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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 2, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number: 333-29871
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THERMA-WAVE, INC.
(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 94-3000561
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1250 Reliance Way
Fremont, California 94539
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (510) 668-2200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name Of Each Exchange On Which Registered
------------------- -----------------------------------------
N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best or registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [_]
The aggregate market value of the common equity held by non-affiliates of
the registrant as of June 15, 2000 was $290,526,799.75. As of June 15, 2000, the
Registrant had 23,672,776 shares of common stock outstanding.
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Portions of the Proxy Statement for the 2000 annual stockholders meeting are
incorporated by reference into Part III.
FORM 10-K
THERMA-WAVE, INC.
TABLE OF CONTENTS
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Page
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Part I
Item 1. Business........................................................................................ 1
Item 2. Properties...................................................................................... 10
Item 3. Legal Proceedings............................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders............................................. 11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 12
Item 6. Selected Historical Financial Data.............................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 21
Item 8. Financial Statements and Supplemental Data...................................................... 22
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure.......................... 43
Part III
Item 10. Directors and Executive Officers of the Registrant.............................................. 44
Item 11. Compensation of Executive Officers.............................................................. 44
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 44
Item 13. Certain Relationships and Related Transactions.................................................. 44
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 44
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PART I
ITEM 1. BUSINESS
This annual report on Form 10-K 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 annual report will in fact occur.
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
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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.
Process control metrology is used to monitor process parameters in order to
enable semiconductor manufacturers to reduce costs and improve device
performance. Historically, semiconductor manufacturers have achieved an
approximate 25% to 30% annual reduction in cost per chip function through
productivity improvements including reduced feature size, increased wafer size
and increased equipment productivity. Although increasing wafer size and yields
will continue to be sources of productivity gains by semiconductor
manufacturers, increasingly, we believe, gains will come from reduced feature
size and non-yield manufacturing productivity enhancements, including increased
equipment uptime, reduced manufacturing space requirements, reduced use of
wafers for testing purposes and lower tool maintenance costs. According to
Sematech, a consortium of integrated circuit manufacturers that provides
research, analysis and guidelines to equipment suppliers to the semiconductor
`industry, as summarized in the following table, the greatest potential for
future productivity gains are expected to come primarily from gains in equipment
productivity and continuing reduction of feature sizes:
Key Drivers of Fab Productivity*
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Factor 1980 Present Future
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Reduced feature sizes.................................................... 12% 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>
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* More Than
** Less Than
. Percentages reflect the annual reduction in the cost per chip function.
Source: Sematech
Current Industry Leading Metrology Solutions
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.
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.
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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.
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.
The following table summarizes our improvements to the Therma-Probe product
family:
Year
System Introduced Description of Innovation/Advancement
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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.
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Thin Film Measurement
The majority of the 100 to 500 process steps required to fabricate
semiconductors on a silicon wafer involve the deposition and removal of a
variety of insulating and conducting thin films. Thin film metrology measures
the thickness and material properties of these thin films and, because it is
used to measure a large number of process steps, is one of the most important
metrology systems utilized at semiconductor fabrication facilities. The most
widely used technologies to measure the thickness and properties of thin films
have historically been reflection spectrometry and ellipsometry. Reflection
spectrometers obtain an optical spectrum as a function of wavelength for light
reflected from the surface of a wafer. This spectrum is then analyzed with
appropriate algorithms to obtain film thickness and, in some cases, other
properties of the film. In ellipsometry, the change of polarization of the
reflected light is measured. The polarization change is analyzed with
appropriate algorithms to obtain film thickness, and, in some cases, other
properties of the film.
Increasingly, these systems have been unable to meet the process control
metrology demands of the semiconductor industry. For example, the industry is
rapidly moving toward measuring product wafers rather than test wafers, both
because of the inability to adequately control the manufacturing process using
test wafers alone, and the costs associated with the processing of
non-productive test wafers. Measurements on product wafers, however, must be
performed in small areas, and both spectrometers and ellipsometers generally
require fairly large measurement areas. Additionally, increasing demands for
improved precision and repeatability require the ability to measure thicknesses
that range from extremely thin films, which generally measure below 20
angstroms, to films that are hundreds of thousands times thicker. An angstrom is
equal to one hundred millionth of a centimeter. Reflection spectrometers are
most suitable for measuring 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.
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.
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Ease of Use and Reliability. We believe our Opti-Probe systems are regarded
as easy-to-use and highly reliable. These systems are configured specifically
for semiconductor device manufacturers and feature automated wafer handling,
advanced image processing, automated data collection, statistical data
processing and data management.
Proprietary Software. We believe our proprietary software incorporated into
Opti-Probe systems is superior to that of the competition. During the
fabrication of semiconductors, many different films and film stacks, consisting
of several layers of different films, are deposited and selectively removed from
the silicon wafer. This, in turn, means that hundreds of film measurement data
analysis algorithms, or recipes, must be developed and stored in the computer of
a thin film metrology system. Thus, the full benefit of a thin film metrology
system to the customer is a result of a combination of superior measurement
capability and superior recipe development. We have a staff of over fifty
experienced applications scientists and 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.
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The following table summarizes our improvements to the Opti-Probe product
family:
Year
System Introduced Description of Innovation/Advancement
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OP-1000 1992 Introduced a new patented optical technology,
BPR(TM), to measure thin film deposition and
removal.
OP-2000 1993 Integrated BPR(TM)with a new patented optical
technology, BPE(TM), to enhance measurement
capabilities.
OP-2600 1994 Integrated BPR(TM), BPE(TM)and Spectrometry to
further enhance measurement capabilities.
OP-2600 DUV 1996 Integrated deep ultra-violet reflectance with the
existing system to expand measurement range.
OP-3260 1996 Increased throughput of Opti-Probe.
OP-3260 DUV 1996 Integrated OP-3260 system with deep ultra-violet
reflectance.
OP-5200 Series 1998 Integrated up to five measurement technologies
(BPR(TM), BPE(TM) and deep ultra-violet
reflectance with Spectroscopic Ellipsometry and
AE(TM)).
OP-5300 Series 1998 Expanded OP-5200 series wafer
measurement capability to 300 millimeters.
New Product 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 during fiscal 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.
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
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offices in Japan, Korea, Singapore and Taiwan. The Japan, Singapore and Taiwan
offices work with manufacturers' sales representatives to sell our products to
customers in Japan and Taiwan, while the Korean office sells to customers
directly. We also work with manufacturers' sales representatives in Singapore,
Malaysia, Thailand and China. In Europe, we maintain a sales office in the
United Kingdom and work with manufacturers' sales representatives throughout the
rest of Europe.
In addition, we provide direct customer support in most parts of the world.
In some locations, field service is still provided by the same manufacturers'
sales representative that handles the sales function, but applications support
is provided by our employees in that territory. In the United States, we have
field service and applications engineers located in Arizona, California,
Florida, Massachusetts, New Mexico, Oregon and Texas. Customers, such as Intel,
contract dedicated site-specific field service and applications engineers. In
Asia, we provide customer support in Japan, Taiwan, Korea and Singapore. In
Europe, we maintain a customer support office in the United Kingdom to support
customers there and to assist the field service engineers of our European
manufacturers, sales representatives in the rest of Europe. Applications
personnel supporting continental Europe are located in France, Germany and
Italy.
We provide our customers with comprehensive support before, during and
after delivery of our systems. Prior to shipment, our support personnel
typically assist the customer in site preparation and inspection and typically
provide customers with training at our facilities or at the customer's location.
Our customer training programs include instructions in the maintenance of our
systems and in system hardware and software tools for optimizing the performance
of our systems. Our field support personnel work with the customers' employees
to install the system and demonstrate system readiness. In addition, we maintain
a group of highly skilled applications scientists to respond to customers'
process needs worldwide when a higher level of technical expertise is required.
We generally warrant our products for a period of up to 12 months from
system acceptance. Installation and initial training are customarily included in
the price of the system. After the warranty period, customers may enter into
support agreements covering both field service and field applications support.
Our field service engineers may also provide customers with repair and
maintenance services on a fee basis. Our applications engineers and scientists
are also available to work with the customers on recipe development.
Additionally, for a fee, we train customers to perform routine maintenance on
their purchased systems. We also provide a 24-hour telephone help-line.
See Note 11 to Notes to Consolidated Financial Statements for a summary of
our operations in the United States, Japan, United Kingdom and other foreign
geographic areas.
Research and Development and Engineering
The process control metrology market is characterized by continuous
technological development and product innovations. We believe that continued and
timely development of new products and enhancements to existing products is
necessary to maintain our competitive position. Accordingly, we devote a
significant portion of our personnel and financial resources to engineering and
research and development programs. As of March 31, 2000, our research,
development and engineering staff was comprised of 80 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.
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Engineering and research and development expenses were $21.7 million, $15.1
million and $19.1 million in fiscal 1998, 1999 and 2000, respectively or 17%,
23% and 19% 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.
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Our Therma-Probe systems compete primarily with other metrology systems
designed to measure ion implant dose, such as contact and destructive four-point
probe measurement systems, including those manufactured by KLA-Tencor
Corporation, Kokusai Electric Ltd. and Bio-Rad Semiconductor Systems. Our
Therma-Probe systems are the semiconductor industry's predominant non-contact,
non-destructive ion implant metrology systems for product wafers. Several years
ago, Jenoptik GmbH introduced a competitive product to our Therma-Probe systems,
which utilized thermal wave technology. In November 1997, we received a
favorable verdict for patent infringement by Jenoptik in the United States. As a
result of the settlement of this litigation, Jenoptik has agreed not to sell any
of such products in the United States and to pay us a royalty fee for systems
sold in Japan. To date, the sale of these products by Jenoptik has not had a
material impact on our market position. Our Opti-Probe systems primarily compete
with thin film metrology systems manufactured by KLA-Tencor, Rudolph
Technologies, Nanometrics and Dai Nippon Screen.
