<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
-
ACT OF 1934.
For the quarterly period ended October 1, 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 000-26911
THERMA-WAVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 94-3000561
(State or Other (I.R.S. Employer Identification Number)
Jurisdiction of Incorporation
or Organization)
1250 Reliance Way
Fremont, California 94539
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (510) 668-2200
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares of the issuer's class of common stock, as of the
latest practical date:
Class Outstanding as of October 29, 2000
--------------------------------------------------------------------------------
Common stock, $.01 par value 23,743,698
<PAGE>
THERMA-WAVE, INC.
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 and March 31, 2000 3
Condensed Consolidated Statements of Operations
Three and Six Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended September 30, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 22
2
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Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
---------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 55,027 $ 75,200
Short-term investments 9,482 -
Accounts receivable, net 44,226 24,400
Inventories 39,781 23,689
Other current assets 1,478 1,720
---------------------- ---------------------
Total current assets 149,994 125,009
Property and equipment, net 6,657 4,999
Deferred income taxes 1,685 1,685
Other assets 2,228 2,001
---------------------- ---------------------
Total assets $ 160,564 $ 133,694
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,684 $ 10,111
Other current liabilities 23,428 20,789
---------------------- ---------------------
Total current liabilities 38,112 30,900
Long term debt 16 16
Other liabilities 2,613 3,293
---------------------- ---------------------
Total liabilities 40,741 34,209
Stockholders' equity
Common stock 238 236
Additional paid-in capital 228,238 226,199
Notes receivable from stockholders (210) (241)
Accumulated deficit (107,592) (125,971)
Accumulated other comprehensive loss (851) (738)
---------------------- ---------------------
Total stockholders' equity 119,823 99,485
---------------------- ---------------------
Total liabilities and stockholders' equity $ 160,564 $ 133,694
====================== =====================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
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THERMA-WAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
September 30, September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 50,263 $ 25,913 $ 91,849 $ 47,054
Cost of revenues 24,885 13,676 45,437 25,904
-------------- --------------- -------------- --------------
Gross margin 25,378 12,237 46,412 21,150
Operating Expenses:
Research and development 8,676 5,086 16,195 8,941
Selling, general and administrative 6,896 4,847 12,778 8,902
-------------- --------------- -------------- --------------
Total operating expenses 15,572 9,933 28,973 17,843
-------------- --------------- -------------- --------------
Operating income 9,806 2,304 17,439 3,307
Other income (expense):
Interest expense (52) (3,488) (112) (7,013)
Interest income 1,045 135 2,084 285
Other, net income 130 42 143 75
-------------- --------------- -------------- --------------
1,123 (3,311) 2,115 (6,653)
-------------- --------------- -------------- --------------
Income (loss) before provision for income taxes 10,929 (1,007) 19,554 (3,346)
Provision for income taxes 224 - 1,173 -
-------------- --------------- -------------- --------------
Net income (loss) 10,705 (1,007) 18,381 (3,346)
Accretion of preferred stock dividend - 206 - 412
-------------- --------------- -------------- --------------
Net income (loss) available to common stockholders $ 10,705 $ (1,213) $ 18,381 $ (3,758)
============== =============== ============== ==============
Net income (loss) per share:
Basic $ 0.46 $ (0.19) $ 0.79 $ (0.50)
Diluted 0.43 (0.19) $ 0.74 (0.50)
Weighted average common shares outstanding:
Basic 23,328 9,574 23,297 9,574
Diluted 24,980 9,574 24,915 9,574
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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THERMA-WAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
----------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 18,381 $ (3,346)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 1,562 2,246
Amortization of deferred financing costs - 808
Changes in assets and liabilities:
Accounts receivable (19,826) (11,488)
Inventories (16,092) (5,178)
Other assets 170 6,314
Other liabilities 6,965 4,214
----------------- -----------------
Net cash used by operating activities (8,840) (6,430)
Investing activities:
Purchases of property and equipment (3,024) (1,038)
Change in short-term investments (9,482) -
Investments in intangible assets (351) (255)
----------------- -----------------
Net cash used in investing activities (12,857) (1,293)
Net cash provided by financing activities 1,524 585
----------------- -----------------
Net decrease in cash and cash equivalents (20,173) (7,138)
Cash and cash equivalents at beginning of period 75,200 20,245
----------------- -----------------
Cash and cash equivalents at end of period $ 55,027 $ 13,107
================= =================
Supplementary disclosures:
Cash paid for interest $ 114 $ 6,172
================= =================
Cash paid for taxes $ 371 $ -
================= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THERMA-WAVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and include the accounts of Therma-Wave, Inc. and its
wholly owned subsidiaries. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations. In our opinion, the financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position at
September 30, 2000, and the operating results and cash flows for the three and
six months ended September 30, 2000 and 1999. These financial statements and
notes should be read in conjunction with our audited financial statements and
notes thereto for the year ended March 31, 2000.
