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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 July 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 000-26911
THERMA-WAVE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3000561
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
1250 Reliance Way
Fremont, California 94539
(Address of principal executive offices) (Zip Code)
</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 July 30, 2000
------------------------------------------------------------------------------
Common stock, $.01 par value 23,724,818
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THERMA-WAVE, INC.
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2000 and March 31, 2000 3
Condensed Consolidated Statements of Operations
Three months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
Three months ended June 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 17
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
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Part I. Financial Information
Item 1. Unaudited Consolidated Condensed Financial Statements
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
--------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 74,363 $ 75,200
Accounts receivable, net 32,522 24,400
Inventories 29,147 23,689
Other current assets 1,797 1,720
--------- ----------
Total current assets 137,829 125,009
Property and equipment, net 5,342 4,999
Deferred income taxes 1,685 1,685
Other assets 2,153 2,001
--------- ----------
Total assets $147,009 $ 133,694
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,791 $ 10,111
Other current liabilities 24,365 20,789
--------- ----------
Total current liabilities 36,156 30,900
Long term debt 16 16
Other liabilities 2,836 3,293
--------- -----------
Total liabilities 39,008 34,209
Commitments and contingencies
Stockholders' equity
Common stock 237 236
Additional paid-in capital 227,003 226,199
Notes receivable from stockholders (214) (241)
Accumulated deficit (118,295) (125,971)
Accumulated other comprehensive loss (730) (738)
--------- -----------
Total stockholders' equity 108,001 99,485
--------- -----------
Total liabilities and stockholders' equity $ 147,009 $ 133,694
========= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THERMA-WAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30,
---------------------------------
2000 1999
---------------- -----------
<S> <C> <C>
Net revenue $ 41,586 $ 21,141
Cost of revenue 20,552 12,228
-------------- ------------
Gross margin 21,034 8,913
Operating expenses:
Research and development 7,519 3,855
Selling, general and administrative 5,881 4,055
-------------- ------------
Total operating expenses 13,400 7,910
-------------- ------------
Operating income 7,634 1,003
Other income (expense):
Interest expense (60) (3,525)
Interest income 1,039 150
Other, net 12 33
-------------- ------------
991 (3,342)
-------------- ------------
Income (loss) before income taxes 8,625 (2,339)
Provision for income taxes (949) -
-------------- ------------
Net income (loss) 7,676 (2,339)
Accretion of preferred stock dividend - 206
-------------- ------------
Net income (loss) available to common stockholders $ 7,676 $ (2,545)
============== ============
Net income (loss) per share:
Basic $ 0.33 $ (0.31)
Diluted $ 0.31 $ (0.31)
Weighted average common shares outstanding:
Basic 23,148 9,458
Diluted 24,853 9,458
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THERMA-WAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30,
-------------------------------------
2000 1999
------------------ --------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 7,676 $ (2,339)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 778 1,134
Amortization of deferred financing costs - 405
Changes in assets and liabilities:
Accounts receivable (8,122) (6,314)
Inventories (5,458) 131
Other assets (156) 6,893
Other liabilities 5,203 (2,529)
------------ -----------
Net cash used by operating activities (79) (2,619)
Investing activities:
Purchases of property and equipment (1,004) (389)
Other (190) (149)
------------ -----------
Net cash used in investing activities (1,194) (538)
Net cash provided (used) in financing activities 436 (147)
------------ -----------
Net decrease in cash and cash equivalents (837) (3,304)
Cash and cash equivalents at beginning of period 75,200 20,245
------------ -----------
Cash and cash equivalents at end of period $74,363 $ 16,941
============ ===========
Supplementary disclosures:
Cash paid for interest $ 57 $ 6,172
============ ===========
Cash paid for taxes $ 1 $ 10
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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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 June 30, 2000, and the operating results and cash
flows for the three months ended June 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 April 1, 2001.