In recent years, there has been significant merger and acquisition activity
among our competitors and potential competitors. Acquisitions by our competitors
and potential competitors could allow them to expand their product offerings,
which could afford such competitors and potential competitors an advantage in
meeting customers' demands. The greater resources, including financial,
marketing and support resources, of competitors engaged in these acquisitions
could permit them to accelerate the development and commercialization of new
products and the marketing of existing products to their larger installed bases.
Accordingly, such business combinations and acquisitions could have a
detrimental impact on both our market share and the pricing of our products,
which could result in a material adverse effect on our business and results of
operations.
Patents and Proprietary Rights
We believe the success of our business depends as much on the technical
competence, creativity and marketing abilities of our employees as on the
protection derived from our patents and other proprietary rights. Nevertheless,
our success will depend, at least in part, on our ability to obtain and maintain
patents and proprietary rights to protect our technology.
We have a policy of seeking patents where appropriate on inventions
concerning new products and improvements as part of our ongoing engineering and
research and development activities. We have acquired a number of patents
relating to our two key product families, the Opti-Probe and Therma-Probe
systems. As of March 31, 2000, we owned 33 U.S. patents with expiration dates
ranging from 2004 to 2017 and had filed applications for 26 additional U.S.
patents. In addition, we owned 28 foreign patents with expiration dates ranging
from 2004 to 2017 and had filed applications for 15 additional foreign patents.
There can be no assurance that any of our pending patent applications will
be approved, that we will develop additional proprietary technology that is
patentable, that any patents owned by or issued to us will provide us with
competitive advantages or that these patents will not be challenged by any third
parties. Furthermore, there can be no assurance that third parties will not
design around our patents. Any of the foregoing results could have a material
adverse effect on our business, financial condition or results of operations.
In addition to patent protection, we rely upon trade secret protection for
our confidential and proprietary information and technology. We routinely enter
into confidentiality agreements with our employees. However, there can be no
assurance that these agreements will not be breached, that we will have adequate
remedies for any breach or that our confidential and proprietary information and
technology will not be independently developed by, or become otherwise known, to
third parties.
As of March 31, 2000, we owned eight registered trademarks in the U.S. and
two in Japan and had filed 12 trademark registration applications in the U.S.
9
<PAGE>
ITEM 2. PROPERTIES
Our executive and sales offices and manufacturing, engineering, research
and development operations are located in a 102,000 square foot building in
Fremont, California with approximately 800 square feet of Class 100 clean rooms
for customer demonstrations and approximately 10,000 square feet of Class 1000
clean rooms for manufacturing. This facility is occupied under a lease expiring
in 2006 at an aggregate annual rental expense of approximately $1.0 million. We
have the option of extending this lease for another 15 years after 2006. We own
substantially all of the equipment used in our facilities. On May 31, 2000, we
entered into a lease for additional building space of approximately 25,000
square feet in Fremont, California. We believe that our existing facilities,
capital equipment and anticipated capital expenditures will be 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 Florida, Texas, Japan,
Korea, Taiwan, the United Kingdom and Israel.
Employees
As of March 31, 2000, we employed 379 persons, including 80 in engineering,
research and development, 97 in manufacturing, 149 in customer support, 22 in
sales and marketing and 31 in executive and administrative functions. Many of
our employees are highly trained and hold advanced post-graduate degrees in
science and engineering. None of our employees are represented by a labor union
or covered by a collective bargaining agreement. We consider our employee
relations to be good. We believe we have low employee turnover relative to our
industry and have been able to attract and retain a highly talented group of
managers, designers and engineers which enables us to continually improve our
products and customer support.
ITEM 3. LEGAL PROCEEDINGS
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 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.
10
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS IN FOURTH QUARTER
OF FISCAL YEAR 2000
On January 31, 2000 the stockholders voted on a consent in lieu of a special
meeting. The following matters were voted on: (1) Amended and Restated
Certificate of Incorporation (which included among other things the
establishment of a classified Board of Directors and the election of the
existing Directors to such Classified Board); (2) Amended and Restated By-laws;
(3) Form of Indemnification Agreements; (4) 2000 Equity Incentive Plan; (5) 2000
Employee Stock Purchase Plan; and (6) Election of the following Directors in
connection with the establishment of a Classified Board: G. Leonard Baker, Jr.
and Ian K. Loring will serve until the annual stockholders meeting in 2000;
Martin M. Schwartz and David Dominik will serve until the annual stockholders
meeting in 2001; Dr. Allan Rosencwaig and Adam W. Kirsch will serve until the
annual stockholders meeting in 2002. On all matters the vote tally was 8,827,449
votes for, with 1,254,253 votes abstaining.
11
<PAGE>
On February 2, 2000 the stockholders voted on a consent in lieu of a special
meeting. The following matters were voted on: (1) 2000 Employee Stock Option
Plan; and (2) 2000 Equity Incentive Plan. On both matters the vote tally was
6,152,165 votes for, with 3,929,537 votes abstaining.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK PRICE HISTORY
High Low
Fiscal Year 2000
First Calendar Quarter (commencing February 4, $49.50 $30.00
2000 and ending on March 31, 2000)
Therma-Wave's common stock is traded on the NASDAQ National Market. As of
March 31, 2000, there were 83 holders of record of common stock.
To date, we have not declared or paid cash dividends to our stockholders.
We have no plans to declare or pay cash dividends in the near future.
Prior to the initial public offering in February 2000, 17 employees
exercised options representing 7,569 shares of common stock for an aggregate
exercise price of $45,414.
12
<PAGE>
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and accompanying notes
thereto included elsewhere in this Form 10-K.
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data (1):
Net revenues..................................................... $ 79,293 $ 109,493 $ 115,459 $ 66,207 $ 115,679
Cost of revenues................................................. 35,027 49,795 55,683 36,827 60,320
---------- ---------- ---------- ---------- ----------
Gross margin..................................................... 44,266 59,698 59,776 29,380 55,359
Operating expenses:
Research and development....................................... 10,072 13,050 19,057 15,130 21,748
Selling, general and administrative............................ 18,704 22,004 24,589 17,870 20,829
Amortization of goodwill and purchased intangibles............. 1,912 1,275 -- -- --
Recapitalization and other non-recurring expenses.............. -- -- 4,188 -- --
Expenses relating to operating cost improvements............... -- -- -- 1,057 --
---------- ---------- ---------- ---------- ----------
Total operating expenses.................................... 30,688 36,329 47,834 34,057 42,577
---------- ---------- ---------- ---------- ----------
Operating income (loss).......................................... 13,578 23,369 11,942 (4,677) 12,782
Interest expense................................................. 1,722 1,621 12,930 14,060 13,178
Interest income.................................................. (247) (346) (753) (651) (1,637)
Other (income) expense, net...................................... 138 (14) 194 (6) 3,392
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for income taxes.................. 11,965 22,108 (429) (18,080) (2,151)
Provision (benefit) for income taxes............................. 4,684 9,007 604 (2,350) --
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary charge........................ 7,281 13,101 (1,033) (15,730) (2,151)
Extraordinary charge............................................. -- -- -- -- (18,404)
---------- ---------- ---------- ---------- ----------
Net income (loss)................................................ $ 7,281 $ 13,101 $ (1,033) $ (15,730) $ (20,555)
========== ========== ========== ========== ==========
Net income (loss) attributable to common stockholders (2)........ $ 7,281 $ 13,101 $ (1,771) $ (16,562) $ (21,497)
========== ========== ========== ========== ==========
Basic and diluted net income (loss) per share (3):
Income (loss) before extraordinary charge...................... $ 0.16 $ 0.29 $ (0.27) $ (1.86) $ (0.25)
Extraordinary charge........................................... -- -- -- -- (1.47)
--------- --------- --------- --------- ---------
Net income (loss).............................................. $ 0.16 $ 0.29 $ (0.27) $ (1.86) $ (1.72)
Weighted average common shares outstanding:
Basic.......................................................... 45,515 45,515 13,540 9,397 12,511
Diluted........................................................ 45,515 45,515 13,540 9,397 12,511
Other Financial Data:
EBITDA (excluding non-recurring charges) (4)..................... $ 17,185 $ 27,113 $ 19,725 $ 974 $ 17,272
Cash provided by (used in) operating activities.................. 5,867 11,860 8,113 745 (6,258)
Cash used in investing activities................................ (4,965) (1,575) (2,900) (1,389) (3,627)
Cash provided by (used in) financing activities.................. (1,541) (1,234) (1,532) 467 64,840
Capital expenditures............................................. 4,361 1,091 2,900 862 3,261
</TABLE>
<TABLE>
<CAPTION>
March 31,
----------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .................... $ 7,690 $ 16,741 $ 20,422 $ 20,245 $ 75,200
Working capital .............................. 23,740 38,720 43,348 29,140 94,109
Total assets ................................. 53,056 68,620 89,762 72,352 133,694
Long-term debt ............................... 23,100 23,100 115,000 115,000 16
Mandatorily redeemable convertible preferred
stock (2) .................................... -- -- 14,515 15,347 --
Stockholders' equity (net capital deficiency) 6,903 20,145 (70,990) (86,971) 99,485
</TABLE>
----------
(1) On May 16, 1997, we effected the recapitalization. We issued $115.0 million
in aggregate principal amount of 105/8% senior notes in connection with the
recapitalization.