The results of operations for the interim periods are not necessarily
indicative of the results of operations that may be expected for any other
period or for the fiscal year, which ends on March 31, 2001.
The second quarters of fiscal years 2001 and 2000 and the fiscal year 2000
ended on October 1, 2000, October 3, 1999 and April 2, 2000, respectively. For
presentation purposes, the accompanying financial statements have been shown
as ending on the last day of the month.
2. Inventories
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
--------------------------- --------------------------
<S> <C> <C>
Purchased materials $19,784 $ 7,752
Systems in process 14,310 12,370
Finished systems 5,687 3,567
--------------------------- --------------------------
$39,781 $23,689
=========================== ==========================
</TABLE>
3. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." The statement established standards for the reporting and display of
comprehensive income and its components. The adoption of this statement had no
significant impact on our net income (loss) or stockholders' equity. SFAS 130
requires unrealized gains or losses on available-for-
6
<PAGE>
sale securities and foreign currency translation adjustments to be included in
comprehensive income (loss). The difference between net income (loss) and
comprehensive income (loss) is due to foreign currency translation
adjustments. Prior year financial statements have been reclassified to conform
to the requirements of SFAS 130.
During the quarter ended September 30, 2000 and 1999, comprehensive income
(loss) amounted to approximately $10,584,000 and $(308,000), respectively. For
the six months ended September 30, 2000 and 1999, comprehensive income (loss)
was approximately $18,268,000 and $(2,775,000), respectively.
4. Net Income (Loss) Per Share
Basic net income (loss) per share 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. Diluted net income (loss) per share is based
on the weighted average number of common shares outstanding and dilutive
potential common shares outstanding.
Class A common stock, Class B common stock and Class L common stock share
ratably in the net income (loss) remaining after giving effect to the 12%
yield on Class L common stock for the period the shares were outstanding. Net
loss for the three and six months ended September 30, 1999 used in the net
loss per share calculation represents the loss attributable to the weighted
average number of shares of Class A, Class B and Class L common stock
outstanding after giving effect to the 12% yield on Class L common stock. As a
result of the losses incurred by the Company, all potential common shares were
anti-dilutive and excluded from the diluted net loss per share calculation for
fiscal 2000.
On February 4, 2000, all classes of common stock were converted to one
class of common stock.
