exchange
or under any state or federal securities or other law or regulation, or the
consent
-8-
<PAGE>
or approval of any governmental regulatory body, is necessary or desirable as a
condition to or in connection with the granting of such Option or the issue or
purchase of shares thereunder, no such Option may be exercised or paid in Common
Stock in whole or in part unless such listing, registration, qualification,
consent or approval (a "Required Listing") shall have been effected or obtained,
----------------
and the holder of the Option will supply the Company with such certificates,
representations and information as the Company shall request which are
reasonably necessary or desirable in order for the Company to obtain such
Required Listing, and shall otherwise cooperate with the Company in obtaining
such Required Listing. In the case of Section 16 Persons, the Board may at any
time impose any limitations upon the exercise of an Option which, in the Board's
discretion, are necessary or desirable in order to comply with Section 16(b) and
the rules and regulations thereunder. If the Company, as part of an offering of
securities or otherwise, finds it desirable because of federal or state
regulatory requirements to reduce the period during which any Options may be
exercised, the Board may, in its discretion and without the consent of the
holders of any such Options, so reduce such period on not less than 15 days'
written notice to the holders thereof.
12. Cash Payments Upon Exercise. Options which are not Incentive
---------------------------
Stock Options may, in the Board's discretion, provide that the holder thereof,
as soon as practicable after the exercise of the Options will receive, in lieu
of any issuance of Common Stock, a cash payment in such amount as the Board may
determine, but not more than the excess of the Fair Market Value of a share of
Common Stock (on the date the holder recognizes taxable income) over the
Option's exercise price multiplied by the number of shares as to which the
Option is exercised.
13. Organic Change. Except as otherwise provided in this Plan, any
--------------
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Company's assets or other transaction which
is effected in such a way that holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with respect to or in exchange for Common Stock is referred to herein as an
"Organic Change." Except as otherwise provided in this Plan, after the
--------------
consummation of any Organic Change, each Participant holding Options shall
thereafter have the right to acquire and receive upon exercise thereof, rather
than the Option Shares immediately theretofore acquirable and receivable upon
exercise of such Participant's Options, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for the number
of Option Shares immediately theretofore acquirable and receivable upon exercise
of such Participant's Options had such Organic Change not taken place. Except as
otherwise provided in this Plan, in any such case, the Company shall make
appropriate provision with respect to such Participant's rights and interests
to insure that the provisions hereof (including this Section 13) shall
thereafter be applicable to the Options (including, in the case of any such
Organic Change in which the successor entity or purchasing entity is other than
the Company, an immediate adjustment of the Exercise Price to the value for the
Common Stock reflected by the terms of such Organic Change and a corresponding
immediate adjustment in the number of Option Shares acquirable and receivable
upon exercise of the Options, if the value so reflected is less than the Fair
Market Value of the Common Stock in effect immediately prior to such Organic
Change).
-9-
<PAGE>
14. Adjustment for Change in Common Stock. In the event of a
-------------------------------------
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation or other change in the Common Stock, the Board
shall make appropriate changes in the number and type of shares authorized by
this Plan, the number and type of shares covered by outstanding Options and the
prices specified therein.
15. Termination of Options. Unless otherwise expressly provided
----------------------
in any grant of Options pursuant to this Plan, upon a Sale of the Company as
defined below) or upon termination of the Participant's employment for any
reason, the Board may (i) terminate such Participant's Options without payment
of any kind; (ii) terminate such Participant's Options for a cash payment in
such amount as the Board may determine, but not more than the excess of the Fair
Market Value of a share of Common Stock (on the date of such Sale of the Company
or such termination) over the Option's exercise price multiplied by the number
of Options to be terminated; or (iii) immediately vest any unvested Options held
by such Participant, causing such Options to become immediately exercisable.
For purposes of this paragraph, "Sale of the Company" means any
-------------------
transaction involving the Company and a third party or affiliated group of third
parties pursuant to which such party or parties acquire (i) a majority of the
outstanding shares of capital stock of the Company entitled to vote generally in
the election of Company's Board (whether by merger, consolidation or sale or
transfer of the Company's capital stock) or (ii) all or substantially all of the
Company's assets determined on a consolidated basis.
