<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 January 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
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 Number)
1250 Reliance Way
Fremont, California 94539
(Address of principal executive offices) (Zip Code)
(510) 668-2200
(Registrant's telephone number, including area code)
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 January 30, 2000
- --------------------------------------------------------------------------------
Class A Common stock, $0.01 par value 9,073,532
Class B Common stock, $0.01 par value 1,122,836
Class L Common stock, $0.01 par value 1,008,170
<PAGE>
THERMA-WAVE, INC.
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets
December 31, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations
Three and nine months ended December 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
Nine months ended December 31, 1999 and 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
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 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Unaudited Consolidated Condensed Financial Statements
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
--------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,699 $ 20,245
Accounts receivable, net 23,792 12,180
Inventories, net 23,369 15,369
Other current assets 3,236 9,759
--------------------- --------------------
Total current assets 62,096 57,553
Property and equipment, net 4,589 4,513
Deferred financing costs, net 7,137 8,349
Other assets 2,459 1,937
--------------------- --------------------
Total assets $ 76,281 $ 72,352
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $ 9,244 $ 4,034
Other current liabilities 21,661 22,125
--------------------- --------------------
Total current liabilities 30,905 26,159
Long term debt 115,000 115,000
Other liabilities 4,018 2,817
--------------------- --------------------
Total liabilities 149,923 143,976
Commitments and contingencies
Mandatorily redeemable preferred stock 16,073 15,347
Stockholders' equity (net capital deficiency)
Common stock - Class A 91 91
Common stock - Class B 11 11
Common stock - Class L 10 10
Additional paid-in capital 19,044 19,754
Notes receivable from stockholders (241) (241)
Accumulated deficit (108,118) (105,416)
Other comprehensive loss (512) (1,180)
--------------------- --------------------
Total stockholders' equity (net capital deficiency) (89,715) (86,971)
--------------------- --------------------
Total liabilities and stockholders' equity (net
capital deficiency) $ 76,281 $ 72,352
===================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31 December 31
---------------------------------------- ----------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net revenue $31,977 $17,161 $ 79,031 $ 47,603
Cost of revenue 16,397 8,957 42,301 26,819
----------------- ----------------- ----------------- -----------------
Gross margin 15,580 8,204 36,730 20,784
Operating expenses:
Research and development 5,842 3,095 14,783 11,617
Selling, general and administrative 5,645 4,501 14,547 13,634
Expenses relating to operating cost
improvements - - - 1,057
----------------- ----------------- ----------------- -----------------
Total operating expenses 11,487 7,596 29,330 26,308
----------------- ----------------- ----------------- -----------------
Operating income (loss) 4,093 608 7,400 (5,524)
Other income (expense):
Interest expense (3,532) (3,542) (10,545) (10,491)
Interest income 115 141 400 518
Other, net (32) 171 43 115
----------------- ----------------- ----------------- -----------------
(3,449) (3,230) (10,102) (9,858)
----------------- ----------------- ----------------- -----------------
Income (loss) before income taxes 644 (2,622) (2,702) (15,382)
Benefit for income taxes - (341) - (2,001)
----------------- ----------------- ----------------- -----------------
Net income (loss) 644 (2,281) (2,702) (13,381)
Accretion of preferred stock dividend 314 208 726 624
----------------- ----------------- ----------------- -----------------
Net income (loss) attributable to common
stockholders $ 330 $(2,489) $ (3,428) $(14,005)
================= ================= ================= =================
Net loss per share:
Basic $ (0.05) $ (0.31) $ (0.54) $ (1.56)
Diluted $ (0.05) $ (0.31) $ (0.54) $ (1.56)
Weighted average number of shares
outstanding:
Basic 9,542 9,374 9,594 9,316
Diluted 9,542 9,374 9,594 9,316
Pro Forma net income (loss) per share:
Basic $ 0.03 $ (0.29)
Diluted $ 0.02 $ (0.29)
Weighted average number of shares
outstanding:
Basic 11,794 11,742
Diluted 13,609 11,742
