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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 1, 2001
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
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THERMA-WAVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3000561
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1250 Reliance Way 94539
Fremont, California (Zip Code)
(Address of Principal Executive
Offices)
(510) 668-2200
Registrant's telephone number, including area code
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best or registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [_]
The aggregate market value of the common equity held by non-affiliates of
the registrant as of April 1, 2001 was $177,219,007. As of April 1, 2001, the
registrant had 23,994,699 shares of common stock outstanding.
Portions of the Proxy Statement for the 2001 annual stockholders meeting
are incorporated by reference into Part III.
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THERMA-WAVE, INC.
FORM 10-K
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 13
Item 3. Legal Proceedings.............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............ 13
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 14
Item 6. Selected Financial Data........................................ 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 24
Item 8. Financial Statements and Supplemental Data..................... 25
Item 9. Changes in and Disagreements with Accountants and Financial
Disclosure..................................................... 46
Part III
Item 10. Directors and Executive Officers of the Registrant............. 47
Item 11. Executive Compensation......................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 47
Item 13. Certain Relationships and Related Transactions................. 47
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K............................................................ 48
PART I
ITEM 1. BUSINESS
This annual report on Form 10-K contains forward-looking statements,
including, without limitation, statements concerning the conditions in the
semiconductor and semiconductor capital equipment industries, our operations,
economic performance and financial condition, including in particular
statements relating to our business and growth strategy and product development
efforts. The words "believe," "expect," "anticipate," "intend" and other
similar expressions generally identify forward-looking statements. Potential
investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. These forward-looking
statements are based largely on our current expectations and are subject to a
number of risks and uncertainties, including, without limitation, those
identified under Exhibit 99.1, "Risk Factors," and elsewhere in this annual
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. In addition, important factors to consider in
evaluating such forward-looking statements include changes in external market
factors, changes in our business or growth strategy or an inability to execute
our strategy due to changes in our industry or the economy generally, the
emergence of new or growing competitors, inability to develop or introduce new
products as planned, or the acceptance of those products by our customers and
various other competitive factors. In light of these risks and uncertainties,
there can be no assurance that the matters referred to in the forward-looking
statements contained in this annual report will in fact occur.
Overview
Therma-Wave is a worldwide leader in the development, manufacture, marketing
and service of process control metrology systems used in the manufacture of
semiconductors. Process control metrology is used to monitor process parameters
in order to enable semiconductor manufacturers to maintain high overall
manufacturing yield, reduce the size of the circuit features imprinted on the
semiconductor to improve the performance of the semiconductor device and
increase their equipment productivity. Our current product families, Therma-
Probe, Opti-Probe, Opti-Probe CD, Meta-Probe X, and Integra, use proprietary
and patented technology to provide precise, non-contact, non-destructive
measurement for each and every basic building block ("process module") in the
manufacture of integrated circuits:
. Ion Implantation--implanting ions, usually boron, phosphorus or arsenic,
into selected areas of the silicon wafer to alter its electrical
properties. Ion implantation may be performed typically 6 to 12 times in
the manufacture of IC's. For example, ion implantation creates the
positively- and negatively-doped regions used to create each of the
millions of transistors on each integrated circuit. It also is used to
adjust the voltage at which the transistors "will turn on'. Our Therma-
Probe is typically used as a standard metrology tool for these ion
implantation processes.
. Dielectric Film Deposition and Etching--depositing and selectively
removing layers of dielectric films on the silicon wafer in order to
provide electrical insulation for each layer of the semiconductor IC.
Film deposition is typically done by Chemical Vapor Deposition (CVD), and
film removal is typically done by plasma etching. Our Opti-Probe is
typically used as a standard, in-line metrology tool for film thickness
in these processes. Our Opti-Probe CD, and Integra integrated metrology
products, are newly introduced products which can provide rapid, non-
destructive control of the Critical Dimensions (CD's) of the etch
processes.