For purposes of this paragraph, "Person" means an individual, a
------
partnership, a joint venture, a corporation, a limited liability company, a
trust, an unincorporated organization and a government or any department or
agency thereof.
16. Termination and Amendment. The Board at any time may
-------------------------
suspend or terminate this Plan and make such additions or amendments as it deems
advisable under this Plan, except that they may not, without further approval by
the Company's stockholders, (a) increase the maximum number of shares as to
which Options may be granted under this Plan, except pursuant to Section 14
above or (b) extend the term of this Plan; provided that, subject to Section 11
hereof, the Board may not change any of the terms of a written agreement with
respect to an Option between the Company and the holder of such Option without
the approval of the holder of such Option. No Options shall be granted or shares
of Common Stock issued hereunder after May 16, 2007; provided that, if the term
of this Plan is otherwise extended, no Incentive Stock Options shall be granted
hereunder after May 16, 2007. After the Section 162(m) Effective Date, the
modification or addition of a material term of the Plan (as determined under
Section 162(m) and any applicable Treasury Regulations promulgated thereunder)
shall be approved by the stockholders in the manner provided in Section 19 of
this Plan.
17. Reservation of Shares. During the term of this Plan the
---------------------
Company will at all times reserve and keep available such number of shares of
Common Stock as shall be sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any
-10-
<PAGE>
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any shares hereunder,
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
18. Information to Optionee. During the term of any Option
-----------------------
granted under the Plan, the Company shall provide or otherwise make available to
each Participant a copy of its annual financial statement and any other
financial information provided to its shareholders in accordance with the
provisions of the Company's Bylaws and applicable law.
19. Stockholder Approval. The Plan shall be subject to approval
--------------------
by the stockholders of the Company within twelve (12) months before or after the
Plan is adopted by the Board. Except as provided otherwise in Section 6, any
amendments to the plan requiring stockholder approval must be approved by the
affirmative vote of the holders of a majority of the outstanding shares of
voting stock present or represented and entitled to vote at a duly held meeting
at which a quorum is present, or by the written consent of the stockholders in
the manner provided by Delaware law.
* * * * *
-11-
<PAGE>
EXHIBIT 10.31
THERMA-WAVE, INC.
----------------
1997 SPECIAL EMPLOYEE STOCK PURCHASE AND OPTION PLAN
----------------------------------------------------
1. Purpose of Plan. This 1997 Special Employee Stock Purchase and
---------------
Option Plan (the "Plan") of Therma-Wave, Inc. (the "Company") is designed to
---- -------
provide incentives to such present and future employees, directors, consultants
or advisers of the Company or its subsidiaries ("Participants"), as may be
------------
selected in the sole discretion of the Company's board of directors, through the
grant of Options by the Company to Participants or through the sale of Common
Stock to Participants. Only those Participants who are employees of the Company
and its Subsidiaries shall be eligible to receive incentive stock options. This
is intended to be a stock purchase and option plan for purposes of Section 408
of the California General Corporation Law and is intended to comply with the
provisions of Sections 25102(o) of the California Corporate Securities Law of
1968, as amended.
2. Definitions. Certain terms used in this Plan have the meanings
-----------
set forth below:
"Board" means the Company's board of directors.
-----
"Class A Common" means the Company's Class A Common Stock, par value
--------------
$.01 per share.
"Class B Common" means the Company's Class B Common Stock, par value
--------------
$0.1 per share.
"Class L Common" means the Company's Class L Common Stock, par value
--------------
$0.1 per share.
"Code" means the Internal Revenue Code of 1986, as it may be amended
----
from time to time.
"Committee" means the Committee appointed by the Board pursuant to
---------
Section 5 of the Plan. If the Board does not appoint or ceases to maintain a
Committee, the term "Committee" shall refer to the Board.