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THERMA-WAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
December 31,
--------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Operating activities:
Net loss $ (2,702) $(13,381)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 3,425 3,422
Amortization of deferred financing costs 1,212 1,204
Non-cash expenses relating to operating cost
improvements - 100
Changes in assets and liabilities:
Accounts receivable (11,612) 6,645
Inventories (8,976) 1,629
Other assets 5,965 (90)
Other liabilities 5,580 (7,184)
---------------- -----------------
Net cash used in operating activities (7,108) (7,655)
Investing activities:
Purchases of property and equipment (1,704) (323)
Other (309) (428)
---------------- -----------------
Net cash used in investing activities (2,013) (751)
Net cash provided by financing activities 575 632
---------------- -----------------
Net decrease in cash and cash equivalents (8,546) (7,774)
Cash and cash equivalents at beginning of period 20,245 20,422
---------------- -----------------
Cash and cash equivalents at end of period $ 11,699 $ 12,648
================ =================
Supplementary disclosures:
Cash paid for interest $ 12,343 $ 12,407
================ =================
Cash paid for income taxes $ 2 $ 293
================ =================
</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 December 31, 1999, and the operating results and cash
flows for the nine months ended December 31, 1999 and 1998. These financial
statements and notes should be read in conjunction with our audited
financial statements and notes thereto for the year ended March 31, 1999.
The results of operations for the interim periods are not necessarily
indicative of the results of operations that may be expected for any other
period or for the fiscal year, which ends on April 2, 2000.
The third quarters of fiscal years 2000 and 1999 and the fiscal year
1999 ended on January 2, 2000, January 3, 1999 and April 4, 1999,
respectively. For presentation purposes, the accompanying financial
statements have been shown as ending on the last day of the calendar
quarter.
2. Inventories
Inventories are summarized as follows (in thousands):
December 31, 1999 March 31, 1999
----------------------- ----------------------
Purchased materials $ 5,493 $ 6,678
Systems in process 13,669 5,302
Finished systems 4,207 3,389
----------------------- ----------------------
$23,369 $15,369
======================= ======================
6
<PAGE>
3. Expenses Relating to Operating Cost Improvements
On June 22, 1998 and September 24, 1998, we announced and implemented
an operating cost improvement program aimed at bringing operating expenses
in line with our current operating environment. All terminated employees
were notified of their severance and related benefits at the time the
program was announced. This program resulted in a reduction of
approximately 100 employees primarily involved in customer service and
manufacturing positions. Certain leased facilities in Texas, Arizona and
Japan were closed and fixed assets were consolidated. Total cash outlays
for fiscal 1999 were $832,000. Non-cash charges of $100,000 were primarily
for asset write-offs. The balance of $19,000 at December 31, 1999 primarily
represented cash payments and will be utilized during the remainder of
fiscal 2000. Expenses relating to operating cost improvements are
summarized as follows:
<TABLE>
<CAPTION>
Provision Provision
Quarter Ended Quarter Ended Utilized Balance Balance
June 30, 1998 December 31, 1998 in FY99 March 31, 1999 Utilized December 31, 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Severance $406 $431 $(762) $ 75 $ (75) $ -
Facilities 76 44 (70) 50 (31) 19
Other 100 - (100) - - -
---- ---- ----- ---- ----- ---
$582 $475 $(932) $125 $(106) $19
</TABLE>
4. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." The statement established standards for the
reporting and display of comprehensive income and its components. The
adoption of this statement had no significant impact on our net loss or
stockholders' equity. SFAS 130 requires unrealized gains or losses on
available-for-sale securities and foreign currency translation adjustments
to be included in comprehensive loss. The difference between net loss and
comprehensive loss is due to foreign currency translation adjustments.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
Comprehensive gain (loss) for the three months ended December 31, 1999
and 1998 amounted to approximately $741,000 and $(1,663,000), respectively.
During the nine months ended December 31, 1999 and 1998, comprehensive loss
amounted to approximately $2,034,000 and $12,670,000, respectively.