The following tables set forth the computation of net income (loss) per
share of common stock:
<TABLE>
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator (in thousands):
Net income (loss)...................................... $10,705 $(1,007) $18,381 $(3,346)
Less: preferred stock dividend......................... -- (206) -- (412)
Less: income attributable to Class L common stock...... -- (607) -- (1,043)
------------ ------------ ------------ ------------
$10,705 $(1,820) $18,381 $(4,801)
Denominator (in thousands):
Common stock........................................... 23,328 -- 23,297 --
Class A common stock................................... -- 9,073 -- 9,073
Class B common stock (vested).......................... -- 501 -- 501
------------ ------------ ------------ ------------
Weighted average shares outstanding used for
basic income (loss) per share......................... 23,328 9,574 23,297 9,574
Unvested shares 400 -- 400 --
Dilutive stock options 1,252 -- 1,218 --
------------ ------------ ------------ ------------
Weighted average shares outstanding used for
diluted income (loss) per share....................... 24,980 9,574 24,915 9,574
============ =========== ============= =============
</TABLE>
7
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The following table summarizes securities outstanding as of each period end
which were not included in the calculation of diluted net loss per share since
their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
September 30,
---------------------
2000 1999
---------- ---------
<S> <C> <C>
Common Stock Subject to Repurchase (unvested)........................................ 400,339 617,305
Mandatorily Redeemable Convertible Preferred Stock................................... -- 748,739
Stock Options........................................................................ 106,436 2,605,338
</TABLE>
5. Recently Issued Accounting Statements
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. We do 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," potentially changing the interpretation of revenue recognition
rules. This proposed interpretation may change 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. In June 2000, Staff
Accounting Bulletin No. 101B was issued which allowed further deferral of the
requirements until the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. 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 SAB 101 will be reported as a change
in accounting principle in our fourth quarter of fiscal 2001. Depending on the
final interpretation of SAB 101, the change in accounting policy may result in
the restatement of the Company's results for each of the first three quarters
of fiscal 2001 and 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 the
first day of fiscal 2001. We are still in the process of assessing the impact
of SAB 101 on our financial statements. While SAB 101 would not affect the
fundamental aspects of our operations as measured by our shipments and cash
flows, implementation of SAB 101 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 SAB 101 on a going-forward basis.
8
<PAGE>
6. Commitments and Contingencies
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 of operations.
On July 20, 2000, United States District Court Judge Charles A. Legge
granted our motion for summary judgment on the bases that our Opti-Probe 5000
products do not infringe KLA-Tencor's U.S. Patent, which was the subject of
the suit, either literally or under the doctrine of equivalents. Therefore,
only our older Opti-Probe products remain at issue in this lawsuit.
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 paragraphs and also seeks a
declaratory judgment that KLA-Tencor's patent, which we were alleged of
infringing, is invalid and not infringed by any of our systems.
On July 22, 1999, we were named in a second patent infringement suit filed
by KLA-Tencor. KLA-Tencor has alleged that it patented another aspect of one
of the thin film thickness measuring technologies that we have recently added
to some of our Opti-Probe products. KLA-Tencor is seeking damages and an
injunction to stop the sale of the equipment they allege uses this aspect.
Since the patent which is the subject of this second suit issued on June 8,
1999, any potential liability for past sales is not material. Prior to filing
its first infringement action, KLA-Tencor notified us of an earlier version of
the patent that is the subject of this second suit. We believe none of our
products infringed any of the claims of the earlier version of this KLA-Tencor
patent and previously informed KLA-Tencor of our belief. KLA-Tencor's new
patent is a continuation of the earlier patent. We believe KLA-Tencor's new
patent is invalid and we intend to vigorously defend our position and we
expect to prevail. We believe that the outcome from such litigation, even if
adverse to us, would not have a material adverse effect on our business,
financial condition or results or operations.
9
<PAGE>
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 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.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report on Form 10-Q 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 the heading "Risk Factors" in Exhibit 99.1
of this quarterly report 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. We have experienced and expect to
continue to experience significant fluctuations in our quarterly results of
operations. Our expense levels are based, in part, on expectations of future
revenues. If revenue levels in a particular quarter do not meet expectations,
operating results are adversely affected. A variety of factors could have an
influence on the level of our revenues in a particular quarter. These factors
include the cyclical nature of the semiconductor industry, the risk that
factors which allowed us to experience relatively good performance in industry
downturns may not protect us in future downturns, the timing of the receipt of
orders from major customers, customer cancellations or delay of shipments,
specific feature requests by customers, production delays or manufacturing
inefficiencies, exchange rate fluctuations, management decisions to commence
or discontinue product lines, our ability to design, introduce and manufacture
new products on a cost effective and timely basis, the introduction of new
products by ourselves or our competitors, the timing of research and
development expenditures, and expenses attendant to acquisitions, strategic
alliances and the future development of marketing and service capabilities. 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
quarterly report will in fact occur.