---------
"Common Stock" means the Class A Common, the Class B Common and the
------------
Class L Common.
"Continuous Employment" means the absence of any interruption or
---------------------
termination of service as an employee, director or consultant by the Company or
any Subsidiary. Continuous Employment shall not be considered interrupted
during any period of (i) any leave of absence
<PAGE>
approved by the Company or (ii) transfers between locations of the Company or
between the Company and any parent, Subsidiary or successor of the Company. A
leave of absence approved by the Company shall include sick leave, military
leave or any other personal leave approved by an authorized representative of
the Company. For purposes of Incentive Stock Options, no such leave may exceed
ninety (90) days, unless reemployment upon expiration of such leave is
guaranteed by statue or contract.
"Covered Employee" means any individual whose compensation is subject
----------------
to the limitations on tax deductibility provided by Section 162(m) of the Code
and any Treasury Regulations promulgated thereunder in effect at the close of
the taxable year of the Company in which an Option has been granted to such
individual.
"Employee" means any person, including officers, employed by the
--------
Company or any Subsidiary.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Fair Market Value" means (i) the closing price of a share of Common
-----------------
Stock on the principal exchange on which the Common Stock is traded, or (ii) if
the Common Stock is not traded on an exchange but is quoted on the NASDAQ
National Market or a successor quotation system, the closing price on the NASDAQ
National Market or such successor quotation system, or (iii) if the Common Stock
is not traded on an exchange or quoted on the NASDAQ National Market or a
successor quotation system, the fair market value of a share of Common Stock as
determined by the Company's Board of Directors in good faith, based upon such
factors as they deem relevant. Notwithstanding the preceding, for federal, state
and local income tax reporting purposes, fair market value shall be determined
by the Committee in accordance with uniform and nondiscriminatory standards
adopted by it from time to time. Such determination shall be conclusive and
binding on all persons.
"Grant Date" means the date that the Committee authorizes the grant of
----------
an Option or the sale of Common Stock.
"Non-Employee Director" means a director of the Company who qualifies
---------------------
as a Non-Employee Director as such term is defined in Section 240. 1b-3(b)(3) of
the General Rules and Regulations promulgated under the Exchange Act (the
"General Rules and Regulations").
-----------------------------
"Option" means any option enabling the holder thereof to purchase any
------
class of Common Stock from the Company granted by the Board pursuant to the
provisions of this Plan. Options to be granted under this plan may be incentive
stock options within the meaning of Section 422 of the Code ("Incentive Stock
---------------
Options") or in such other form, consistent with this Plan, as the Board may
- -------
determine.
"Option Shares" means any shares of Common Stock issued hereunder upon
-------------
exercise of Options.
-2-
<PAGE>
"Outside Director" means a director of the Company who qualifies as an
----------------
Outside Director as such term is used in Section 162(m) of the Code and defined
in any applicable Treasury Regulations promulgated thereunder.
"Registration Date" means the effective date of the first registration
-----------------
of any class of the Company's equity securities pursuant to Section 12 of the
Exchange Act.
"Section 162(m) Effective Date" means the first date as of which the
-----------------------------
limitations on the tax deductibility of certain compensation provided by Section
162(m) of the Code and any Treasury Regulations promulgated thereunder are
applicable to Options granted under the Plan.
"Section 16 Person" means a person who, with respect to the Option
-----------------
Shares, is subject to Section 16 of the Exchange Act.
"Subsidiary" means any corporation of which shares of stock having a
----------
majority of the general voting power in electing the board of directors are, at
the time as of which any determination is being made, owned by the Company
either directly or through its Subsidiaries.
"Termination of Service" means (a) in the case of an Employee, a
----------------------
cessation of the employee-employer relationship between an employee and the
Company or a Subsidiary for any reason, including, but not by way of limitation,
a termination by resignation, discharge, death, disability, or the
disaffiliation of a Subsidiary, but excluding any such termination where there
is a simultaneous reemployment by the Company or a Subsidiary; and (b) in the
case of a Consultant, a cessation of the service relationship between a
Consultant and the Company or a Subsidiary for any reason, including, but not by
way of limitation, a termination by resignation, discharge, death, disability,
or the disaffiliation of a Subsidiary, but excluding any such termination where
there is a simultaneous re-engagement of the Consultant by the Company or a
Subsidiary.