7
<PAGE>
5. Net Income (Loss) Per Share
The Company had adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS
No. 128 requires the Company to report both basic net income (loss) per
share, which is based on the weighted-average number of common shares
outstanding excluding contingently issuable or returnable shares such as
unvested Class B Stock or shares that contingently convert into Common
Stock upon certain events, and diluted net income (loss) per share, which
is based on the weighted average number of common shares outstanding and
dilutive potential common shares outstanding. Class A Stock, Class B Stock
and Class L Stock share ratably in the net income (loss) remaining after
giving effect to the 12% yield on Class L Stock. Net loss for the three and
nine months ended December 31, 1999 and 1998 used in the net loss per share
calculation represents the loss attributable to the weighted average number
of shares of Class A Stock, Class B Stock and Common Stock outstanding
after giving effect to the 12% yield on Class L Stock. As a result of the
losses incurred by the Company during the three and nine months ended
December 31, 1999 and 1998, all potential common shares were anti-dilutive
and excluded from the diluted net income (loss) per share calculation.
The following tables set forth the computation of net income (loss)
per share of common stock:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
-------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator (in thousands):
Net income (loss) $ 644 $(2,281) $(2,702) $(13,381)
Less: Preferred stock dividend (314) (208) (726) (624)
Less: Income attributable to Class L Stock (763) (416) (1,800) (543)
-------------------------------------------------------------
$ (433) $(2,905) $(5,228) $(14,548)
Denominator (in thousands):
Class A Stock 9,074 9,074 9,074 9,074
Class B Stock (vested) 468 300 520 242
-------------------------------------------------------------
Weighted average shares outstanding used for basic
and diluted income (loss) per share 9,542 9,374 9,594 9,316
</TABLE>
The following tables 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.
December 31
-----------------------
1999 1998
-----------------------
Class B Stock Subject to Repurchase (unvested) 583,711 876,092
Mandatorily Redeemable Convertible Preferred Stock 748,739 748,739
Stock Options 2,810,000 1,742,691
8
<PAGE>
The stock options outstanding at December 31, 1999 and 1998, had a weighted
average exercise price of $8.625, and $9.685, respectively. Upon effectiveness
of the initial public offering, Class L common stock is convertible into one
share of Class A common stock plus an additional number of shares of Class A
common stock (determined by dividing the preference amount for such share by
the initial public offering price).
6. Unaudited Pro Forma Net Income (Loss) Per Share
Unaudited pro forma basic and diluted net income (loss) per share for the
three and nine months ended December 31, 1999 have been calculated based on
net income (loss) applicable to all classes of common stock and assuming the
reclassification of the Company's Class B and Class L stock immediately prior
to the completion of the initial public offering, as if such reclassification
had occurred at the beginning of the period. Each share of Class L stock will
be reclassified into one share of Class A stock plus an additional number of
shares of Class A stock (determined by dividing the preference amount of
$26.018 for such share by the initial public offering price of $20.00 per
share). Each share of Class B stock will then be reclassified into one share
of Class A stock.
7. Subsequent Events
On February 3, 2000, the Company closed the initial public offering of its
common stock. In connection with this offering and the exercise of an over-
allotment option by the underwriters, the Company sold 10,350,000 shares of
common stock at a price of $20.00 per share.
Upon the effectiveness of the initial public offering, all of the
outstanding shares of Class A common stock and Class B common stock were
reclassified into a single class of common stock on a share-for-share basis
and all of the outstanding shares of Class L common stock were reclassified
into one share of common stock plus an additional number of shares of common
stock determined by dividing the preference amount by the initial public
offering price. On February 3, the preference amount was $26.018 per share of
Class L common stock resulting in an aggregate of 2,319,698 shares of common
stock issued in exchange for outstanding shares of Class L common stock.
Immediately after the closing of the initial public offering, the Company
called for the redemption of 35% of its outstanding $115.0 million 10.625%
senior notes due 2004 at a price of 110.625% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon to the date of redemption,
pursuant to the terms of the indenture governing the senior notes. In
addition, the Company commenced a tender offer and consent solicitation for
the remaining 65% or $74,750,000 aggregate principal amount of its senior
notes. We expect to incur a non-recurring extraordinary charge for early debt
extinguishment of approximately $17.8 million, relating primarily to the
premium on the redemption and repurchase of our senior notes.