. Conductor Film Deposition and Etching--depositing and selectively
removing layers of metal, polysilicon, and metal barrier films used to
interconnect the transistors within a semiconductor device. Film
deposition is typically done by Physical Vapor Deposition (PVD) or by
CVD, and film removal is typically done by plasma etching or CMP. Our
Opti-Probe is typically used as a standard metrology tool for the non-
opaque conductor films, and our Meta-Probe X is a newly introduced system
for metrology of the metal (opaque) films. Our Opti-Probe CD, and Integra
integrated metrology products, are newly introduced products which can
provide rapid, non-destructive control of the Critical Dimensions (CD's)
of the etch processes.
1
. Chemical Mechanical Planarization (CMP)--"leveling' the top surface of
the wafer after each layer of device features is added. The leveling is
done by mechanical polishing in a chemical solution, and is required to
maintain flatness of the wafer throughout the sequence of hundreds of
process steps. Our Opti-Probe is typically used as a standard, in-line
metrology tool for film thickness in these processes.
. Wafer Patterning--using photolithographic techniques to create the fine
(sub-micron) structures that define the integrated circuit. The wafer
patterning is typically done by "stepper" exposure systems and the
photoresist developing and removal is done by "track" systems and
"asher/strip" systems. Our Opti-Probe is typically used as a standard,
in-line metrology tool for film thickness and reflectivity in these
processes. Our Opti-Probe CD and Integra integrated metrology products
are newly introduced products which can provide rapid, non-destructive
control of the Critical Dimensions (CD's) of the wafer patterning
process.
Industry Background
The demand for semiconductors has continually increased as the use of
semiconductors has expanded beyond personal computers and computer systems to a
wide array of additional applications, including telecommunication and data
communication systems, automotive systems, consumer electronics, medical
products and household appliances. Additionally, the Internet has stimulated
the need for more high performance semiconductor devices. As a result,
semiconductors have become more complex, requiring:
. decreases in feature line width, for example, from 0.18 microns to 0.13
microns;
. as many as 500 process steps; and
. an increase in the number of metal or "interconnect" layers.
Additionally, the life cycle for these devices has been compressed from four
years in the early 1990s to approximately two years today. The increase in
device complexity and reduction in product life cycles have led to a more
costly and complex manufacturing process. At the same time, semiconductor
manufacturers have continued to face significant price pressure due to
competitions in the industry. These factors have led semiconductor
manufacturers to intensify efforts to improve fab productivity, including the
increased use of process control metrology.
Process control metrology is used to monitor process parameters in order to
enable semiconductor manufacturers to reduce costs and improve device
performance. Historically, semiconductor manufacturers have achieved an
approximate 25% to 30% annual reduction in cost per chip function through
productivity improvements including reduced feature size, increased wafer size
and increased equipment productivity. Although increasing wafer size and yield
(percentage of "good" IC's per wafer) will continue to be sources of
productivity gains by semiconductor manufacturers, increasingly, we believe,
gains will come from reduced feature size and non-yield-derived manufacturing
productivity enhancements. This important last category includes increased
equipment uptime, reduced manufacturing space requirements, reduced use of
wafers for testing purposes and lower tool maintenance costs. According to
Sematech, a consortium of integrated circuit manufacturers that provides
research, analysis and guidelines to equipment suppliers to the semiconductor
industry, as summarized in the following table, the greatest potential for
future productivity gains are expected to come primarily from gains in
equipment productivity and continuing reduction of feature sizes:
Key Drivers of Fab Productivity*
Factor 1980 Present Future
------ ---- ------- ------
Reduced feature sizes................................... 12% 12-14% 12-14%
Increased wafer sizes................................... 8% 4% <2%
Improved yields......................................... 5% 2% <1%
Other gains in equipment productivity................... 3% 7-10% >10-13%
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* Percentages reflect the annual reduction in the cost per chip function.
Source: Sematech
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Therma-Wave x Metrology Solutions
Therma-Wave's Fab Productivity Enhancement(TM) solutions currently consist
of:
. two well-established, major product families of in-line process control
metrology systems--the Therma-Probe and Opti-Probe systems The Therma-
Probe product family was introduced in 1985 as the company's initial
product line, and the Opti-Probe product family was introduced in 1992.