3. Grant of Options. The board shall have the right and power to
----------------
grant to any Participant Options at any time prior to the termination of this
Plan in such quantity, at such price, on such terms and subject to such
conditions that are consistent with this Plan and established by the Board.
Options granted under this Plan shall be subject to such terms and conditions
and evidenced by agreements as shall be determined from time to time by the
Board.
4. Sale of Common Stock. The Board shall have the power and
--------------------
authority to sell to any Participant any class or classes of Common Stock at any
time prior to the termination of this Plan in such quantity, at such price, on
such terms and subject to such conditions that are consistent with this Plan and
established by the Board. Common Stock sold under this Plan shall be subject to
such terms and evidenced by agreements as shall be determined from time to time
by the Board.
5. Administration of the Plan. The Board shall have the power and
--------------------------
authority to prescribe, amend and rescind rules and procedures governing the
administration of this Plan, including, but not limited to the full power and
authority (i) to interpret the terms of this Plan, the terms of any Options
granted under this Plan, and the rules and procedures established by the Board
-3-
<PAGE>
governing any such Options and (ii) to determine the rights of any person under
this Plan, or the meaning of requirements imposed by the terms of this Plan or
any rule or procedure established by the Board. Each action of the Board shall
be final and binding on all persons.
The Board may appoint a Committee consisting of not less than two (2)
members of the Board to administer the Plan, subject to such terms and
conditions as the Board may prescribe. Once appointed, the Committee shall
continue to serve until otherwise directed by the Board. From time to time, the
Board may increase the size of the Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies however caused, and remove all members of
the Committee and, thereafter, directly administer the Plan. Members of the
Board or Committee who are either eligible for Options or have been granted
Options may vote on any matters affecting the administration of the plan or the
grant of Options pursuant to the plan, except that no such member shall act upon
the granting of an Option to himself, but any such member may be counted in
determining the existence of a quorum at any meeting of the Board or the
Committee during which action is taken with respect to the granting of an Option
to him or her. Notwithstanding the foregoing, after the Section 162(m) Effective
Date, the Plan and all Option grants shall be administered and approved by a
Committee comprised solely of two or more Outside Directors.
The Committee shall meet at such times and places and upon such notice
as the chairperson determines. A majority of the Committee shall constitute a
quorum. Any acts by the Committee may be taken at any meeting at which a quorum
is present and shall be by majority vote of those members entitled to vote.
Additionally, any acts reduced to writing or approved in writing by all of the
members of the Committee shall be valid acts of the Committee.
6. Limitation on the Aggregate Number of Shares. The number of
--------------------------------------------
shares of Common Stock issued under this Plan (including the number of shares of
Common Stock with respect to which Options may be granted under this Plan (and
which may be issued upon the exercise or payment thereof) shall not exceed, in
the aggregate, 60,000 shares of Class B Common (as such number is equitably
adjusted pursuant to Section 14 hereof). If any Options expire unexercised or
unpaid or are canceled, terminated or forfeited in any manner without the
issuance of Common Stock or payment thereunder, the shares with respect to which
such Options were granted shall again be available under this Plan. Similarly,
if any shares of Common Stock issued hereunder upon exercise of Options are
repurchased hereunder, such shares shall again be available under this Plan for
reissuance as Options. Shares of Common Stock to be issued upon exercise of the
Options or shares of Common Stock to be sold directly hereunder may be either
authorized and unissued shares, treasury shares, or a combination thereof, as
the Board shall determine.