9
<PAGE>
Immediately prior to the effectiveness of the initial public offering, the
Board of Directors and stockholders adopted the 2000 Equity Incentive Plan and
the 2000 Employee Stock Purchase Plan.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
When used in this discussion, the words "expects", "anticipates" and
similar expressions are intended to identify forward-looking statements. Such
forward-looking statements are subject to a number of risks and uncertainties
that could cause actual results to differ materially from the statements made.
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.
General
We are a worldwide leader in the development, manufacture, marketing and
servicing 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: the Therma-Probe systems and the
Opti-Probe systems.
The Therma-Probe systems utilize our proprietary thermal wave technology
and are the predominant nondestructive process control metrology system used to
measure the critical ion implantation process on product wafers in the
fabrication of semiconductors.
10
<PAGE>
The 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 nine months ended December 31, 1999, we
derived approximately 84% of our revenues from system sales, 9% from sales of
replacement and spare parts, including associated labor, and 7% from service
contracts. During the year ended March 31, 1999, we derived approximately 78% of
our revenues from system sales, 12% from sales of replacement and spare parts,
including associated labor, and 10% from service contracts. 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 55%, 69% and 65% of our
total revenues for fiscal 1998, 1999, and the nine months ended December 31,
1999, respectively. We anticipate that international sales will continue to
account for a significant portion of our revenue in the foreseeable future. A
substantial portion of our international sales are denominated in U.S. dollars.
As a result, changes in the values of foreign currencies relative to the value
of the U.S. dollar can render our products comparatively more expensive.
Although we have not been negatively impacted in the past by foreign currency
changes in Japan, Korea, Taiwan and Europe, such conditions could negatively
impact our international sales in future periods.
We were acquired by Toray and Shimadzu in fiscal 1992. As a result, we
incurred substantial interest expense and amortization expense from goodwill and
purchased intangibles in periods prior to the recapitalization. In May 1997, we
effected the recapitalization. We incurred significant indebtedness in
connection with the recapitalization.
On June 22 and September 24, 1998, we announced and implemented an
operating cost improvement program aimed at bringing operating expenses in line
with our current operating environment. These efforts were in response to the
continued cutbacks in capital equipment investment by semiconductor
manufacturers. As a result of the implementation of this program, we recorded a
charge of $1.1 million in fiscal 1999, which consisted principally of severance
and other related charges.
We expect to incur a non-recurring extraordinary charge for early debt
extinguishment of approximately $17.8 million, relating primarily to the premium
on the redemption and repurchase of our senior notes.
11
<PAGE>
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 nine months ended December 31, 1999 and 1998
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.
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
-------------------------------- ---------------------------------
Statement of Operations Data: 1999 1998 1999 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 51.3 52.2 53.5 56.3
-------------- ------------- -------------- --------------
Gross margin 48.7 47.8 46.5 43.7
Operating expenses:
Research and development 18.2 18.0 18.7 24.4
Selling, general and administrative 17.7 26.3 18.4 28.6
Expenses relating to operating cost
improvements - - - 2.2
------------- ------------- -------------- --------------
Operating income (loss) 12.8 3.5 9.4 (11.5)
Interest expense (11.0) (20.6) (13.3) (22.0)
Interest income 0.3 0.8 0.5 1.1
Other, net (0.1) 1.0 - 0.2
-------------- ------------- -------------- --------------
Income (loss) before income taxes 2.0 (15.3) (3.4) (32.2)
Benefit for income taxes - (2.0) - (4.2)
-------------- ------------- -------------- --------------
Net income (loss) 2.0% (13.3)% (3.4)% (28.0)%
============== ============= ============== ==============
</TABLE>
Net Revenues. Net revenues were $32.0 million for the three months ended
December 31, 1999, an increase of 23% from the prior quarter and an increase of
86% from the same period in the prior fiscal year. Net revenues were $79.0
million for the nine months ended December 31, 1999, an increase of 66% from the
same period in the prior fiscal year. The increase in revenue is the result of
the strong demand in the semiconductor industry requiring our customers to
increase their capital investments and the recovery of economic conditions in
the Asia Pacific region. Revenues have increased primarily due to increased unit
sales of both our Therma-Probe and Opti-Probe products. Revenue from spare parts
and service contracts have also increased as our customer base continues to
expand. New orders for the third quarter were up substantially from the prior
quarter and resulted in a strengthened backlog.