(2) We issued shares of preferred stock as part of the recapitalization. The
fair value of the preferred stock at March 31, 1999 of $15,347 represents
the liquidation value plus accrued dividends. Dividends on the preferred
stock accrue at a rate of 6.0% per annum. In March 2000, all outstanding
shares of preferred stock were converted into an equivalent number common
shares.
13
<PAGE>
(3) For the calculation of net loss per share for the years ended March 31,
1998 and 1999: (a) net loss represents the loss attributable to the
weighted average number of shares of Class A common stock, Class B common
stock and, prior to the recapitalization, common stock outstanding after
giving effect to the 12% yield on Class L common stock and (b) weighted
average number of shares outstanding excludes unvested Class B common
stock.
(4) "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 years ended March 31, 1998 and 1999 does not
include $4,188 and $1,057, in recapitalization and other non-recurring
expenses, respectively. Including such non-recurring charges, EBITDA would
have been reduced to $15,537 and $(83) for fiscal 1998 and 1999,
respectively. We believe EBITDA and EBITDA (excluding non-recurring
charges) are widely accepted financial indicators of a company's historical
ability to service and/or incur indebtedness. However, EBITDA and EBITDA
(excluding non-recurring charges) should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles. Additionally, EBITDA and EBITDA (excluding non-
recurring charges) as defined herein may not be comparable to similarly
titled measures reported by other companies.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
We are a worldwide leader in the development, manufacture, marketing and
service of process control metrology systems for use in the manufacture of
semiconductors. Process control metrology is used to monitor process parameters
in order to enable semiconductor manufacturers to reduce feature size, increase
wafer size, increase equipment productivity and improve device performance. Our
current process control metrology systems are principally used to measure ion
implantation and thin film deposition and removal. We 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 year ended March 31, 2000, we derived
approximately 85% of our revenues from system sales, 9% from sales of
replacement and spare parts, including associated labor, and 6% 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 63% of our
total revenues for fiscal 1998, 1999 and 2000, 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.
On February 9, 2000, we completed an initial public offering of common
stock. In connection with this offering and the exercise of the underwriters'
over-allotment option, we sold 10,350,000 shares of common stock at a price of
$20.00 per share. Net proceeds, net of underwriting discounts and offering
costs, were $190.7 million. During the early part of March 2000, we used
approximately $130.5 million of net proceeds to redeem or repurchase
substantially all of our outstanding senior notes, including accrued interest,
redemption premiums and related expenses. We also used $3.5 million of net
proceeds to buy out the seven and one half years remaining in the term
15
<PAGE>
of a consulting agreement with Bain Capital. Remaining cash proceeds will be
used for general corporate purposes, including working capital.
On March 3, 2000, the Company called for redemption of all outstanding
shares of Preferred Stock. On March 24, 2000 and March 29, 2000, respectively,
169,589 and 579,150 shares of Preferred Stock were converted into an aggregate
of 748,739 shares of common stock.
Results of Operations
The following table summarizes our historical results of operations as a
percentage of net revenues for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year
------------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Statement of Operations Data (1):
Net revenues ............................................. 100.0% 100.0% 100.0%
Cost of revenues ......................................... 48.2 55.6 52.1
----- ----- -----
Gross margin ............................................. 51.8 44.4 47.9
Operating expenses:
Research and development expenses ................... 16.5 22.9 18.8
Selling, general and administrative expenses ........ 21.3 27.0 18.1
Recapitalization and other non-recurring expenses.... 3.6 -- --
Expenses relating to operating cost improvements..... -- 1.6 --
----- ----- -----
Total operating expenses ....................... 41.4 51.5 36.9
----- ----- -----
Operating income (loss) .................................. 10.4 (7.1) 11.0
Interest expense ......................................... 11.2 21.2 11.4
Interest income .......................................... (0.6) (1.0) (1.4)
Other expense, net ....................................... 0.2 -- 2.9
----- ----- -----
Loss before income taxes ................................. (0.4) (27.3) (1.9)
Provision (benefit) for income taxes ..................... 0.5 (3.5) --
----- ----- -----
Loss before extraordinary charge ......................... (0.9) (23.8) (1.9)
Extraordinary charge ..................................... -- -- 15.9
----- ----- -----
Net loss ................................................. (0.9%) (23.8%) (17.8%)
===== ===== =====
Other Financial Data:
EBITDA (excluding non-recurring charges) (2) ............. 17.1% 1.5% 14.9%
Cash provided by (used in) operating activities .......... 7.0% 1.1% (5.4%)
Cash used in investing activities ........................ (2.5%) (2.1%) (3.1%)
Cash provided by (used in) financing activities .......... (1.3%) 0.7% 56.1%
Capital expenditures ..................................... 2.5% 1.3% 2.8%
</TABLE>
________________
(1) On May 16, 1997, we effected the recapitalization. We issued $115.0 million
in aggregate principal amount of 105/8% senior notes in connection with the
recapitalization.
(2) "EBITDA" is defined herein as income before taxes, plus depreciation,
amortization, interest expense, interest income and other (income) expenses,
net. "EBITDA (excluding non-recurring charges)" as a percent of sales for
the fiscal year ended March 31, 1998 and 1999 does not include
recapitalization and other non-recurring expenses. Including such
non-recurring charges, EBITDA as a percent of sales would have been 13.5%
and (0.1%) for fiscal 1998 and 1999, respectively.
16
<PAGE>
Fiscal Year Ended March 31, 2000 Compared to Fiscal Year Ended March 31, 1999
Net Revenues. Net revenues for the fiscal year ended March 31, 2000 and
1999 were $115.7 million and $66.2 million, respectively. Compared to the
corresponding period of fiscal 1999, net revenues increased $49.5 million or
75%. 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 and average selling prices 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 fiscal year 2000 were up
substantially from the prior year and resulted in a strengthened backlog.
Net revenues attributable to international sales for the fiscal years ended
March 31, 1999 and 2000 accounted for 69% and 63% 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 50% of total net revenues for the year
ended March 31, 1999 and 2000, 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 increased 88% from $29.4 million in fiscal 1999
to $55.4 million in fiscal 2000. As a percentage of net revenues, gross margin
increased from 44% in fiscal 1999 to 48% in fiscal 2000. The increase in gross
margin is due to higher revenue levels and favorable sales mix.
Research and Development ("R&D")Expenses. R&D expenses were $15.1 million
and $21.7 million for fiscal 1999 and 2000, respectively. Compared to the
corresponding period of fiscal 1999, R&D expenses increased $6.6 million, or 44%
for fiscal 2000. R&D expenses as a percentage of net revenues for fiscal 2000
decreased to 19% from 23% for fiscal 1999. The increase of absolute dollars from
the prior year is primarily the result of additional resources dedicated to new
products expected to be released in the next year. 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.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses were
$17.9 million and $20.8 million for fiscal 1999 and 2000, respectively. Compared
to the corresponding period of fiscal 1999, SG&A expenses increased $2.9
million, or 17%. SG&A expenses as a percentage of net revenues decreased to 18%
in fiscal 2000 from 27% in fiscal 1999 primarily due to higher revenue levels.
The increase in SG&A expenses was due primarily to the increase in sales
expenses related to increased revenues.
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 and 2000 were
$832,000 and $125,000, respectively. Non-cash charges of $100,000 in fiscal 1999
were primarily for asset write-offs.
Interest Expense. Interest expense for fiscal 1999 and 2000 was $14.1
million and $13.2 million, respectively. As a percentage of net revenues,
interest expense decreased from 21% in fiscal 1999 to 11% in fiscal 2000. The
decrease in interest expense from the prior fiscal year is attributable to the
redemption or repurchase of substantially all of our outstanding senior notes in
March 2000.
Other (income) expense. Other expenses, net for fiscal 2000 was $3.4
million. During the fourth quarter of fiscal 2000, there was a one-time charge
of $3.5 million related to the buy out of the seven and one half years remaining
in the term of a consulting agreement with Bain Capital.
17
<PAGE>
Provision for Income Taxes. For fiscal 1999, we recorded a benefit for
income taxes of $2.4 million. Our tax benefit for fiscal 1999 reflects a tax
benefit rate of 13% based upon our loss carryback potential. For fiscal 2000, we
have not recorded any tax benefit because we believe that it is more likely than
not that the net deferred tax assets will not be fully realizable and have
provided a full valuation allowance against net deferred tax assets.
Net Loss. Net loss for fiscal 2000 was $20.6 million, compared to $15.7
million in fiscal 1999. Excluding extraordinary and one time charges, net income
for fiscal 2000 would have been $407,000. Also, in March 2000, all outstanding
shares of preferred stock were converted into an equal number of shares of
common stock, increasing the income available to common stockholders beginning
in the fourth quarter of fiscal 2000. Dividends accrued for preferred
stockholders totaled $0.9 million in fiscal 2000.
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 was attributable to the 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 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 was 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 55% 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.
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.
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
18
<PAGE>
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.
Backlog
At March 31, 2000, our backlog was $41.9 million compared to $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 includes 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, tax refunds and net proceeds
from an initial public offering.