Notwithstanding the foregoing, the total number of shares subject to
the Plan shall not exceed the applicable percentage of total outstanding shares
of capital stock of the Company as calculated in accordance with the conditions
and exclusions of Section 260.140.45 of the Rules of the California Corporations
Commissioner based on the shares of the Company that are outstanding at the time
the calculation is made, unless a higher percentage is approved by at least two-
thirds (2/3) of the total outstanding shares of capital stock of the Company
entitled to vote on the matter. The foregoing limitation shall cease to apply to
the Plan at such time as, in the opinion of legal
-4-
<PAGE>
counsel to the Company, such rule is no longer deemed to apply to the offer or
sale of shares subject to the Plan by the Company.
7. Eligibility. Nonstatutory Stock Options under the Plan may be
-----------
granted to Participants whom the Committee, in its sole discretion, may
designate from time to time. Incentive Stock Options may be granted only to
Employees. A Participant who has been granted an Option, if he or she is
otherwise eligible, may be granted an additional Option or Options. However, the
aggregate Fair Market Value of the shares subject to one or more Incentive Stock
Options that are exercisable for the first time by an Optionee during any
calendar year (under all stock option plans of the Company and its parents and
Subsidiaries) shall not exceed $100,000 (determined as of the Grant Date). After
the Section 162(m) Effective Date, Options under the Plan shall be granted to
Covered Employees upon satisfaction of the conditions to such grants provided
pursuant to Section 162(m) and any Treasury Regulations promulgated thereunder.
Neither the establishment nor the operation of the Plan shall confer
upon any Participant or any other person any right with respect to continuation
of employment or other service with the Company or any Subsidiary, nor shall the
Plan interfere in any way with the right of the Participant or the right of the
Company (or any Subsidiary) to terminate such employment or service at any time.
8. Term of Option. Unless the Committee determines otherwise, the
--------------
term of each Option granted under the Plan shall be ten (10) years from the
Grant Date. The term of the Option shall be set forth in the Option Agreement.
No Option shall be exercisable after the expiration of ten (10) years from the
Grant Date, provided that no Option granted to any Participant who, at the date
such Option is granted, owns (within the meaning of Section 424(d) of the Code)
more than ten percent (10%) of the total combined voting power of all classes of
the stock of the Company or any Subsidiary shall be exercisable after the
expiration of five (5) years from the Grant Date. The Board may, in its
discretion, provide at the time that an Incentive Stock Option is granted that
such Incentive Stock Option may be exercised for a period ending no later than
either (x) the termination of this Plan in the event of the Participant's death
while an employee of the Company or a Subsidiary, or (y) the date which is three
months after termination of the Participant's employment for any other reason.
The Board's discretion to extend the period during which an Incentive Stock
Option is exercisable shall only apply if and to the extent that (i) the
Participant was entitled to exercise such Option on the date of termination, and
(ii) such Option would not have expired had the Participant continued to be
employed by the Company or a Subsidiary. To the extent that the aggregate Fair
Market Value of stock with respect to which Incentive Stock Options are
exercisable for the first time by any individual during any calendar year
exceeds $100,000, such Options shall be treated as Options which are not
Incentive Stock Options.
-5-
<PAGE>
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Option Price. Except as provided in subsections (b)
------------
and (c) below, the exercise price for the shares to be issued pursuant to any
Option shall be such price as is determined by the Committee, which shall in no
event be less than: (i) in the case of Incentive Stock Options, the Fair Market
Value of such shares on the Grant Date; or (ii) in the case of Nonstatutory
Stock Options, 85% of such Fair Market Value.
(b) Ten Percent Shareholders. No Option shall be granted
------------------------
to any Participant who, at the date such Option is granted, owns (within the
meaning of Section 424(d) of the Code) more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any parent or
Subsidiary, unless the exercise price for the shares to be issued pursuant to
such Option is at least equal to 110% of the Fair Market Value of such shares on
the Grant Date.
(c) Section 162(m) Limitations. After the Section 162(m)
--------------------------
Effective Date, the exercise price of any Option granted to a Covered Employee
shall be at least equal to the Fair Market Value of the shares on the Grant
Date.