Net revenues attributable to international sales for the three months ended
December 31, 1999 and 1998 accounted for 70% and 54% of our total revenues for
such periods, respectively. Net revenues attributable to international sales for
the nine months ended December 31, 1999 and 1998 accounted for 65% and 61% of
our total revenues for such periods, respectively. Due
12
<PAGE>
to significant demand from customers in Taiwan and stronger economic conditions
in the Asia Pacific region, sales to customers in Asia represented approximately
46% and 13% of total net revenues for the three months December 31, 1999 and
1998, respectively, and 41% and 19% of total net revenues for the nine months
ended December 31, 1999 and 1998, respectively.
Historically, we have experienced volatility from Asian markets. Although
we have recently experienced increased sales and received an increased level of
orders from customers in the Asia Pacific region, turbulance in the Asian
markets could adversely affect our sales in the future.
Gross Margin. Gross margin was 49% and 47%, respectively, for the three and
nine months ended December 31, 1999. For the three months ended December 31,
1999, gross margin increased from 47% in the previous quarter and 48% for the
same quarter a year ago. For the nine months ended December 31, 1999, gross
margin increased from 44% in the same period in the prior fiscal year. The
increase in gross margin is due to the improvement in the semiconductor
industry, higher volume and a favorable sales mix. The increase in gross margin
was slightly offset by higher manufacturing costs associated with the
manufacturing scale-up of new products.
Research and Development ("R&D") Expenses. R&D expenses were $5.8 million
and $14.8 million, respectively, for the three and nine months ended December
31, 1999. For the three months ended December 31, 1999, R&D expenses increased
15% from the previous quarter and 89% from the same quarter a year ago. For the
nine months ended December 31, 1999, R&D expenses increased 27% from the same
period in the prior fiscal year. The increase from the prior period is the
result of additional resources dedicated to new products and product
improvements expected to be released in the next six to twelve months. We
believe that technical leadership is essential to our success and expect to
continue to commit significant resources to R&D projects. In the future, we
expect our R&D expenses to increase in absolute dollar terms.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses were
$5.6 million and $14.5 million, respectively, for the three and nine months
ended December 31, 1999. For the three months ended December 31, 1999, SG&A
increased 16% from the previous quarter and 25% from the same quarter a year
ago. For the nine months ended December 31, 1999, SG&A increased 7% from the
same period in the prior fiscal year. The increase from the prior periods is
mainly due to the increase in sales commissions resulting from the increase in
sales and the change in customer sales mix.
Expenses Relating to Operating Cost Improvements. On June 22, 1998 and
September 24, 1998, we announced and implemented an operating cost improvement
program aimed at bringing operating expenses in line with our current operating
environment. All terminated employees were notified of their severance and
related benefits at the time the program was announced. This program resulted in
a reduction of approximately 100 employees primarily involved in customer
service and manufacturing positions. Certain leased facilities in Texas, Arizona
and Osaka, Japan were closed and fixed assets were consolidated. Total cash
outlays for the nine months ended December 31, 1999 and 1998 were $106,000 and
$753,000, respectively.
13
<PAGE>
Interest Expense. Interest expense for the three and nine months ended
December 31, 1999 was $3.5 million and $10.5 million, respectively. These
amounts are comparable to prior periods.
Provision for Income Taxes. Our tax benefit for the three and nine months
ended December 31, 1998 reflected the tax benefit rate of 13% based upon our
loss carryback potential. For the three and nine months ended December 31, 1998,
we recorded a benefit for income taxes of $0.3 million and $2.0 million,
respectively. For fiscal 2000, we have not recorded any tax benefit since we
have fully utilized our loss carryback ability.