Cash flow provided by (used in) operating activities was $8.1 million, $0.7
million and $(6.3) million for the years ended March 31, 1998, 1999 and 2000,
respectively. Excluding extraordinary charges and non-recurring charges, cash
flow provided by operating activities for the year ended March 31, 2000 would
have been $15.6 million. The decrease in cash flow provided by operating
activities from fiscal 1998 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. The decrease in cash flow from operating
activities from fiscal 1999 to 2000 is mainly due to the increased investment in
working capital and the termination of the Bain consulting agreement.
19
<PAGE>
Purchases of property and equipment were $2.9 million, $0.9 million and
$3.3 million for the years ended March 31, 1998, 1999 and 2000, respectively.
Capital expenditures for fiscal 2001 are expected to be approximately $7.5
million, which will include approximately $3.0 million for expansion of our
clean room at our Fremont manufacturing facility and $2.0 million for leasehold
improvements to the additional leased building.
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. In March 2000, we entered into a third
amendment to permit the redemption and conversion of the mandatorily redeemable
preferred stock into common stock. These amendments were effected in light of
the impact of the downturn in the semiconductor industry on our operating
results. Without the first amendment to our bank credit facility, on June 30,
1998, we would have violated the financial test relating to the maintenance of
minimum levels of EBITDA for the six-month period ending on such date. We may
borrow amounts under the amended bank credit facility to finance our working
capital requirements and other general corporate purposes. The amended bank
credit facility requires us to meet financial tests and contains covenants
customary for this type of financing. At March 31, 2000, there was $3.5 million
outstanding under a letter of credit and $21.5 million of unused borrowing
capacity under the amended bank credit facility. Our anticipated level of
capital spending for the next fiscal year would be in excess of the allowable
amounts under the covenants of our third amendment. We are currently in the
process of negotiating a new loan agreement with Comerica Bank. No assurances
can be given that the new loan agreement will be satisfactorily negotiated.
On February 9, 2000, we completed an initial public offering of common
stock. In connection with this offering and the exercise of the underwriters'
over-allotment option, we sold 10,350,000 shares of common stock at a price of
$20.00 per share. Net proceeds, net of underwriting discounts and offering
costs, were $190.7 million. During the early part of March 2000, we used
approximately $130.5 million of net proceeds to redeem or repurchase
substantially all of the outstanding senior notes, including accrued interest,
redemption premiums and related expenses. We also used $3.5 million of net
proceeds to buy out of the seven and one half years remaining in the term of a
consulting agreement with Bain Capital. Remaining cash proceeds will be used for
general corporate purposes, including working capital.
Our principal sources of funds following the offering are anticipated to be
cash on hand ($75.2 million as of March 31, 2000), cash flows from operating
activities and, if necessary, borrowings under a 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. 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.
20
<PAGE>
Inflation
The impact of inflation on our business has not been material for the
fiscal years ended March 31, 1998, 1999 and 2000.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standard 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.
In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," changing the interpretation of revenue recognition rules. This
interpretation changes revenue recognition from the date of shipment to the date
of final customer acceptance, when such acceptance is part of the purchase
contract. In March 2000, Staff Accounting Bulletin No. 101A was issued which
allowed deferral of the requirements until the second fiscal quarter of 2000 for
most companies. Because we have complied with generally accepted accounting
principles for our historical revenue recognition, a change, if any, in our
revenue recognition policy resulting from SAB101 will be reported as a change in
accounting principle in the quarter ended June 30, 2000. The change in
accounting policy may result in a cumulative adjustment in the first quarter of
fiscal 2001 to reflect the deferral of revenue for shipments previously recorded
as revenue for which customers had not signed acceptance certificates as of
March 31, 2000. We are still in the process of assessing the impact of SAB101 on
our financial statements. While SAB101 would not affect the fundamental aspects
of our operations as measured by our shipments and cash flows, implementation of
SAB101 could have a material adverse effect on our reported results of
operations for fiscal 2001. We are also considering potential changes to our
standard contracts for equipment sales that could mitigate the potential impact
of SAB101 on a going forward basis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
The following discussion about market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risks
related to changes in interest rates and foreign currency exchange rates. We do
not have any derivative financial instruments.
Interest Rate Risk
As of March 31, 2000, our cash included money market securities and
commercial paper. Due to the short term 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.
Foreign Currency Exchange Risk
21
<PAGE>
A substantial portion of our sales are denominated in U.S. dollars and as a
result, we have relatively little exposure to foreign currency exchange risk
with respect to sales made. We do not use forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. The effect of an immediate 10%
change in exchange rates would not have a material impact on our future
operating results or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<TABLE>
<S> <C>
Report of Independent Accountants............................................ 23
Report of Ernst & Young LLP, Independent Auditors............................ 24
Consolidated Balance Sheets as of March 31, 1999 and 2000.................... 25
Consolidated Statements of Operations for the years ended
March 31, 1998, 1999 and 2000............................................. 26
Consolidated Statements of Mandatorily Redeemable Convertible Preferred
Stock and Stockholders' Equity (Net Capital Deficiency) for the years
ended March 31, 1998, 1999 and 2000....................................... 27
Consolidated Statements of Cash Flows for the years ended March 31, 1998,
1999 and 2000............................................................. 28
Notes to Consolidated Financial Statements................................... 29
</TABLE>
22
<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 2000, and the
results of their operations and their cash flows for the two years in the period
ended March 31, 2000 in conformity with accounting principles generally accepted
in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States 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
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
April 27, 2000
23
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Therma-Wave, Inc.
We have audited the accompanying consolidated statements of operations,
mandatorily redeemable convertible preferred stock and stockholders' equity (net
capital deficiency), and cash flows of Therma-Wave, Inc. for the year 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 audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Therma-Wave, Inc. for the year ended March 31, 1998, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
May 1, 1998
24
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31,
-------------------------
1999 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................................ $ 20,245 $ 75,200
Accounts receivable, net of allowance for doubtful accounts of $1,911 and $1,472 at March 31,
1999 and 2000, respectively.................................................................... 12,180 24,400
Inventory........................................................................................ 15,369 23,689
Other current assets.............................................................................
7,505 1,720
--------- ---------
Total current assets.......................................................................... 55,299 125,009
Property and equipment, net...................................................................... 4,513 4,999
Deferred financing costs, net.................................................................... 8,349 -
Deferred income taxes............................................................................ 2,254 1,685
Other assets..................................................................................... 1,937 2,001
--------- ---------
Total assets.................................................................................. $ 72,352 $ 133,694
========= =========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable................................................................................. $ 4,034 $ 10,111
Accrued liabilities.............................................................................. 20,495 19,835
Deferred revenue ................................................................................ 1,556 732
Capital lease obligations, current portion....................................................... 74 222
--------- ---------
Total current liabilities..................................................................... 26,159 30,900
Long term debt..................................................................................... 115,000 16
Capital lease obligations, long-term portion....................................................... 201 357
Deferred income taxes.............................................................................. 2,254 1,685
Deferred rent and other............................................................................ 362 1,251
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, 1999 and no shares authorized,
issued and outstanding at March 31, 2000 (aggregate liquidation preference of $15,347 and $0,
at March 31, 1999 and 2000, respectively)........................................................ 15,347 -
Stockholders' equity (net capital deficiency)
Common stock, $0.01 par value; no shares authorized, issued and outstanding at March 31, 1999
and 35,000,000 shares authorized; 23,646,878 shares issued and outstanding at March 31, 2000... _ 236
Class A common stock, $0.01 par value; 20,000,000 shares authorized; 9,073,532 shares issued
and outstanding at March 31, 1999 and no shares authorized, issued and outstanding at
March 31, 2000................................................................................. 91 -
Class B common stock, $0.01 par value; 4,000,000 shares authorized; 1,118,092 shares issued
and outstanding at March 31, 1999 and no shares authorized, issued and outstanding at
March 31, 2000................................................................................. 11 -
Class L common stock, $0.01 par value; 2,000,000 shares authorized; 1,008,170 and no shares
issued and outstanding at March 31, 1999 and no shares authorized, issued and outstanding at
March 31, 2000................................................................................. 10 -
Additional paid-in capital....................................................................... 19,754 226,199
Accumulated deficit.............................................................................. (105,416) (125,971)
Notes receivable from stockholders............................................................... (241) (241)
Accumulated other comprehensive loss............................................................. (1,180) (738)
--------- ---------
Total stockholders' equity (net capital deficiency)........................................... (86,971) 99,485
--------- ---------
Total liabilities, mandatorily redeemable convertible preferred stock and stockholders'
equity (net capital deficiency) $ 72,352 $133,694
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-------------------------------------
1998 1999 2000
--------- -------- ---------
<S> <C> <C> <C>
Net revenues................................................................... $115,459 $ 66,207 $ 115,679
Cost of revenues............................................................... 55,683 36,827 60,320
-------- -------- ---------
Gross margin................................................................... 59,776 29,380 55,359
Operating expenses:
Research and development.................................................. 19,057 15,130 21,748
Selling, general and administrative....................................... 24,589 17,870 20,829
Recapitalization and other non-recurring expenses......................... 4,188 -- --
Expenses relating to operating cost improvements.......................... -- 1,057 --
-------- -------- ---------
Total operating expenses....................................................... 47,834 34,057 42,577
-------- -------- ---------
Operating income (loss)........................................................ 11,942 (4,677) 12,782
Other (income) expense:
Interest expense.......................................................... 12,930 14,060 13,178
Interest income........................................................... (753) (651) (1,637)
Other (income) expense.................................................... 194 (6) 3,392
-------- -------- ---------
(12,371) (13,403) (14,933)
-------- -------- ---------
Income (loss) before provision for income taxes................................ (429) (18,080) (2,151)
Provision (benefit) for income taxes........................................... 604 (2,350) --
-------- -------- ---------
Loss before extraordinary charge............................................... (1,033) (15,730) (2,151)
Extraordinary charge........................................................... -- -- 18,404
-------- -------- ---------
Net loss ..................................................................... (1,033) (15,730) (20,555)
Preferred stock dividends...................................................... 738 832 942
-------- -------- ---------
Net loss attributable to common stockholders................................... $ (1,771) $(16,562) $ (21,497)
======== ======== =========
Basic and diluted net loss per share:
Loss before extraordinary charge.......................................... $ (0.27) $ (1.86) $ (0.25)
Extraordinary charge...................................................... -- -- (1.47)
--------- -------- ---------
Net loss per share........................................................ $ (0.27) $ (1.86) $ (1.72)
Weighted average number of shares outstanding:
Basic and diluted......................................................... 13,540 9,397 12,511
</TABLE>
See accompanying notes to consolidated financial statements.