The first quarters of fiscal years 2001 and 2000 and the fiscal year
2000 ended on July 2, 2000, July 4, 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):
June 30, 2000 March 31, 2000
-------------------- --------------------
Purchased materials $ 10,620 $ 7,752
Systems in process 14,349 12,370
Finished systems 4,178 3,567
----- -----
$ 29,147 $ 23,689
========= =========
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
6
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(loss) or stockholders' equity. SFAS 130 requires unrealized gains or
losses on available-for-sale securities and foreign currency translation
adjustments to be included in comprehensive 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 June 30, 2000 and 1999, comprehensive income
(loss) amounted to approximately $7,684,000 and $(2,467,000), 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 months ended June 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 income
(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 Ended June 30,
2000 1999
---------------------------
<S> <C> <C>
Numerator (in thousands):
Income (loss) before extraordinary charge....................................... $ 7,676 $(2,339)
Less: Preferred stock dividend ................................................ -- (206)
Less: Income attributable to Class L Stock .................................... -- (434)
------- -------
$ 7,676 $(2,979)
======= =======
Denominator (in thousands):
Common Stock .................................................................. 23,148 --
Class A Stock ................................................................. -- 9,074
Class B Stock (vested) ........................................................ -- 385
------- -------
Weighted average shares outstanding used for basic income (loss)
per share .................................................................. 23,148 9,458
======= =======
Unvested Shares................................................................. 517 --
Dilutive Stock Options.......................................................... 1,188 --
------- -------
Weighted average shares outstanding used for diluted income (loss)
per share.................................................................... 24,853 9,458
======= =======
</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>
June 30,
------------------
<S> <C> <C>
2000 1999
------- ---------
Common Stock Subject to Repurchase (unvested)................................. 516,524 734,037
Mandatorily Redeemable Convertible Preferred Stock............................ -- 748,739
Stock Options................................................................. 109,736 1,701,491
</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
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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.
Subsequent to the end of the quarter, on July 20, 2000, United States
District Court Judge Charles A. Legge granted our Motion for summary
judgment that one of our Opti-Probe 5000 products does not infringe KLA-
Tencor's U.S. Patent, which was the subject of the suit, either literally
or under the doctrine of equivalents. 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 paragraph and also seeks a declaratory judgment that KLA-Tencor's
patent, which we were alleged of infringing, is invalid and not infringed
by any of our systems.
On July 22, 1999, we were named in a second patent infringement suit
filed by KLA-Tencor. KLA-Tencor has alleged that it patented another aspect
of one of the thin film thickness measuring technologies that we have
recently added to some of our Opti-Probe products. KLA-Tencor is seeking
damages and an injunction to stop the sale of the equipment they allege
uses this aspect. Since the patent which is the subject of this second suit
issued on June 8, 1999, any potential liability for past sales is not
material. Prior to filing its first infringement action, KLA-Tencor
notified us of an earlier version of the patent that is the subject of this
second suit. We believe none of our products infringed any of the claims of
the earlier version of this KLA-Tencor patent and previously informed KLA-
Tencor of our belief. KLA-Tencor's new patent is a continuation of the
earlier patent. We believe KLA-Tencor's new patent is invalid and we intend
to vigorously defend our position and we expect to prevail. We believe that
the outcome from such litigation, even if adverse to us, would not have a
material adverse effect on our business, financial condition or results or
operations.
9
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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.
10
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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.
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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.
We derive our revenues from system sales, sales of replacement and spare
parts, and service contracts. During the three months ended June 30, 2000, we
derived approximately 89% of our revenues from system sales, 7% from sales of
replacement and spare parts, including associated labor, and 4% from service
contracts. During the three months ended June 30, 1999, we derived
approximately 82% of our revenues from system sales, 10% from sales of
replacement and spare parts, including associated labor, and 8% 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.
International sales accounted for approximately 67% and 61% of our total
revenues for the three months ended June 30, 2000 and 1999, respectively. We
anticipate that international sales will continue to account for a significant
portion of our revenue in the foreseeable future. A substantial portion of our
international sales are denominated in U.S. dollars. As a result, changes in
the values of foreign currencies relative to the value of the U.S. dollar can
render our products comparatively more expensive. Although we have not been
negatively impacted in the past by foreign currency changes in Japan, Korea,
Taiwan and Europe, such conditions could negatively impact our international
sales in future periods.
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.
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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 months ended June 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.
Three months ended
June 30,
----------------------
Statement of Operations Data: 2000 1999
------ -------
Net revenue 100.0% 100.0%
Cost of revenue 49.4 57.8
------ -------
Gross margin 50.6 42.2
Operating expenses:
Research and development expenses 18.1 18.3
Selling, general and administrative 14.1 19.2
------ -------
Operating income 18.4 4.7
Other income (expense):
Interest expense (0.1) (16.7)
Interest income 2.5 0.7
Other, net (0.1) 0.2
------ -------
Income (loss) before income taxes 20.7 (11.1)
Provision for income taxes (2.3) -
------ -------
Net income (loss) 18.4% (11.1)%
====== =======
Net Revenues. Net revenues for the fiscal quarters ended June 30, 2000 and
1999 were $41.6 million and $21.1 million, respectively. Compared to the prior
fiscal quarter, net revenues increased $4.9 million or 13%. Compared to the
corresponding period of fiscal 1999, net revenues increased $20.4 million or
97%. The increase in revenue is the result of the improvement in the
semiconductor capital equipment industry, which is primarily related to the
growth of semiconductor manufacturers and the recovery of economic conditions
in the Asia Pacific region. Revenues have increased primarily due to increased
unit sales of both our Therma-Probe and Opti-Probe products.