Both product families feature our proprietary and patented measurement
technologies and offer robotic wafer handling, advanced vision
processing, sophisticated but user-friendly software and high throughput
and reliability. The modular design of the hardware and software enables
continuous product enhancement as new advances are made.
. three newly-introduced product families--the Meta-Probe X, Opti-Probe CD
and Integra products. The Meta-Probe X is an X-ray reflectometry (XRR)
system which provides independent film thickness and density metrology
for Copper barrier and seed layers and other metal films that are key for
the next generations of IC technology. The Opti-Probe CD is a
spectroscopic ellipsometer-based system that provides revolutionary,
nondestructive Critical Dimension (CD) metrology for the smallest
features of the next generations of IC's, in ways superior to the
traditional CD-SEM tools. This product employs software from Timbre
Technologies (a Tokyo Electron company) in conjunction with the Opti-
Probe 5000 system. Therma-Wave's Integra line of integrated metrology
products is a broad-based family of compact metrology "modules" which
will be installed and function inside an IC process system, such as an
etcher or CVD deposition system, to provide metrology on each wafer
before it exits the process tool. All three of these new product families
were introduced in the reported fiscal year. These new products represent
a substantial expansion of Therma-Wave's Fab Productivity Enhancement(TM)
product offerings to the semiconductor industry, and represent a growth
in Therma-Wave's addressed market by over 100%.
THERMA-PROBE
Ion Implant Metrology
A key process step in the fabrication of semiconductor devices is the
implantation of ions, usually boron, phosphorous or arsenic, into selective
areas of the silicon wafer to alter its electrical properties. Control of the
accuracy and uniformity of the ion implant dose is critical to device
performance and yield. Ion implantation is generally performed several
(typically 6 to 12) times during the early phases of the fabrication cycle. As
a result, there is typically a time lag of several weeks between these implant
steps and the first electrical measurements that indicate whether the ion
implantation process was properly executed. Failure to identify improper ion
implantation can be extremely costly to a semiconductor manufacturer if the
wafer production is permitted to continue in error. To test on a more timely
basis whether the ion implantation was properly executed, semiconductor
manufacturers historically used a four-point probe which measured electrical
resistance but required physical contact between the probe and the silicon
wafer surface. Because the physical contact with the wafer surface produces
silicon particles (defects) which can kill IC yield, the four-point probe
method can only be used on "test wafers" (non-production blank wafers that have
no IC devices on them). In contrast to that method, our Therma-Probe's
capability to measure nondestructively on the actual production IC wafers
decreases manufacturing costs by reducing the need for test wafers and pilot
runs and shortening the cycle time between the implant and monitoring steps. In
addition, our Therma-Probe systems detect implant processing problems which
only effect the product wafers and which are not revealed by utilizing test
wafer monitoring alone.
Therma-Probe Product Family
Therma-Probe systems are the predominant non-destructive process control
metrology system used world-wide for the ion implantation process in the
fabrication of semiconductors. The Therma-Probe systems employ proprietary
thermal wave technology that uses highly focused but low power laser beams to
generate
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and detect thermal and plasma wave signals in the silicon wafer. Proprietary
software correlates the signals to the ion implant dose. Unlike previous ion
implant metrology systems, the Therma-Probe systems utilize a totally non-
contact, non-damaging technology and thus can be used to monitor product wafers
immediately after the ion implantation process. These features have been
integrated into an easy-to-use and reliable package with automated wafer
handling and statistical data processing. Since their introduction, we believe
the Therma-Probe systems have captured over 50% of the entire market for ion
implant metrology (destructive plus non-destructive methods) , and over 95% of
the market for non-destructive ion implantation metrology.
Therma-Probe Benefits
We believe that our Therma-Probe systems offer the following technological
advantages and benefits that distinguish them from the ion implant metrology
systems offered by our competitors:
Proprietary Technology. To provide non-contact, non-contaminating ion
implant measurements on product wafers, our Therma-Probe systems employ
proprietary thermal wave technology, which uses highly focused but low
power laser beams to generate and detect thermal wave signals in the
silicon wafer that can be correlated to the ion implant dose. The thermal
wave technology used to measure the ion implant dose in the silicon wafer
is a highly proprietary and extensivelypatented technology owned by Therma-
Wave. We believe that these patents help to maintain our competitive
position.