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.
11
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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.
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 of a
consulting agreement with Bain Capital, Inc. Remaining cash proceeds have
been 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 unaudited historical results of
operations as a percentage of net revenues for the periods indicated. The
historical financial data for the three and six months ended September 30,
2000 and 1999 were derived from our unaudited consolidated financial
statements which, in the opinion of management, reflect all adjustments
(consisting of normal recurring adjustments) necessary for the fair
presentation of the financial condition and results of operations for such
periods.
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
Statement of Operations Data: 2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 49.5 52.8 49.5 55.1
-------------- -------------- -------------- --------------
Gross margin 50.5 47.2 50.5 44.9
Operating expenses:
Research and development expenses 17.3 19.6 17.6 19.0
Selling, general and administrative 13.7 18.7 13.9 18.9
-------------- -------------- -------------- --------------
Operating income 19.5 8.9 19.0 7.0
Other income (expense):
Interest expense (0.2) (13.5) (0.1) (14.9)
Interest income 2.1 0.5 2.3 0.6
Other, net income 0.3 0.2 0.1 0.2
-------------- -------------- -------------- --------------
Income (loss) before income taxes 21.7 (3.9) 21.3 (7.1)
Provision for income taxes 0.4 - 1.3 -
-------------- -------------- -------------- --------------
Net income (loss) 21.3% (3.9)% 20.0% (7.1)%
============== ============== ============== ==============
</TABLE>
Net Revenues. Net revenues for the fiscal quarters ended September 30, 2000
were $50.3 million, an increase of 94% from $25.9 million in the comparable
fiscal quarter of the prior year. Compared to the prior fiscal quarter, net
revenues increased $8.7 million or 21%. For the six months ended September 30,
2000, net revenues were $91.9 million, up 95% from $47.1 million for the
comparable period of the prior year. Net revenues increased broadly across all
geographic regions and all product families including our new 300mm products.
The increase in net 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.
We derive our net revenues from system sales, sales of replacement and
spare parts, and service contracts. During the three months ended September
30, 2000, we derived approximately 92% of our net revenues from system sales,
6% from sales of replacement and spare parts, including associated labor, and
2% from service contracts. During the three months ended September 30, 1999,
we derived approximately 83% of our net revenues from system sales, 11% from
sales of replacement and spare parts, including associated labor, and 6% from
service contracts. During the six months ended September 30, 2000, we derived
approximately 91% of our net revenues from system sales, 6% from sales of
replacement and spare parts, including associated labor, and 3% from service
contracts. During the six months ended September 30, 1999, we derived
approximately 83% of our net revenues from system sales, 10% from sales of
replacement and spare parts, including associated labor, and 7% from service
contracts. Net revenues from system sales, replacement and spare parts are
generally recognized at the time of shipment. Net revenues on service
contracts are deferred and recognized on a straight-line basis over the period
of the contract.
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International sales accounted for approximately 66% of our total revenues
for the three months ended September 30, 2000, as compared to 61% of our total
revenues for the comparable period of the prior year. For the six months ended
September 30, 2000, international sales accounted for 67%, as compared to 61%
of our total revenues for the comparable period of the prior year. 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.
Gross Margin. Gross margin for the second quarter of fiscal 2001 was 50.5%,
about the same as the prior fiscal quarter and up from 47.2% for the second
quarter of our last fiscal year. For the six months ended September 30, 2000,
gross margin was 50.5%, up from 44.9% for the same period of the prior year.
The increase in gross margin in the second quarter of fiscal 2001 versus the
same quarter of fiscal 2000 is due to higher revenue levels and favorable
sales mix.