(d) Consideration. The consideration to be paid for the
-------------
Option Shares shall be payment in cash or by check, cashier's check, certified
check or wire transfer, unless payment in some other manner, including by
promissory note, other shares of the Company's Common Stock or such other
consideration and method of payment for the issuance of the Option Shares as may
be permitted under Sections 408 and 409 of the California General Corporation
Law, is authorized by the Committee at the time of the grant of the Option. Any
cash or other property received by the Company from the sale of Common Stock
pursuant to the Plan shall constitute part of the general assets of the Company.
10. Exercise of Option.
------------------
(a) Vesting Period. Any Option granted hereunder shall be
--------------
exercisable at such times and under such conditions as determined by the
Committee and as shall be permissible under the terms of the Plan, which shall
be specified in the option agreement evidencing the Option. Unless the
Committee specifically determines otherwise at the time of the grant of the
Option, each Option shall vest and become exercisable, cumulatively, as to
twenty percent (20%) of the shares subject to the Option on each of the first
five anniversaries of the Grant Date until all of the Option Shares subject to
the option have vested, subject to the Participant's Continuous Employment. An
Option may not be exercised for fractional shares or for less than ten (10)
shares.
(b) Exercise Procedures. An Option shall be deemed to be
-------------------
exercised when written notice of such exercise has been given to the Company in
accordance with the terms of the Option by the person entitled to exercise the
Option and full payment for the Option Shares with respect to which the Option
is exercised has been received by the Company. After the Registration Date, in
lieu of delivery of a cash payment for the purchase price of the Option Shares
with respect to which the Option is exercised, the Participant may deliver to
the Company a sell order to a broker
-6-
<PAGE>
for the Option Shares being purchased and an agreement to pay (or have the
broker remit payment for) the purchase price for the Option Shares being
purchased on or before the settlement date for the sale of such shares to the
broker. As soon as practicable following the exercise of an Option in the manner
set forth above, the Company shall issue or cause its transfer agent to issue
stock certificates representing the Option Shares purchased. Until the issuance
of such stock certificates (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Option Shares notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other rights for which the record date
is prior to the date of the transfer by the Participant of the consideration for
the purchase of the Option Shares, except as provided in Section 14 of the Plan.
(c) Exercise of Option With Stock. If a Participant is
-----------------------------
permitted to exercise an Option by delivering shares of the Company's Common
Stock, the Option agreement covering such Option may include provisions
authorizing the Participant to exercise the Option, in whole or in part, by (i)
delivering whole shares of the Company's Common Stock previously owned by such
Participant (whether or not acquired through the prior exercise of a stock
option) having a Fair Market Value equal to the Option price; or (ii) directing
the Company to withhold from the Option Shares that would otherwise be issued
upon exercise of the Option that number of whole Option Shares having a Fair
Market Value equal to the Option price. Shares of the Company's Common Stock so
delivered or withheld shall be valued at their Fair Market Value at the close of
the last business day immediately preceding the date of exercise of the Option,
as determined by the Committee. Any balance of the Option price shall be paid in
cash. Any shares delivered or withheld in accordance with this provision shall
again become available for purposes of the Plan and for Options subsequently
granted thereunder. After the Registration Date, any exercise of an Option under
Section 9(c)(i) or 9(c)(ii) above by a Section 16 Person shall comply with the
relevant requirements of Section 240.16b-1 et. seq. of the General Rules and
Regulations.
(d) Termination of Status as Employee, Director or Consultant.
---------------------------------------------------------
If a Participant shall cease to be an employee, director, consultant or advisor
for any reason other disability or death, he or she may, but only within thirty
(30) days (or such other period of time as is determined by the Committee) after
the date of Termination of Service, exercise his or her Option to the extent
that he or she was entitled to exercise it at the date of Termination of
Service, subject to the condition that no Option shall be exercised after the
expiration of the Option period.