Net Income (Loss). Net income (loss) for the three and nine months ended
December 31, 1999 was $0.6 million and ($2.7) million. For the three months
ended December 31, 1999, the net income improved $1.7 million from the previous
quarter and $2.9 million from the same quarter a year ago. For the nine months
ended December 31, 1999, the net loss improved $10.7 million from the same
period of the prior fiscal year.
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital, consisting
primarily of accounts receivable, inventories, capital expenditures and debt
service. Since the recapitalization, we have funded our operating activities
principally from funds generated from operations.
Cash flow used in operating activities was $7.1 million and $7.7 million
for the nine months ended December 31, 1999 and 1998, respectively. The decrease
in cash flow used in operating activities from fiscal year 2000 to 1999 is
mainly due to the increase in accounts receivable and inventories and the
decrease in net loss, partially offset by the tax refund of $8.3 million.
Purchases of property and equipment were $2.2 million and $0.3 million for
the nine months ended December 31, 1999 and 1998, respectively.
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. A redemption of 35% of the aggregate principal
amount of senior notes at a premium following an initial public offering is
required pursuant to the terms of the indenture governing the senior notes.
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 (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.
14
<PAGE>
During the quarter ended June 30, 1998, we amended the bank credit
facility to have our borrowing availability subject to a borrowing base formula,
which provided a maximum revolving credit facility of $30.0 million, and to
adjust the financial covenants requiring us to maintain minimum levels of EBITDA
during each six-month period ending on the last day of each fiscal quarter and
minimum levels of cumulative EBITDA from April 7, 1996 to the last day of each
fiscal quarter. In August 1999, we entered into a second amendment to our bank
credit facility to further adjust these financial tests. The second amendment
also provided that if we had not consummated a qualified initial public offering
by the end of December 31, 1999, then the loan commitment amount would be
reduced by $5.0 million to $25.0 million. These amendments were effected in
light of the impact of the downturn in the semiconductor industry on our
operating results. Without the first amendment to our bank credit facility, on
June 30, 1998, we would have violated the financial test relating to the
maintenance of minimum levels of EBITDA for the six-month period ending on such
date. We may borrow amounts under the amended bank credit facility to finance
our working capital requirements and other general corporate purposes. The
amended bank credit facility requires us to meet financial tests and contains
covenants customary for this type of financing. At December 31, 1999, 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 principal sources of funds are anticipated to be cash on hand ($11.7
million as of December 31, 1999), cash flows from operating activities, net
proceeds of $191.0 million from our completed initial public offering on
February 3, 2000 and, if necessary, borrowings under the bank credit facility.
In addition, we received a tax refund of $8.3 million during the first quarter
of fiscal 2000. We believe that these funds will provide us with sufficient
liquidity and capital resources for us to meet our current and future financial
obligations, as well as to provide funds for our working capital, capital
expenditures and other needs for at least the next 24 months. No assurance can
be given, however, that this will be the case. We may require additional equity
or debt financing to meet our working capital requirements or to fund our
research and development activities. There can be no assurance that additional
financing will be available when required or, if available, will be on terms
satisfactory to us.
On February 3, 2000, the Company closed the initial public offering of its
common stock. In connection with this offering and the exercise of an over-
allotment option by the underwriters, the Company sold 10,350,000 shares of
common stock at a price of $20.00 per share.
Upon the effectiveness of the initial public offering, all of the
outstanding shares of Class A common stock and Class B common stock were
reclassified into a single class of common stock on a share-for-share basis and
all of the outstanding shares of Class L common stock were reclassified into one
share of common stock plus an additional number of shares of common stock
determined by dividing the preference amount by the initial public offering
price. On February 3, the preference amount was $26.018 per share of Class L
common stock resulting in an aggregate of 2,319,698 shares of common stock
issued in exchange for outstanding shares of Class L common stock.