26
<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
Preferred Stock Common Stock Common Stock Common Stock
--------------- ------------ ------------ ------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------- ------- ----------- ------ --------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997.............. -- $ -- 45,515,339 $ 45 -- $ -- -- $ --
Net loss............................... -- -- -- -- -- -- -- --
Currency translation adjustments....... -- -- -- -- -- -- -- --
Comprehensive loss...................
Recapitalization Transactions:......... -- -- 8,614,997 9 -- -- -- --
Conversion of outstanding
Common Stock into shares of
Class A and Class L Common
Stock................................ -- -- (8,614,997) (9) 7,264,236 73 -- --
Conversion of outstanding
Common Stock into shares of
Preferred Stock, Class A and
Class L Common Stock................. 750,000 13,800 (6,101,252) (6) 509,433 5 -- --
Redemption of Common Stock............. -- -- (39,414,087) (39) -- -- -- --
Issuances of Class A, B and L
Common Stock......................... -- -- -- -- 1,290,010 13 1,334,875 13
Conversion of Preferred Stock
into Class A Common Stock............ (1,261) (23) -- -- 9,853 -- -- --
Recapitalization related expenses
paid by Toray and Shimadzu........... -- -- -- -- -- -- -- --
Forgiveness of receivable from
Toray and Shimadzu................... -- -- -- -- -- -- -- --
Preferred stock dividends.............. -- 738 -- -- -- -- -- --
Repurchased shares..................... -- -- -- -- -- -- (45,090) --
-------- ------- ----------- ------ --------- ------ ---------- ------
Balance at March 31, 1998.............. 748,739 14,515 -- -- 9,073,532 91 1,289,785 13
Net loss............................... -- -- -- -- -- -- -- --
Currency translation adjustments....... -- -- -- -- -- -- -- --
Comprehensive loss...................
Preferred stock dividends.............. -- 832 -- -- -- -- -- --
Repurchased shares..................... -- -- -- -- -- -- (171,693) (2)
-------- ------- ----------- ------ --------- ------ ---------- ------
Balance at March 31, 1999.............. 748,739 15,347 -- -- 9,073,532 91 1,118,092 11
Net loss............................... -- -- -- -- -- -- -- --
Currency translation adjustments....... -- -- -- -- -- -- -- --
Comprehensive loss...................
Issuance of common stock............... -- -- -- -- -- -- 12,810 --
Preferred stock dividends.............. -- 942 -- -- -- -- -- --
Conversion of Class A, B
and L into common stock................ -- -- 12,524,132 125 (9,073,532) (91) (1,130,902) (11)
Issuance of common stock in
connection with IPO.................... -- -- 10,350,000 104 -- -- -- --
Conversion of preferred stock.......... (748,739) (16,289) 748,739 7 -- -- -- --
Issuance of common stock............... -- -- 24,007 -- -- -- -- --
-------- ------- ----------- ------ --------- ------ ---------- ------
Balance at March 31, 2000.............. -- $ -- 23,646,878 $ 236 -- $ -- -- $ --
======== ======= =========== ====== ========= ====== ========== ======
<CAPTION>
Accu-
mulated
Class L Notes Other Compre-
-------
Common Stock Additional Receivable Compre- hensive
------------
Paid in Accumulated from hensive Income
Shares Amount Capital Deficit Stockholders Loss Total (Loss)
---------- ------- ----------- ------- ------------ ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997............ -- $ -- $ 60,465 $ (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:....... -- -- 17,102 -- -- -- 17,111
Conversion of outstanding
Common Stock into shares of
Class A and Class L Common
Stock.............................. 807,138 8 (72) -- -- -- --
Conversion of outstanding
Common Stock into shares of
Preferred Stock, Class A and
Class L Common Stock............... 56,604 1 (8,100) (5,700) -- -- (13,800)
Redemption of Common Stock........... -- -- (52,835) (44,026) -- -- (96,900)
Issuances of Class A, B and L
Common Stock....................... 143,333 1 3,328 -- (299) -- 3,056
Conversion of Preferred Stock
into Class A Common Stock.......... 1,095 -- 23 -- -- -- 23
Recapitalization related expenses
paid by Toray and Shimadzu......... -- -- 2,888 -- -- -- 2,888
Forgiveness of receivable from
Toray and Shimadzu................. -- -- (1,425) -- -- -- (1,425)
Preferred stock dividends............ -- -- (738) -- -- -- (738)
Repurchased shares................... -- -- (11) -- 11 -- --
---------- ------- ----------- --------- ----------- -------- -------
Balance at March 31, 1998............ 1,008,170 10 20,625 $ (89,686) (288) (1,755) (70,990)
Net loss............................. -- -- -- (15,730) -- -- (15,730) $(15,730)
Currency translation adjustments..... -- -- -- -- -- 575 575 575
--------
Comprehensive loss................. $(15,155)
========
Preferred stock dividends............ -- -- (832) -- -- -- (832)
Repurchased shares................... -- -- (39) -- 47 -- 6
---------- ------- ----------- --------- ----------- -------- -------
Balance at March 31, 1999............ 1,008,170 10 19,754 (105,416) (241) (1,180) (86,971)
Net loss............................. -- -- -- (20,555) -- -- (20,555) $(20,555)
Currency translation adjustments..... -- -- -- -- -- 442 442 442
--------
Comprehensive loss................. $(20,113)
========
Issuance of common stock............. -- -- 75 -- -- -- 75
Preferred stock dividends............ -- -- (942) -- -- -- (942)
Conversion of Class A, B
and L into common stock.............. (1,008,170) (10) (13) -- -- -- --
Issuance of common stock in
connection with IPO.................. -- -- 190,635 -- -- -- 190,739
Conversion of preferred stock........ -- -- 16,282 -- -- -- 16,289
Issuance of common stock............. -- -- 408 -- -- -- 408
---------- ------- ----------- --------- ----------- -------- -------
Balance at March 31, 2000... -- $ -- $ 226,199 $(125,971) $ (241) $ (738) $99,485
========== ======= =========== ========= =========== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------
1998 1999 2000
-------- ---------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................................................... $ (1,033) $(15,730) $(20,555)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation............................................................ 2,102 2,590 2,775
Amortization............................................................ 1,493 2,004 1,715
Amortization of deferred financing costs................................ 1,385 1,607 1,481
Deferred income taxes................................................... (2,106) 5,977 --
Noncash recapitalization and related expenses........................... 3,888 -- --
Loss on disposal of property, plant and equipment....................... 400 -- --
Extraordinary charge.................................................... -- -- 18,404
Changes in assets and liabilities:
Accounts receivable.................................................. (1,991) 9,918 (12,220)
Inventories.......................................................... (4,956) 4,310 (9,577)
Other assets......................................................... 78 (4,136) 6,198
Accounts payable..................................................... (57) 15 6,077
Accrued and other liabilities........................................ 8,910 (5,810) (556)
-------- -------- --------
Net cash provided by (used in) operating activities................ 8,113 745 (6,258)
-------- -------- --------
Investing activities:
Purchases of property and equipment..................................... (2,900) (862) (3,261)
Other................................................................... -- (527) (366)
-------- -------- --------
Net cash used in investing activities.............................. (2,900) (1,389) (3,627)
-------- -------- --------
Financing activities:
Issuance (Redemption) of Senior Notes................................... 115,000 -- (126,520)
Proceeds from initial public offering................................... -- -- 190,739
Repayment of notes payable.............................................. (26,934) -- --
Principal payments under capital lease obligations...................... (128) (114) (304)
Redemption of common stock.............................................. (96,900) -- --
Proceeds from issuance of common stock.................................. 20,169 -- 483
Deferred financing costs................................................ (11,341) -- --
Other................................................................... (1,398) 581 442
-------- -------- --------
Net cash (used in) provided by financing activities................ (1,532) 467 64,840
-------- -------- --------
Net (decrease)/increase in cash and cash equivalents......................... 3,681 (177) 54,955
Cash and cash equivalents at beginning of period............................. 16,741 20,422 20,245
-------- -------- --------
Cash and cash equivalents at end of period................................... $ 20,422 $ 20,245 $ 75,200
======== ======== ========
Supplementary disclosures:
Cash paid for interest.................................................. $ 6,323 $ 12,469 $ 16,422
======== ======== ========
Cash paid for income taxes.............................................. $ 2,764 $ 293 $ 10
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<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 amended its
certificate of incorporation on May 16, 1997, August 6, 1999, September 16, 1999
and February 2, 2000. 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 1998, 1999 and 2000 ended on
April 5, 1998, April 4, 1999 and April 2, 2000, 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, 2000 presentation.