Research and Development ("R&D") Expenses. R&D expenses for the second
quarter of fiscal 2001 were $8.7 million, an increase of 15% from the prior
quarter and an increase of 71% from the same quarter of our last fiscal year.
Year-to-date R&D expenses were $16.2 million, up from $8.9 million for the
same period last year. The increase was primarily the result of additional
resources dedicated to the development of new products. 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 continue to increase in absolute dollar terms.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
for the second quarter of fiscal 2001 were $6.9 million, an increase of 17%
from the prior fiscal quarter and an increase of 42% from the second quarter
of last fiscal year. SG&A expenses for the first six months of fiscal 2001
were $12.8 million, an increase of 44% from the same period last fiscal year.
The increase from the prior periods resulted from higher orders and revenue
levels.
Interest Expense. Interest expense for the second quarter of fiscal 2001
was $0.1 million, which was about the same as that of the prior fiscal quarter
and was significantly lower than that of the second quarter of the prior
fiscal year. Year-to-date interest expense was $0.1 million in comparison to
$7.0 million for the same period last year. The decrease in interest expense
from prior year was attributable to the redemption and repurchase of
substantially all of our outstanding senior notes in March 2000.
Provision for Income Taxes. For the second quarter of fiscal 2001, we
recorded a $0.2 million provision for income taxes. This lowered our
cumulative tax rate for the six months ended September 30, 2000 to 6% from 11%
in the first fiscal quarter. The 6% tax rate is
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<PAGE>
based upon our current evaluation of our loss carry-forward potential and
research and development tax credit carry-forward benefits.
Net Income/Loss. Net income was $10.7 million for the second quarter of
fiscal 2001, up 39% from $7.7 million for the prior fiscal quarter, and, as
compared to our net loss for the second quarter of fiscal 2000, represented an
improvement of $11.9 million. For the six months ended September 30, 2000, net
income increased to $18.4 million from a net loss of $3.8 million last year.
Backlog
Effective April 1, 2000, our backlog consists of product orders for which a
customer purchase order has been received and accepted and which is scheduled
for shipment within twelve months.
Orders are subject to rescheduling or cancellation by the customer, usually
without penalty. Backlog also consists of recurring fees payable under support
contracts with our customers and orders for spare parts and billable service.
Because of possible changes in product delivery schedules and cancellation of
product orders and because our sales will sometimes reflect orders shipped in
the same quarter that they are received, our backlog at any particular date is
not necessarily indicative of actual sales for any succeeding period.
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital. We have
funded our operating activities principally from funds generated from
operations, tax refunds and net proceeds from an initial public offering.
Cash flow used in operating activities were $8.8 million and $6.4 million
for the first two quarters of fiscal 2001 and 2000, respectively. The
increase in cash flow used in operating activities from fiscal year 2000 to
2001 is mainly due to the higher investment in working capital.
Purchases of property and equipment were $3.0 million and $1.0 million for
the first two quarters of fiscal 2001 and 2000, respectively.
In May 1997, 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 (i) the base rate plus 1.75% or (ii) 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 expires on May
16, 2002. During the quarter ended June 30, 1998, we amended the bank credit
facility to have our borrowing availability
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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 September 30, 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
have requested a consent to increase our capital spending limit. No assurance
can be given that we will receive this consent.
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 are anticipated to be cash and investments
on hand ($64.5 million as of September 30, 2000), cash flows from operating
activities and, if necessary, borrowings under the 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 for at
least the next two years. 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
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that additional financing will be available when required or, if available,
will be on terms satisfactory to us.
Impact of Currency Exchange Rates
Foreign exchange rate fluctuations have historically not had a significant
impact on our results of operations since our export sales are denominated in
United States dollars. 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.
Due to the unpredictability of currency exchange rates, there can be no
assurance that we will not experience negative currency translation
adjustments in the future, nor can we predict the effect of exchange rate
fluctuations upon future operating results.
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Part II. Other Information
Item 1. Legal Proceedings
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 of operations.