Ease of Use and Reliability. We believe we have integrated our thermal
wave technology into easy-to-use and reliable process control metrology
systems. These systems are configured specifically for use by semiconductor
device manufacturers and feature automated wafer handling, automated data
collection, statistical data processing and data management.
Installed Base. Virtually all major semiconductor manufacturers use
Therma-Probe systems to monitor and control their ion implant processes. In
addition, virtually all major manufacturers of ion implant equipment
utilize Therma-Probe systems to help develop and qualify their implanters.
Additionally, our engineers have extensive experience in addressing many
different types of ion implant applications and providing valuable
assistance to our customers, thereby strengthening our relationships with
them. We believe our significant installed base of Therma-Probe systems
acts as a barrier to entry for current and potential competitors in the ion
implant measurement market.
Continuous Improvement. We continue to develop, manufacture and market
new and improved Therma-Probe systems to enhance system capability and to
lower the cost of ownership to the customer. For example, we recently
introduced the TP-630, which possesses state of the art ion implant
measurement technology for wafer sizes up to 300 millimeters.
The following table summarizes our improvements to the Therma-Probe product
family:
Year
System Introduced Description of Innovation/Advancement
------ ---------- -------------------------------------
TP-200 1985 Introduced first non-destructive process control metrology
system to measure ion implantation. Solved wide-spread IC
industry need for rapid ion implant metrology on product
wafers.
TP-300 1987 Added cassette-to-cassette wafer handling and automation
software to the capability of the TP-200 to satisfy
industry need to proliferate product wafer measurements.
TP-400 1992 Significantly improved repeatability of the basic ion
implantation dose measurement and added second wafer
cassette station for improved tool calibration.
TP-500 1996 Provided improved product reliability by employing
themodernized and field-proven platform of the Therma-Wave
Opti-Probe 2600, and added pattern recognition and
improved wafer throughput.
4
Year
System Introduced Description of Innovation/Advancement
------ ---------- -------------------------------------
TP-630 1998 Expanded wafer measurement capability to handle the new
300 millimeter silicon wafers, in addition to traditional
200 millimeter wafers.
TP-500 2000 Initiated application research for ultra-shallow junction
depth metrology.
TP-630
OPTI-PROBE
Thin Film Metrology
The majority of the 100 to 500 process steps required to fabricate
semiconductors on a silicon wafer involve the deposition and selective removal
of a variety of insulating and conducting thin films. Thin film metrology
systems measure the thickness and material properties of these thin films and,
because they are used to measure a large number of process steps, they are one
of the most important and pervasive metrology systems utilized at semiconductor
fabrication facilities. The most widely used technologies to measure the
thickness and properties of thin films have historically been reflection
spectrometry and ellipsometry. Reflection spectrometers obtain an optical
spectrum as a function of wavelength for light reflected from the surface of a
wafer. This spectrum is then analyzed with appropriate physics-based algorithms
to obtain film thickness and, in some cases, other properties of the film. In
ellipsometry, the change of polarization of the reflected light is measured.
The polarization change is analyzed with appropriate algorithms to obtain film
thickness, and, in some cases, other properties of the film.