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.
29
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED 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:
Year Ended March 31,
---------------------------
Customer
-------- 1998 1999 2000
A............................. ---- ---- ----
B............................. 23% 23% 14%
C............................. -- 18% --
-- -- 10%
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 26%,
12% and 11% of total accounts receivable at March 31, 1999. There were no
customers with accounts receivable balances greater than 10% of accounts
receivable at March 31, 2000.
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 $(275,000), $(23,000) and $48,000 for the years ended March 31, 1998, 1999
and 2000.
Cash and Cash Equivalents
The Company maintains its cash and cash equivalents in depository accounts,
money market accounts and commercial paper 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.
30
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED 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 1998, 1999 and 2000 are $2,102,000, $2,590,000 and $2,775,000,
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. In connection with the redemption of the Senior Notes in March
2000, all unamortized deferred financing costs were expensed as part of the
extraordinary charge.
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 common 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.
31
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED STATEMENTS (continued)
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
for the period the shares were outstanding. 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, all potential common
shares were anti-dilutive and excluded from the diluted net income (loss) per
share calculation.
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 Financial Accounting Standards Board issued Statement on
Financial Accounting Standard 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 does not currently hold
any derivative instruments that are affected by the adoption of SFAS No. 133.
In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," changing the interpretation of revenue recognition rules. This
interpretation changes revenue recognition from the date of shipment to the date
of final customer acceptance, when such acceptance is part of the purchase
contract. In March 2000, Staff Accounting Bulletin No. 101A was issued which
allowed deferral of the requirements until the second fiscal quarter of 2000 for
most companies. Because the Company has complied with generally accepted
accounting principles for our historical revenue recognition, a change, if any,
in our revenue recognition policy resulting from SAB101 will be reported as a
change in accounting principle in the quarter ended June 30, 2000. The change in
accounting policy may result in a cumulative adjustment in the first quarter of
fiscal 2001 to reflect the deferral of revenue for shipments previously recorded
as revenue for which customers had not signed acceptance certificates as of
March 31, 2000. The Company is still in the process of assessing the impact of
SAB101 on our financial statements. While SAB101 would not affect the
fundamental aspects of our operations as measured by our shipments and cash
flows, implementation of SAB101 could have a material adverse effect on our
reported results of operations for fiscal 2001. The Company is also considering
potential changes to our standard contracts for equipment sales that could
mitigate the potential impact of SAB101 on a going forward basis.
32
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED STATEMENTS (continued)
2. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
March 31,
---------------------
1999 2000
---- ----
(in thousands)
<S> <C> <C>
Inventory:
Purchased materials........................................................... $ 6,678 $ 7,752
Systems in process............................................................ 5,302 12,370
Finished systems.............................................................. 3,389 3,567
-------- --------
$ 15,369 $ 23,689
======== ========
Property and equipment:
Laboratory and test equipment................................................. $ 4,096 $ 4,274
Office furniture and equipment................................................ 5,766 7,718
Machinery and equipment....................................................... 1,816 2,525
Leasehold improvements........................................................ 3,154 3,289
-------- --------
14,832 17,806
Accumulated depreciation and amortization..................................... (10,319) (12,807)
-------- --------
$ 4,513 $ 4,999
======== ========
Accrued liabilities:
Interest payable.............................................................. $ 4,932 $ 21
Accrued compensation and related expenses..................................... 2,313 6,388
Accrued warranty costs........................................................ 4,733 4,575
Commissions payable........................................................... 1,311 2,275
Other accrued liabilities..................................................... 7,206 6,576
-------- --------
$ 20,495 $ 19,835
======== ========
</TABLE>
3. NET INCOME (LOSS) PER SHARE
The following tables set forth the computation of net loss before
extraordinary charge per share of common stock:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
1998 1999 2000
------- -------- -------
<S> <C> <C> <C>
Numerator (in thousands):
Loss before extraordinary charge...................................... $(1,033) $(15,730) $(2,151)
Less: Preferred stock dividend........................................ (738) (832) (942)
Less: Income attributable to Class L Stock............................ (1,947) (944) --
------- -------- -------
$(3,718) $(17,506) $(3,093)
======= ======== =======
Denominator (in thousands):
Common Stock.......................................................... 5,563 -- 12,511
Class A Stock......................................................... 7,939 9,074 --
Class B Stock (vested)................................................ 38 323 --
------- -------- -------
Weighted average shares outstanding used for basic and diluted loss
per share.......................................................... 13,540 9,397 12,511
======= ======== =======
</TABLE>
33
<PAGE>
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,
-----------------------------------
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Common Stock Subject to Repurchase (unvested).......................... 1,189,004 767,084 550,117
Mandatorily Redeemable Convertible Preferred Stock..................... 748,739 748,739 --
Stock Options.......................................................... 1,765,458 1,778,086 3,061,165
</TABLE>
The stock options outstanding at March 31, 1998, 1999 and 2000, had a
weighted average exercise price of $10.69, $9.64 and $8.74, respectively.
4. FINANCING ARRANGEMENTS
Senior Notes
Immediately after the closing of the Company's initial public offering in
February 2000, the Company began to redeem the $115.0 million of senior notes
("Senior Notes") outstanding which accrue interest at 105/8% per annum and will
mature on May 15, 2004. In accordance with the Senior Notes indenture, the
Company was required to redeem prior to maturity, $40,250,000, or 35% of the
aggregate principal amount of its outstanding Senior Notes at a price of
110.625% of the principal amount, plus accrued and unpaid interest thereon.
In addition, the Company commenced a tender offer and consent solicitation
for the remaining $74,750,000, or 65% of the aggregate principal amount of its
Senior Notes (representing all remaining Senior Notes outstanding after giving
effect to the mandatory redemption). In accordance with the Company's Offer to
Purchase and Consent Solicitation Statement dated February 9, 2000, the Company
redeemed $74,734,000 aggregate principal amount of its outstanding Senior Notes
at a price per note of $1,089.86, plus accrued and unpaid interest and a consent
payment of $30.00. The tender offer was completed on March 10, 2000.
The redemption of $114,984,000 aggregate principal amount of Senior Notes
resulted in a one-time extraordinary charge relating to the early extinguishment
of debt of $18,404,000 consisting of the following (in thousands):
Premium on Senior Notes $ 10,992
Write-off of unamortized financing costs 6,868
Expenses 544
---------
Total Extraordinary Charge $ 18,404
=========
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 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, the
Company entered into a second amendment to our bank credit facility to further
adjust these financial tests. The second amendment also provided that if the
Company 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. In March 2000, we entered into a third amendment to
permit the redemption and conversion of the mandatorily redeemable preferred
stock into common stock. 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, 2000, there was $3.5 million of an outstanding letter of
credit and unused borrowing capacity under the Amended Bank Credit Facility of
$21.5
34
<PAGE>
million. The interest rate under the Amended Bank Credit Facility is at the
lenders base rate plus 1.25% (12.0% at March 31, 2000).
5. INCOME TAXES
The domestic and foreign components of loss before provision (benefit) for
income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Domestic.............................................................. $ (436) $ (19,016) $ (2,657)
Foreign............................................................... 7 936 506
------ --------- --------
Total............................................................ $ (429) $ (18,080) $ (2,151)
====== ========= ========
</TABLE>
The components of the provision (benefit) for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Current:
Federal............................................................ $ 2,314 $ (8,344) --
State.............................................................. 396 4 --
Foreign............................................................ -- 13 --
------- -------- ------
2,710 (8,327) --
Deferred:
Federal............................................................ (1,710) 5,807 --
State.............................................................. (396) -- --
Foreign............................................................ -- 170 --
------- -------- ------
(2,106) 5,977 --
------- -------- ------
$ 604 $ (2,350) $ --
======= ======== ======
</TABLE>
A rate reconciliation between income tax provisions at the U.S. federal
statutory rate and the effective tax rate reflected in the statements of
operations is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
-----------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Provision at statutory rate........................................... (35.0)% (35.0)% (35.0)%
Nondeductible expenses................................................ -- -- 10.4
Utilization of net operating loss and credit carryforward............. -- (5.5) (2.3)
Foreign sales corporation............................................. (40.5) -- --
Other changes in valuation allowance.................................. 195.4 26.1 27.4
Others, net........................................................... 20.9 1.4 (0.5)
----- ----- -----
140.8% (13.0)% --%
===== ===== =====
</TABLE>
35
<PAGE>
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED STATEMENTS(continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands):
March 31,
-----------------
1999 2000
------- -------
Deferred tax assets:
Accrued costs and expenses....................... $ 3,241 $ 2,601
State taxes...................................... 1 2
Other............................................ 3,156 3,628
Net operating loss and tax credits............... 1,866 8,319
------- -------
Total gross deferred tax assets.................. 8,264 14,550
Less: valuation allowance........................... (6,010) (12,865)
------- -------
Total gross deferred tax assets.................. 2,254 1,685
------- -------
Deferred tax liabilities:
Deferred revenue on foreign sales................ (1,139) (996)
Depreciation and amortization.................... (834) (397)
Other............................................ (281) (292)
------- -------
Net deferred tax liabilities..................... (2,254) (1,685)
------- -------
Total net deferred tax assets.................... $ -- $ --
======= =======
The net changes in the total valuation allowance for the years ended March
31, 1999 and 2000 were $4,719,000 and $6,855,000, respectively. At March 31,
2000, 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, 2000, the Company has federal and state net operating loss
carryforwards of $15,400,000 and $25,300,000, respectively. These net operating
losses will begin to expire in various amounts in 2004. At March 31, 2000, the
Company had net operating loss carryforwards for foreign income tax purposes of
approximately $300,000, which expire in varying amounts through 2003. The
Company also has federal and California research and development tax credits of
$300,000 and $800,000, respectively. The federal research and development tax
credits will begin to expire in 2012, while the California research tax credits
may be carried forward indefinitely.