Gross Margin. Gross margin for the first quarter of fiscal 2001 was 50.6%,
about the same as the fourth quarter of fiscal 2000 and up from 42.2% for the
first quarter of our last fiscal year. The increase versus the first quarter
of fiscal 2000 is due to higher revenue levels and favorable sales mix.
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Research and Development ("R&D") Expenses. R&D expenses for the first
quarter of fiscal 2001 were $7.5 million, an increase of 8% from the prior
quarter and an increase of 95% from the first quarter of our last fiscal year.
The increase was the result of additional resources dedicated to the
development of new products expected to be released later this 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 continue to increase in absolute dollar terms.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
for the first quarter of fiscal 2001 were $5.9 million, a decrease of 6% from
the prior fiscal quarter and an increase of 45% from the first quarter of last
fiscal year. The decrease from the prior fiscal quarter was due to lower
sales commissions resulting from the change in customer sales mix. The
increase from the first quarter of the prior fiscal year resulted from higher
revenue levels.
Interest Expense. Interest expense for the first quarter of fiscal 2001
was $0.1 million, which was significantly lower than that of the prior fiscal
quarter as well as the first quarter of the prior fiscal year. The decrease in
interest expense is attributable to the redemption and repurchase of
substantially all of our outstanding senior notes in March 2000.
Provision for Income Taxes. For the first quarter of fiscal 2001, we
recorded a $0.9 million provision for income taxes. The tax rate of 11% is
based upon our loss carryforward potential and research and development tax
credit carryforward benefits.
Net Income/Loss. Net income was $7.7 million for the first quarter of
fiscal 2001. This was a major turnaround from our $18.1 million loss for the
prior fiscal quarter (which included $21.9 million for an extraordinary loss
due to the early redemption and repurchase of our senior notes), and, as
compared to our net loss for the first quarter of fiscal 2000, represented an
improvement of $10.2 million.
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. Prior to April 1, 2000, orders that were
scheduled for shipment beyond six months were not included in backlog. This
change of backlog policy increased our backlog by approximately $3 million.
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.
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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 $0.1 million and $2.6 million
for the first quarters of fiscal 2001 and 2000, respectively. The decrease in
cash flow used in operating activities from fiscal year 2001 to 2000 is mainly
due to the increase in net income offset by a higher investment in working
capital.
Purchases of property and equipment were $1.0 million and $0.4 million for
the first 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 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 June 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 are currently in the process of negotiating a new loan
agreement. No assurances can be given that the new loan agreement will be
satisfactorily negotiated.
15
<PAGE>
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 on hand ($74.4
million as of June 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 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.
16
<PAGE>
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 or operations.
Subsequent to the end of the quarter, on July 20, 2000, United States
District Court Judge Charles A. Legge granted our Motion for summary judgment
that one of our Opti-Probe 5000 products does not infringe KLA-Tencor's U.S.
Patent, which was the subject of the suit, either literally or under the
doctrine of equivalents. 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 paragraph and also seeks a
declaratory judgment that KLA-Tencor's patent, which we were alleged of
infringing, is invalid and not infringed by any of our systems.
On July 22, 1999, we were named in a second patent infringement suit filed
by KLA-Tencor. KLA-Tencor has alleged that it patented another aspect of one
of the thin film thickness measuring technologies that we have recently added
to some of our Opti-Probe products. KLA-Tencor is seeking damages and an
injunction to stop the sale of the equipment they allege uses this aspect.
Since the patent which is the subject of this second suit issued on June 8,
1999, any potential liability for past sales is not material. Prior to filing
its first infringement action, KLA-Tencor notified us of an earlier version of
the patent that is the subject of this second suit. We believe none of our
products infringed any of the claims of the earlier version of this KLA-Tencor
patent and previously informed KLA-Tencor of our belief. KLA-Tencor's new
patent is a continuation of the earlier patent. We believe KLA-Tencor's new
patent is invalid and we intend to vigorously defend our position and we
expect to prevail. We believe that the outcome from such litigation, even if
adverse to us, would not have a material adverse effect on our business,
financial condition or results or operations.
17
<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.
18
<PAGE>
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 the Amendment to the
2000 Equity Incentive Plan to Increase the Number of Shares Authorized of
Issuance. The vote tally was as follows:
Proposal I:
<TABLE>
<CAPTION>
Total Vote For Each Total Vote Withheld From
Director Each Director
<S> <C> <C>
G. Leonard Baker, Jr. 21,020,632 12,733
Ian K. Loring 21,020,686 12,679
</TABLE>
Proposal II:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
<S> <C> <C> <C>
15,316,300 4,431,531 1,836 1,283,698
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
Exhibit
Number Description
27.1 Financial Data Schedule.
99.1 Risk Factors. (1)
_______
(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)
19
<PAGE>
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.
20
<PAGE>
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)
August 15, 2000
21