Increasingly, traditional, single-technology film metrology systems have
been unable to meet the process control metrology demands of the semiconductor
industry. For example, the industry is rapidly moving toward measuring product
wafers rather than test wafers, both because of the inability to adequately
control the manufacturing process using test wafers alone, and the costs
associated with the processing of non-productive test wafers. Measurements on
product wafers, however, must be performed in small areas, and both
spectrometers and ellipsometers generally require fairly large measurement
areas. Additionally, increasing demands for improved precision and
repeatability require the ability to measure thicknesses that range from
extremely thin films, which generally measure below 20 angstroms, to films that
are hundreds of thousands times thicker. (An angstrom is equal to one hundred
millionth of a centimeter.) Reflection spectrometers are most suitable for
measuring thicker films, whereas ellipsometers are most suitable for measuring
very thin films. Thus, neither system alone is capable of accurate and reliable
measurements over the full range of film thicknesses. Further, the industry is
now using film stacks composed of several layers of different films and the
optical properties of many films are functions of the actual deposition
conditions. Generally, spectrometers or ellipsometers alone generate
insufficient data to simultaneously determine the thicknesses and properties of
these film stacks and new films with the precision that semiconductor
manufacturers require. Reflection spectrometers and most ellipsometers have
very limited capabilities for such simultaneous measurements of both thickness
and optical parameters.
Opti-Probe Product Family
Opti-Probe systems significantly improve upon existing thin film metrology
systems by successfully integrating up to five distinct film measurement
technologies, three of which are patented by Therma-Wave. By combining the
measured data from these multiple technologies and correlating it by using our
proprietary software, Opti-Probe systems provide increased measurement
capability leading to higher yields, less misprocessing, less rework, faster
production ramp-up and increased productivity on both test and product wafers.
These techniques of combining optical measurement technologies and correlating
the results have also been patented by Therma-Wave. We believe Opti-Probe
systems have captured approximately 37% of the thin film measurement market.
5
Opti-Probe Benefits
We believe our Opti-Probe systems offer several technological advantages and
benefits which distinguish them from thin film metrology systems offered by our
competitors including the following:
Proprietary Technology. Opti-Probe systems combine up to five distinct
measurement technologies, three of which we have patented. Additionally, we
hold patents on the use of many of the combinations of these thin film
measurement technologies. Because of the wealth of data that can be
obtained from these combined optical technologies, it is possible to
determine the thickness and optical parameters of one or more films
simultaneously. In addition, since our proprietary technologies employ a
highly focused laser beam, Opti-Probe systems can perform measurements with
a spot size that is the smallest in the industry. Although our competitors
have now introduced systems that contain both spectrometers and
ellipsometers in one tool, we have patented the technique of combining the
measurement data from these technologies. We believe our patented
technologies, and the patented combinations thereof, result in a superior
product.
Ease of Use and Reliability. We believe our Opti-Probe systems are
regarded as easy-to-use and highly reliable. These systems are configured
specifically for semiconductor device manufacturers and feature automated
wafer handling, advanced image processing, automated data collection,
statistical data processing and data management.
Proprietary Software. We believe our proprietary software incorporated
into Opti-Probe systems is superior to that of the competitors. During the
fabrication of semiconductors, many different films and film stacks,
consisting of several layers of different films, are deposited and
selectively removed from the silicon wafer. This, in turn, means that
hundreds of film measurement data analysis algorithms, or recipes, must be
developed and stored in the computer of a thin film metrology system. Thus,
the full benefit of a thin film metrology system to the customer is a
result of a combination of superior measurement capability and superior
recipe development. We have a staff of over fifty experienced applications
scientists and engineers stationed worldwide near all major customers that
provides full applications support to develop new recipes as device
manufacturing processes change.
Continuous Improvement. While we have achieved market share growth in
the thin film metrology market with our current Opti-Probe systems, we
continue to develop, manufacture and market new and improved systems. We
believe we provide the semiconductor industry with thin film metrology
systems that operate with greater reliability in the deep ultra-violet
region of the optical spectrum. This is of paramount importance since
device manufacturers are now developing patterning technology utilizing
optical radiation in this ultra-violet region.
In 1998, we introduced the Opti-Probe 5000 series, which integrates up to
two additional measurement technologies into the Opti-Probe product family. As
a result, the Opti-Probe 5000 series has up to five independent, yet fully
integrated measurement technologies. We believe current competitive products
include no more than two independent measurement technologies. The two
additional technologies that have been integrated into the 5000 series are
spectroscopic ellipsometry and absolute laser ellipsometry, each of which has
expanded the Opti-Probe's measurement capabilities and improved measurement
integrity.