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 and 2000 were $832,000 and $125,000, respectively. Non-cash charges
of $100,000 are primarily for asset write-offs. Expenses relating to operating
cost improvements are summarized as follows:
<TABLE>
<CAPTION>
Provision
Year Ended Balance Balance
March 31, 1999 Utilized March 31, 1999 Utilized March 31, 2000
-------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
Severance....... $ 837 $ 762 $ 75 $ 75 $ --
Facilities...... 120 70 50 50 --
Other........... 100 100 -- -- $ --
-------------- -------- -------------- -------- --------------
$ 1,057 $ 932 $ 125 $ 125 --
============== ======== ============== ======== ==============
</TABLE>
36
<PAGE>
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 $1,340,000, and related accumulated amortization of
$620,000 and $761,000 at March 31, 1999 and 2000 respectively.
Rent expense was approximately $1,629,000, $1,661,000 and $1,506,000 for
the fiscal years ended March 31, 1998, 1999 and 2000, respectively.
At March 31, 2000, future minimum lease payments under capital and
noncancellable operating leases are as follows (in thousands):
Capital Operating
Leases Leases
------- ---------
Fiscal Year
2001............................................ $ 279 $ 1,573
2002............................................ 253 1,481
2003............................................ 94 1,301
2004............................................ -- 1,293
2005............................................ -- 1,249
Thereafter...................................... -- 924
------- ---------
Future Minimum Lease Payments................... 626 $ 7,821
=========
Less: Amounts Representing Interest............. (47)
-------
Present Value of Minimum Lease Payments......... 579
Less: Current Portion........................... (222)
-------
$ 357
=======
Deferred Bonus Arrangements
Pursuant to the terms of certain management bonus arrangements, the Company
may be obligated to pay up to an aggregate of $13.5 million after March 31, 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 March
31, 2002 in order for the deferred bonus of $13.5 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 March 31, 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 $13.5 million. No amounts have been accrued to date as
the achievement of the required operating results is not considered probable as
of March 31, 2000.
Legal Proceedings
On September 3, 1998, the Company was 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 the Company uses 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. The Company believes 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
37
<PAGE>
covering technology that accounts for a significant portion of our revenues. The
Company believes these allegations are unfounded, intends to vigorously defend
our position, and expects to prevail. The Company believes 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, the Company 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 the Company was alleged of infringing,
is invalid and not infringed by any of the Company's systems.
On July 22, 1999, the Company was 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 the Company has
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. The Company believes 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. The Company believes
KLA-Tencor's new patent is invalid and intends to vigorously defend our position
and expects to prevail. The Company believes 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, the Company 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, the Company 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 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)
Common Stock
In connection with 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
38
<PAGE>
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.
On February 9, 2000, the Company completed its initial public offering of
common stock. The Company issued 10,350,000 shares of common stock, including
the exercise of the underwriters' overallotment option, at a price of $20.00 per
share. Net proceeds, net of underwriting discounts and offering costs, were
$190,739,000.
In conjunction with the Company's initial public offering and an amendment
to the Company's articles of incorporation, 9,073,532, 1,130,902 and 1,008,170
shares of the Company's outstanding Class A, Class B and Class L stock were
converted into 9,073,532, 1,130,902 and 2,319,698 shares of common stock,
respectively.
The Company has outstanding unvested shares of common stock which 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. As of March
31, 1999 and 2000, respectively, 767,084 and 550,117 shares of common stock were
subject to repurchase by the Company.
Mandatorily Redeemable Convertible Preferred Stock
The Series A Mandatorily Redeemable Convertible Voting Preferred Stock
("Preferred Stock") had a liquidation preference of $18.40 and was convertible
at any time into one share of Common Stock at the option of the holder.
Dividends on each share of the Preferred Stock were cumulative and accrued at
the rate of 6% per annum. The Preferred Stock had a scheduled redemption on May
17, 2004, and was 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 was convertible into one share of 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 Common Stock issuable upon conversion of the Preferred Stock.
On March 3, 2000, the Company called for redemption of all outstanding
shares of Preferred Stock. On March 24, 2000 and March 29, 2000, respectively,
169,589 and 579,150 shares of Preferred Stock were converted into an aggregate
of 748,739 shares of common stock.
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.
In connection with the initial public offering, the Company adopted the
2000 Equity Incentive Plan, whereby the Board of Directors may grant incentive
stock options and nonstatutory stock options to employees, directors or
consultants. No future grants are available under the Plans upon the
effectiveness of the 2000 Equity Incentive Plan. The Company has reserved (1)
300,000 shares of common stock (2) any shares returned to the Plans as a result
of termination of options and (3) annual increases to be added on the date of
each annual meeting of stockholders
39
<PAGE>
THERMA-WAVE
NOTES TO CONSOLIDATED STATEMENTS (continued)
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, for issuance
under the 2000 Equity Incentive Plan.
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 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.
In connection with the initial public offering, the Company adopted the
2000 Employee Stock Purchase Plan, whereby employees may purchase shares of
common stock, at a discounted price through payroll deductions or lump sum cash
payments. The Company has reserved 500,000 shares of common stock for issuance
under the 2000 Employee Stock Purchase Plan.
A summary of the Company's stock option activity, and related information
for the years ended March 31, 1998, 1999 and 2000 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
Termination of Plans...................................... (4,416,453) -- --
Authorized................................................ 300,000 -- --
Granted................................................... (1,382,946) 1,382,946 7.43
Exercised................................................. -- (12,810) 6.00
Canceled.................................................. 87,057 (87,057) 6.65
--------- ----------
Balance at March 31, 2000.................................... 294,572 3,061,165 8.74
========= ==========
</TABLE>
The following table summarizes information about stock options outstanding
as of March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Life Price
Range of exercise prices: ----------- ----------- --------
<S> <C> <C> <C>
$4.00........................................................ 270,000 8.34 $ 4.00
$6.00-$7.00.................................................. 1,664,448 8.98 $ 6.71
$8.93-$15.89................................................. 1,084,831 7.13 $ 12.42
$16.00-$35.50................................................ 41,886 9.82 $ 24.76
---------
3,061,165 8.28 $ 8.74
=========
</TABLE>
40
<PAGE>
THERMA-WAVE
NOTES TO CONSOLIDATED STATEMENTS (continued)
At March 31, 2000, there were 274,670 vested shares and 1,562,691 shares
were exercisable.
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 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 the year ended March 31, 2000, the following
weighted-average assumptions were used to determine the fair value of options:
volatility of 65%, expected life of 5 years and a risk free interest rate of
6.8%. For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. For the year
ended March 31, 2000, the following weighted-average assumptions were used to
determine the fair value of purchase rights under the 2000 Employee Stock
Purchase Plan: volatility of 65%, expected life of one year and a risk free
interest rate of 6.8%.
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, $(16,717,000) and $(1.88) for the year ended March 31, 1999, and
$(22,769,000) and $(1.82) for the year ended March 31, 2000, respectively.
The weighted average fair value of options granted during the years ended
March 31, 1998, 1999 and 2000 with exercise prices equal to the market price at
the date of grant is $0.45, $0.96 and $3.94 per share, respectively.
9. RELATED PARTY TRANSACTIONS
The Company had revenue transactions with Toray & Shimadzu totaling
$82,000, $31,000 and $24,000 for the years ended March 31, 1998, 1999 and 2000,
respectively.
The Company incurred expenses of approximately $75,000, $118,000 and
$62,000 for the fiscal years ended March 31, 1998, 1999 and 2000, respectively,
for employee related costs paid on our behalf by Toray and Shimadzu.
On March 31, 2000, 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, 1999 and 2000 were $750,000, $1,000,000 and $750,000, respectively.
41
<PAGE>
THERMA-WAVE
NOTES TO CONSOLIDATED STATEMENTS (continued)
During the fourth quarter of fiscal year 2000, the Company paid $3.5
million for the early buy out of the remaining seven and one-half years of a
consulting agreement with Bain Capital, resulting in a one-time charge which is
included in other income (expense).
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 accrued, which are based on achieving certain operating profit
goals, were $566,000, $0, and $400,000 in fiscal 1998, 1999 and 2000,
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.