(e) Disability of Optionee. If a Participant shall cease to be
----------------------
an employee, director, consultant or advisor due to disability, and such
Optionee was in Continuous Employment as an employee, director or consultant
from the Grant Date until the date of Termination of Service, the Option may be
exercised at any time within six (6) months following the date of Termination of
Service, but only to the extent of the accrued right to exercise at the time of
Termination of Service, subject to the condition that no option shall be
exercised after the expiration of the Option period.
(f) Death of Optionee. In the event of the death during the
-----------------
Option period of a Participant who is at the time of his or her death, an
employee, director, consultant or advisor
-7-
<PAGE>
and who was in Continuous Employment as such from the Grant Date until the date
of death, the Option may be exercised at any time within six (6) months
following the date of death by the Participant's estate or by a person who
acquired the right to exercise the Option by bequest, inheritance or otherwise
as a result of the Participant's death, but only to the extent of the accrued
right to exercise at the time of death, subject to the condition that no option
shall be exercised after the expiration of the Option period.
(g) Tax Withholding. The Company shall be entitled, if necessary
---------------
or desirable, to withhold from the Participant (or secure payment from the
Participant in lieu of withholding) the amount of any withholding or other tax
due from the Company with respect to any amount payable and/or shares issuable
under this Plan, and the Company may defer such payment or issuance unless
indemnified to its satisfaction.
11. Listing, Registration and Compliance with Laws and Regulations.
--------------------------------------------------------------
Each Option shall be subject to the requirement that if any time the Board shall
determine, in its discretion, that the listing, registration or qualification of
the shares subject to the Option upon any securities exchange or under any state
or federal securities or other law or regulation, or the consent or approval of
any governmental regulatory body, is necessary or desirable as a condition to or
in connection with the granting of such Option or the issue or purchase of
shares thereunder, no such Option may be exercised or paid in Common Stock in
whole or in part unless such listing, registration, qualification, consent or
approval (a "Required Listing") shall have been effected or obtained, and the
----------------
holder of the Option will supply the Company with such certificates,
representations and information as the Company shall request which are
reasonably necessary or desirable in order for the Company to obtain such
Required Listing, and shall otherwise cooperate with the Company in obtaining
such Required Listing. In the case of Section 16 Persons, the Board may at any
time impose any limitations upon the exercise of an Option which, in the Board's
discretion, are necessary or desirable in order to comply with Section 16(b) and
the rules and regulations thereunder. If the Company, as part of an offering of
securities or otherwise, finds it desirable because of federal or state
regulatory requirements to reduce the period during which any Options may be
exercised, the Board may, in its discretion and without the consent of the
holders of any such Options, so reduce such period on not less than 15 days'
written notice to the holders thereof.
12. Cash Payments Upon Exercise. Options which are not Incentive
--------------------------
Stock Options may, in the Board's discretion, provide that the holder thereof,
as soon as practicable after the exercise of the Options will receive, in lieu
of any issuance of Common Stock, a cash payment in such amount as the Board may
determine, but not more than the excess of the Fair Market Value of a share of
Common Stock (on the date the holder recognizes taxable income) over the
Option's exercise price multiplied by the number of shares as to which the
Option is exercised.
13. Organic Change. Except as otherwise provided in this Plan, any
--------------
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Company's assets or other transaction which
is effected in such a way that holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with respect to or in exchange for Common Stock is referred to herein as an
-8-
<PAGE>
"Organic Change." Except as otherwise provided in this Plan, after the
--------------
consummation of any Organic Change, each Participant holding Options shall
thereafter have the right to acquire and receive upon exercise thereof, rather
than the Option Shares immediately theretofore acquirable and receivable upon
exercise of such Participant's Options, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for the number
of Option Shares immediately theretofore acquirable and receivable upon exercise
of such Participant's Options had such Organic Change not taken place. Except
as otherwise provided in this Plan, in any such case, the Company shall make
appropriate provision with respect to such Participant's rights and interests to
insure that the provisions hereof (including this Section 13) shall thereafter
be applicable to the Options (including, in the case of any such Organic Change
in which the successor entity or purchasing entity is other than the Company, an
immediate adjustment of the Exercise Price to the value for the Common Stock
reflected by the terms of such Organic Change and a corresponding immediate
adjustment in the number of Option Shares acquirable and receivable upon
exercise of the Options, if the value so reflected is less than the Fair Market
Value of the Common Stock in effect immediately prior to such Organic Change).