On July 20, 2000, United States District Court Judge Charles A. Legge
granted our motion for summary judgment on the bases that Opti-Probe 5000
products do not infringe KLA-Tencor's U.S. patent, which was the subject of
the suit, either literally or under the doctrine of equivalents. Therefore,
only our older Opti-Probe products remain at issue in this lawsuit.
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 paragraphs and also seeks a
declaratory judgment that KLA-Tencor's patent, which we were alleged of
infringing, is invalid and not infringed by any of our systems.
On July 22, 1999, we were named in a second patent infringement suit filed
by KLA-Tencor. KLA-Tencor has alleged that it patented another aspect of one
of the thin film thickness measuring technologies that we have recently added
to some of our Opti-Probe products. KLA-Tencor is seeking damages and an
injunction to stop the sale of the equipment they allege uses this aspect.
Since the patent which is the subject of this second suit issued on June 8,
1999, any potential liability for past sales is not material. Prior to filing
its first infringement action, KLA-Tencor notified us of an earlier version of
the patent that is the subject of this second suit. We believe none of our
products infringed any of the claims of the earlier version of this KLA-Tencor
patent and previously informed KLA-Tencor of our belief. KLA-Tencor's new
patent is a continuation of the earlier patent. We believe KLA-Tencor's new
patent is invalid and we intend to vigorously defend our position and we
expect to prevail. We believe that the outcome from such litigation, even if
adverse to us, would not have a material adverse effect on our business,
financial condition or results or operations.
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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 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.
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Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The 2000 Annual Meeting of Stockholders was held on July 31, 2000. The
following matters were voted on: (1) election of G. Leonard Baker, Jr. and
Ian K. Loring as Class I directors; (2) approval of an amendment to our 2000
Equity Incentive Plan to increase the number of shares that may be issued
under the plan from 300,000 shares (plus any shares returned to the company
as a result of terminated options granted under our 1997 Plans and plus an
annual increase of one percent of the company's outstanding shares) to a
total of 3,300,000 shares (plus any shares returned to the company as a
result of terminated options granted under our 1997 Plans and plus an annual
increase of one percent of the company's outstanding shares). The vote tally
was as follows:
<TABLE>
<CAPTION>
Proposal I:
Total Votes For Each Director Total Votes Withheld From
Each Director
<S> <C> <C>
G. Leonard Baker, Jr. 21,020,632 12,733
Ian K. Loring 21,020,686 12,679
</TABLE>
<TABLE>
<CAPTION>
Proposal II:
For Against Abstain Broker Non-Votes
<S> <C> <C> <C>
15,316,300 4,431,531 1,836 1,283,698
</TABLE>
David Dominik, Martin M. Schwartz and Allan Rosencwaig are directors of
the company whose term of office continued beyond the 2000 Annual Meeting of
Stockholders.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
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Exhibit
Number Description
*10.34 Development and Cooperation Agreement entered into by
and among Applied Materials, Inc. and Therma-Wave,
Inc., effective as of July 24, 2000.
*10.35 Technology Escrow Agreement entered into by and among
Applied Materials, Inc. and Therma-Wave, Inc.,
effective as of July 24, 2000.
27.1 Financial Data Schedule.
99.1 Risk Factors. (1)
--------------------------------------------------------------------------------
* Confidential treatment is being requested for portions of this
agreement.
(1) Incorporated by reference to the same numbered exhibit in the Company's
Annual Report on Form 10-K for the period ended March 31, 2000
(Registration No. 333-29871)
The company filed a report on Form 8-K on July 26, 2000 to report a set of
agreements with Applied Materials, Inc. The Agreements include a Development
and Cooperation Agreement, a Technology Escrow Agreement and a Global Supply
Agreement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THERMA-WAVE, INC.
(Registrant)
/s/ L. RAY CHRISTIE
----------------------------------------------
L. RAY CHRISTIE
Chief Financial Officer
(as Registrant and as Principal Accounting Officer)
November 14, 2000
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