The following is a summary of operations in geographic areas (in
thousands):
<TABLE>
<CAPTION>
Other
-----
U.S. Japan U.K. Foreign Eliminations Consolidation
---- ----- ---- ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal year ended March 31, 1998
Sales to unaffiliated customers............ $ 110,098 $ 2,645 $ 1,272 $ 1,444 $ - $ 115,459
Transfers between geographic locations..... (1,929) 1,706 - 2,572 (2,349) -
--------- -------- ----------- --------- ---------- ---------
Total net sales............................ $ 108,169 $ 4,351 $ 1,272 $ 4,016 $ (2,349) $ 115,459
Operating income (loss).................... $ 11,661 $ 103 $ (94) $ 552 $ (280) $ 11,942
Long-lived assets.......................... $ 16,974 $ 624 $ 55 $ 359 $ - $ 18,012
All other identifiable assets.............. 69,237 2,841 1,489 1,541 (3,358) 71,750
--------- -------- ----------- --------- ---------- ---------
Total assets............................... $ 86,211 $ 3,465 $ 1,544 $ 1,900 $ (3,358) $ 89,762
========= ======== =========== ========= ========== =========
Fiscal year ended March 31, 1999
Sales to unaffiliated customers............ $ 60,355 $ 2,542 $ 1,956 $ 1,353 $ - $ 66,207
Transfers between geographic locations..... (2,811) 1,047 2,408 1,212 (1,856) -
--------- -------- ----------- --------- ---------- ---------
Total net sales............................ $ 57,544 $ 3,589 $ 3,168 $ 3,761 $ (1,856) $ 66,207
Operating income (loss).................... $ (5,652) $ 338 $ 606 $ 28 $ 3 $ (4,677)
Long-lived assets.......................... $ 16,147 $ 555 $ 43 $ 308 $ - $ 17,053
All other identifiable assets.............. 51,391 2,482 2,133 1,642 (2,349) 55,299
--------- -------- ----------- --------- ---------- ---------
Total assets............................... $ 67,538 $ 3,037 $ 2,176 $ 1,950 $ (2,349) $ 72,352
========= ======== =========== ========= ========== =========
Fiscal year ended March 31, 2000
Sales to unaffiliated customers............ $ 108,781 $ 2,650 $ 1,788 $ 2,460 $ - $ 115,679
Transfers between geographic locations..... (940) 953 1,270 1,993 (3,276) -
--------- -------- ----------- --------- ---------- ---------
Total net sales............................ $ 107,841 $ 3,603 $ 3,058 $ 4,453 $ (3,276) $ 115,679
Operating income (loss).................... $ 12,729 $ 87 $ 409 $ 513 $ (956) $ 12,782
Long-lived assets.......................... $ 7,759 $ 433 $ 49 $ 444 $ - $ 8,685
All other identifiable assets.............. 121,240 4,100 2,822 2,108 (5,261) 125,009
--------- -------- ----------- --------- ---------- ---------
Total assets............................... $ 128,999 $ 4,533 $ 2,871 $ 2,552 $ (5,261) $ 133,694
========= ======== =========== ========= ========== =========
</TABLE>
42
<PAGE>
THERMA-WAVE, INC
NOTES TO CONSOLIDATED STATEMENTS (continued)
Other foreign areas include 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 $56,006,000, $39,892,000 and $65,253,000 of
the net sales in fiscal 1998, 1999 and 2000, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
43
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K,
portions of the information required by Part III of Form 10-K are incorporated
by reference from Therma-Wave's Proxy Statement to be filed with the Commission
in connection with the Annual Meeting of Stockholders (the "Proxy Statement").
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS
(a) Information concerning directors of Therma-Wave appears in the Proxy
Statement, under Item 1. This portion of the Proxy Statement in
incorporated herein by reference.
(b) Information concerning executive officers of Therma-Wave appears in
the Proxy Statement, under Item 1. This portion of the Proxy Statement
in incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial owners
and management appears in Therma-Wave's proxy statement, under Item 1. This
portion of the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning the security ownership of certain beneficial owners
and management appears in Therma-Wave's proxy statement, under Item 1. This
portion of the Proxy Statement is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(i) Consolidated Financial Statements - See "Item 8. Financial
Statements and Supplementary Data"
<TABLE>
<CAPTION>
(ii) Financial Statement Schedule: Form 10-K page number
---------------------
<S> <C>
Report of Independent Accountants on Financial Statement Schedule 49
Schedule II - Valuation and Qualifying Accounts 50
</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.
(b) Reports on Form 8-K
None filed within the past quarter.
44
<PAGE>
(c) Exhibits
Exhibit Description
Number
3.1 Restated Certificate of Incorporation of Therma-Wave.
3.2 Amended and Restated By-Laws of Therma-Wave.
*4.2 Indenture, dated as of May 15, 1997, by and among Therma-Wave and IBJ
Schroder Bank & Trust Company, as trustee.
4.3 Supplemental Indenture, dated February 23, 2000, by and between
Therma-Wave and The Bank of New York as Trustee.
*4.4 Form of Series B 10 5/8% Senior Notes.
**4.5 Form of certificate representing shares of Common Stock.
*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
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 Development License Agreement, dated June 12, 1992, by and among
Therma-Wave and Therma-Wave K.K., Toray Industries, Inc. and Shimadzu
Corporation.
*10.12 New Development Agreement, dated December 22, 1995, by and between
Therma-Wave and Toray Industries, Inc.
*10.13 Lease Agreement, dated as of May 26, 1995, by and between Therma-Wave
and Sobrato Interests.
*10.14 Advisory Agreement, dated as of May 16, 1996, between Therma-Wave and
Bain Capital, Inc.
45
<PAGE>
*10.15 Credit Agreement, dated as of May 16, 1997, between Therma-Wave and
Bankers Trust Company, as agent, and certain financial institutions
named therein.
*10.16 Pledge Agreement, dated as of May 16, 1997, between Therma-Wave and
Bankers Trust Company, as agent.
*10.17 Security Agreement, dated as of May 16, 1997, between Therm a-Wave
and Bankers Trust Company, as agent.
*10.18 Therma-Wave, Inc. 1997 Stock Purchase and Option Plan.
*10.19 Registration Agreement, dated as of May 16, 1997, between Therma-Wave
and the stockholders named therein.
*10.20 Stock Repurchase Agreement, dated as of January 26, 1996, between
Toray Industries, Inc. and the key employees of Therma-Wave named
therein.
*10.21 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.
10.22 Therma-Wave, Inc. 2000 Equity Incentive Plan.
**10.23 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.)
**10.24 Employment Agreement, dated as of August 3, 1998, by and between
Therma-Wave and Martin M. Schwartz.
**10.25 Employment Agreement, dated as of August 10, 1998, by and between
Therma-Wave and L. Ray Christie.
10.26 Amended and Restated Therma-Wave 2000 Employee Stock Purchase Plan.
**10.27 Second Amendment to Credit Agreement, dated as of August 3, 1999,
between Therma-Wave and Bankers Trust Company, as agent.
**10.28 1997 Employee Stock Purchase and Option Plan.
**10.29 1997 Special Employee Stock Purchase and Option Plan.
10.30 Third Amendment to Credit Agreement, dated as of March 1, 2000,
between Therma-Wave and Bankers Trust Company, as agent.
10.31 Therma-Wave Executive Deferred Compensation Plan, effective
January 1, 2000.
10.32 Lease between Minos Management, Inc. as Landlord, and Therma-Wave as
Tenant, dated May 31, 2000
10.33 Form of Indemnification Agreement
*21.1 Subsidiaries of Therma-Wave.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Independent Accountants.
46
<PAGE>
27.1 Financial Data Schedule.
99.1 Risk Factors.
--------
* Incorporated herein by reference to Therma-Wave's Registration
Statement on Form S-4 (Registration No. 333-29871).
** Incorporated herein by reference to Therma-Wave's Registration
Statement on Form S-1 (Registration No. 333-76019).
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THERMA-WAVE, INC.
By: /s/ Allan Rosencwaig
-----------------------------------
Allan Rosencwaig
Chairman of the Board
Chief Technology Officer
Dated: June 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Allan Rosencwaig Chairman of the Board, Chief
----------------------------- Technology Officer June 30, 2000
Allan Rosencwaig
/s/ Martin M. Schwartz President, Chief Executive Officer
----------------------------- and Director (Principal Executive
Martin M. Schwartz Officer) June 30, 2000
Vice President, Chief Financial
Officer and Secretary (Principal
/s/ L. Ray Christie Financial and Accounting
----------------------------- Officer) June 30, 2000
L. Ray Christie
/s/ G. Leonard Baker
----------------------------- Director June 30, 2000
G. Leonard Baker
/s/ David Dominik
----------------------------- Director June 30, 2000
David Dominik
/s/ Ian K. Loring
----------------------------- Director June 30, 2000
Ian K. Loring
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Therma-Wave, Inc.
Our audits of the consolidated financial statements as of March 31, 2000 and
1999 and for the two years then ended referred to in our report dated April 27,
2000 appearing on page 23 of the consolidated financial statements in this
Annual Report on Form 10-K also included an audit of the Financial Statement
Schedule for the years ended March 31, 2000 and 1999 listed in Item 14(a) of
this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Jose, California
April 27, 2000
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
THERMA-WAVE, INC.
(in thousands)
<TABLE>
<CAPTION>
Description Additions
-----------------------------------------------------------------------------------------------------------------------------
Charged to
Balance at Charged to Other
Beginning Costs and Accounts Deductions-- Balance at
of Period Expenses Describe Describe (1) End of Period
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 2000:
Reserves and allowances deducted from asset
Accounts: Allowance for Doubtful
Accounts, Returns and Allowances.................. $ 1,911 $-- $-- $ 439 $1,472
Year ended March 31, 1999:
Reserves and allowances deducted from asset
accounts; Allowance for Doubtful
Accounts, Returns and Allowances.................. $ 3,016 $ (631) $-- $ 474 $1,911
Year ended March 31, 1998:
Reserves and allowances deducted from asset
accounts; Allowance for Doubtful
Accounts, Returns and Allowances.................. $ 1,622 $1,394 $-- $-- $3,016
(1) Represents specific customer accounts written off.
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