15
<PAGE>
Immediately after the closing of the initial public offering, the Company
called for the redemption of 35% of its outstanding $115.0 million 10.625%
senior notes due 2004 at a price of 110.625% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon to the date of redemption,
pursuant to the terms of the indenture governing the senior notes. In addition,
the Company commenced a tender offer and consent solicitation for the remaining
65% or $74,750,000 aggregate principal amount of its senior notes. We expect to
incur a non-recurring extraordinary charge for early debt extinguishment of
approximately $17.8 million, relating primarily to the premium on the redemption
and repurchase of our senior notes.
Foreign Currency Exchange Risk
A substantial portion of our sales are denominated in U.S. dollars and as a
result, we have relatively little exposure to foreign currency exchange risk
with respect to sales made. We do not use forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. The effect of an immediate 10%
change in exchange rates would not have a material impact on our future
operating results or cash flows.
Year 2000
Many computer systems used by us and our suppliers may not have properly
recognized a date using "00" as the year 2000. This could have resulted in
system/program failure or logic errors that could disrupt normal business
activities. We established a formal project with a project office and project
team to address this issue and achieve year 2000 readiness.
The project focused on four key readiness areas:
. Internal Infrastructure Readiness, addressing internal hardware,software
and non-information technology systems;
. Supplier Readiness, addressing the preparedness of those suppliers
providing material incorporated into our products;
. Product Readiness, addressing product functionality; and
. Customer Readiness, addressing customer support and transactional
activity.
For each readiness area, we systematically performed a global risk
assessment, conducted testing and remediation (renovation and implementation),
developed contingency plans to mitigate unknown risk, and communicated with
employees, suppliers and customers to raise awareness of the Year 2000 problem.
Internal Infrastructure Readiness Program. We conducted an assessment of
internal applications and computer hardware. All critical software applications
have been made Year 2000 compliant. All software remediation is now complete.
The Year 2000 compliance
16
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evaluation of hardware, including network fabric, telecommunications equipment,
workstations and other items is complete.
In addition to applications and information technology hardware, we tested
and developed remediation plans for facilities and other operations.
Supplier Readiness Program. This program focuses on minimizing the risks
associated with suppliers in two areas: (1) a supplier's business capability to
continue providing products and services; and (2) a supplier's product
integrity. We identified and contacted key suppliers based on their relative
risks in these two areas. We received responses from 100% of our key suppliers,
most of which indicate that they have implemented remediation plans. Based on
our assessment of each supplier's progress to adequately address the Year 2000
issue, we developed a supplier action list and contingency plans. We revisited
key suppliers during the third calendar quarter of 1999 to ensure that supplier
commitments had been met. Alternate sources were evaluated and we do not believe
that further action is necessary.
Product Readiness Program. This program focuses on identifying and
resolving Year 2000 issues existing in our products. The program encompasses a
number of activities including testing, evaluation, engineering and
manufacturing implementation. We adopted the Sematech guidelines known as Year
2000 readiness testing scenarios as the baseline for our product testing.
Sematech is a consortium of integrated circuit manufacturers that provides
guidelines to equipment suppliers to the semiconductor industry. We believe that
the use of these scenarios should enable our products to meet standards that we
believe are generally accepted across the computer industry for Year 2000
readiness. The testing, and subsequent remediation, of our products to meet the
Sematech guidelines has not had a material adverse impact on our operations. As
of the fourth calendar quarter of 1998, we believe that all of our products then
in production met the Sematech guidelines for Year 2000 readiness.
Our customers were notified of known risks and remediation plans in the
third calendar quarter of 1998. All customer equipment that is covered by
warranty or contract was retrofitted by the third calendar quarter of 1999.
Customer Readiness Program. This program is focused on customer support,
including the coordination of retrofit activity, and developing contingency
plans where appropriate, as well as the ability of our customers to continue to
conduct business with us. We completed this program in the third calendar
quarter of 1999.
Our total Year 2000 incremental costs were approximately $135,000, which
were incurred through December 31, 1999. We are continuing our assessments and
developing alternatives that will necessitate refinement of this estimate over
time. There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the programs described in this section.