14. Adjustment for Change in Common Stock. In the event of a
-------------------------------------
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation or other change in the Common Stock, the Board
shall make appropriate changes in the number and type of shares authorized by
this Plan, the number and type of shares covered by outstanding Options and the
prices specified therein.
15. Termination of Options. Unless otherwise expressly provided in
----------------------
any grant of Options pursuant to this Plan, upon a Sale of the Company (as
defined below) or upon termination of the Participant's employment for any
reason, the Board may (i) terminate such Participant's Options without payment
of any kind; (ii) terminate such Participant's Options for a cash payment in
such amount as the Board may determine, but not more than the excess of the Fair
Market Value of a share of Common Stock (on the date of such Sale of the Company
or such termination) over the Option's exercise price multiplied by the number
of Options to be terminated; or (iii) immediately vest any unvested Options held
by such Participant, causing such Options to become immediately exercisable.
For purposes of this paragraph, "Sale of the Company" means any
-------------------
transaction involving the Company and a third party or affiliated group of third
parties pursuant to which such party or parties acquire (i) a majority of the
outstanding shares of capital stock of the Company entitled to vote generally in
the election of Company's Board (whether by merger, consolidation or sale or
transfer of the Company's capital stock) or (ii) all or substantially all of the
Company's assets determined on a consolidated basis.
For purposes of this paragraph, "Person" means an individual, a
------
partnership, a joint venture, a corporation, a limited liability company, a
trust, an unincorporated organization and a government or any department or
agency thereof.
16. Termination and Amendment. The Board at any time may suspend
-------------------------
or terminate this Plan and make such additions or amendments as it deems
advisable under this Plan.
-9-
<PAGE>
except that they may not, without further approval by the Company's
stockholders, (a) increase the maximum number of shares as to which Options may
be granted under this Plan, except pursuant to Section 14 above or (b) extend
the term of this Plan; provided that, subject to Section 11 hereof, the Board
may not change any of the terms of a written agreement with respect to an
Option between the Company and the holder of such Option without the approval
of the holder of such Option. No Options shall be granted or shares of Common
Stock issued hereunder after May 16, 2007; provided that, if the term of this
Plan is otherwise extended, no Incentive Stock Options shall be granted
hereunder after May 16, 2007. After the Section 162(m) Effective Date, the
modification or addition of a material term of the Plan (as determined under
Section 162(m) and any applicable Treasury Regulations promulgated thereunder)
shall be approved by the stockholders in the manner provided in Section 19 of
this Plan.
17. Reservation of Shares. During the term of this Plan the Company
---------------------
will at all times reserve and keep available such number of shares of Common
Stock as shall be sufficient to satisfy the requirements of the Plan. The
inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company's counsel to be necessary
to the lawful issuance and sale of any shares hereunder, shall relieve the
Company of any liability in respect of the nonissuance or sale of such shares as
to which such requisite authority shall not have been obtained.
18. Information to Optionee. During the term of any Option granted
-----------------------
under the Plan, the Company shall provide or otherwise make available to each
Participant a copy of its annual financial statement and any other financial
information provided to its shareholders in accordance with the provisions of
the Company's Bylaws and applicable law.
19. Stockholders Approval. The Plan shall be subject to approval by
---------------------
the stockholders of the Company within twelve (12) months before or after the
Plan is adopted by the Board. Except as provided otherwise in Section 6, any
amendments to the Plan requiring stockholder approval must by approved by the
affirmative vote of the holders of a majority of the outstanding shares of
voting stock present or represented and entitled to vote at a duly held meeting
at which a quorum is present, or by the written consent of the stockholders in
the manner provided by Delaware law.
* * * * *
-10-
<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. 7 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
January 12, 2000
<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 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
January 12, 2000