Since the programs described in this section are ongoing, all potential
Year 2000 complications may not have yet been identified. Therefore, the
potential impact of these
17
<PAGE>
complications on our financial condition and results of operations cannot be
determined at this time. If computer systems used by us or our suppliers,
products provided to us by our suppliers, or the software applications of
hardware used in systems manufactured or sold by us, fail or experience
significant difficulties related to the Year 2000 issue, our results of
operations and financial condition could be materially adversely affected. We
could incur delays in producing and delivering products to our customers, which
could result in order cancellations and lost revenue and profits. As of the date
hereof, we are not aware of, and we have not experienced, any problems with our
internal computer systems that are related to the Year 2000 issue. We believe
the likelihood of losing revenue and profits from difficulties resulting from
Year 2000 issues is low.
Part II. Other Information
Item 1. Legal Proceedings
On July 19, 1994, we filed a patent infringement suit against Jenoptik in
the United States District Court for the Northern District of California. We
alleged that the manufacture and sale by Jenoptik of its TWIN and TWIN SC
systems infringed six of our United States patents that are related to our
Therma-Probe ion implant metrology systems. Jenoptik denied infringement and
claimed that our patents were invalid and unenforceable.
On February 1, 1996, we filed a patent infringement suit against Jenoptik
in the Patent Court in Dusseldorf, Germany. We alleged that the manufacture and
sale by Jenoptik of its TWIN and TWIN SC systems infringed our German
counterpart to one of our United States patents being asserted against Jenoptik
in the United States lawsuit. This German counterpart patent was found to be
invalid by a patent court in Munich, Germany.
On November 26, 1997, we received a favorable jury verdict in our United
States patent infringement suit against Jenoptik. The jury found all six of our
patents valid and concluded that Jenoptik infringed all thirty-one claims at
issue from these patents. As a result of the settlement of this litigation,
Jenoptik has agreed not to sell any of such products in the United States and to
pay us a royalty fee for systems sold in Japan. To date, the sale of these
products by Jenoptik has not had a material impact on our market position. This
settlement resolved all outstanding legal claims and pending appeals relating to
these matters.
On June 5, 1998, at our request, the United States Patent Office initiated
an interference proceeding between Therma-Wave and Rudolph Technologies. The
subject matter of the interference relates to ellipsometer technology that
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
18
<PAGE>
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
equipmentthey 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 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, was 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 of operations.
On October 25, 1999 we commenced an action against KLA-Tencor Corporation
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.
19
<PAGE>
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.
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
On August 6, 1999 the stockholders voted on a consent in lieu of an annual
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 existing
Directors to such Classified Board); (2) Amended and Restated By-Laws; (3)
Appointment of Independent Public Accountant; (4) Form of Indemnification
Agreements; (5) 1999 Equity Incentive Plan; (6) 1999 Employee Stock Purchase
Plan; (7) 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 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 9,504,717 votes for, with
576,985 shares abstaining.
On August 26, 1999 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, among other things, deleted the Classified
Board); (2) Amended and Restated By-
20
<PAGE>
Laws; (3) Election of the following Directors in connection with the
dissolution of thClassified Board: G. Leonard Baker, Jr., Ian K. Loring,
Martin M. Schwartz, David Dominik, Dr. Allan Rosencwaig and Adam W. Kirsch.
On all matters the vote tally was 8,811,361 votes for, with 1,270,341 shares
abstaining.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of Therma-Wave,Inc.
3.2 Amended and Restated By-Laws of Therma-Wave, Inc.
27.1 Financial Data Schedule.
99.1 Risk Factors. (1)
__________
(1) Incorporated by reference to the same numbered exhibit to the
Company's Registration Statement on Form S-1 (Registration No.
333-76019)
The Company did not file any reports on Form 8-K during the nine months
ended December 31, 1999.
21
<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)
February 15, 2000
22
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMA-WAVE,
INC.'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> APR-02-2000
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<PERIOD-END> JAN-02-2000
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<INVENTORY> 23,369
<CURRENT-ASSETS> 62,096
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<BONDS> 115,000
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