Spectroscopic ellipsometry in the Opti-Probe 5000 is advanced to a new level
of capability by being integrated with any of the other four techologies in the
Opti-Probe 5000. This design accelerates the Opti-Probe 5000's ability to
determine the correct film solution even for difficult, multi-parameter
applications, and maximizes its robustness against errors due to fluctuations
in the semiconductor process.
The addition of absolute laser ellipsometry, or AE(TM), to Opti-Probe 5000
systems has enabled the Opti-Probe to set new records for the most repeatible
ultra-thin measurement of gate oxide thickness. These measurements are critical
for process control of the transistor gate on all IC devices. Combined with the
Desorber option of the Opti-Probe, we believe the Opti-Probe offers the
semiconductor industry's best solution for process control and multi-fab
matching of thin gate processes.
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Therma-Wave sold its first Opti-Probe 5000 system in 1998. Since that
introduction, we believe the Opti-Prove 5000 system has successfully
established itself as the semiconductor industry's highest-performance thin
film metrology system. The Opti-Probe continues to be preferred by customers,
as evidenced by its market share gains. Moreover, the majority of the most
successful IC manufacturers, who are now constructing new multi-billion-dollar
300-millimeter fabs, have selected Opti-Probe for thin film metrology in these
state-of-art fabs.
The following table summarizes our improvements to the Opti-Probe product
family:
Year
System Introduced Description of Innovation/Advancement
------ ---------- -------------------------------------
OP-1000 1992 Introduced a new, patented optical technology,
BPR(TM), to measure thin film deposition and
removal.
OP-2000 1993 Integrated BPR(TM) with a new patented optical
technology, BPE(TM), to enhance measurement
capabilities for very thin films
OP-2600 1994 Integrated BPR(TM), BPE(TM) and Spectrometry to
further expand the measurement capabilities.
OP-2600 DUV 1996 Integrated deep ultra-violet reflectance (DUV)
with the existing system to expand measurement
range.
OP-3260 1996 Significantly increased throughput of Opti-Probe.
OP-3260 DUV 1996 Integrated OP-3260 system with DUV reflectance.
OP-5200 Series 1998 Integrated up to five measurement technologies
(BPR(TM), BPE(TM),DUV reflectance, Spectroscopic
Ellipsometry and AE(TM)).
OP-5300 Series 1998 Expanded OP-5200 series wafer measurement
capability to 300 millimeters.
OP-5200 and 2000- Released new applications for advanced
OP-5300 series 2001 semiconductor manufacturing processes, including
ultra-thin gate stacks, advanced 193 nanometer
organic and inorganic antireflective layers,
silicon on insulator, and silicon-germanium.
OP-5300 series 2001 NT became the standard operating system for 300
millimeter Opti-Probes, replacing DOS.
OP-5200 series 2000- Desorber product option was introduced, enabling
2001 Opti-Probe to meet stringent industry requirements
for thin gate dielectric metrology.
OP-5300 series 2000- Wafer Bow/Warp/Stress (WBWS)
2001 product option was introduced, enabling
measurement of additional wafer properties at
overall reduced cost for the customer
OPTI-PROBE CD
New Market Requirements
The trend of shrinking IC feature size into the sub-100 nanometer range is
having a disruptive effect on the ability of the scanning electron microscope
(SEM) to perform the required measurement of the critical dimensions (CD's) of
the IC features. The SEM has been the standard CD measurement tool (referred to
as a CD-SEM) for a number of years. However, the limitations of this tool are
being highlighted by the key IC
7
manufacturers who are rapidly moving production toward 100 nanometer feature
size at this time. CD-SEM limitations are (1) measurement inaccuracy due to e-
beam charging artifacts ("blooming'), (2) inability to detect sidewall defects
resulting from process excursions or drifts, (3) difficulty to measure sidewall
angle, (4) measurement errors due to heating and deformation of the CD
photoresist material by the e-beam, (5) cost (typically $1 million to $3
million each), and (6) slowness.
These limitations pose an opportunity for a new CD measurement method to
displace the SEM for a substantial portion of the CD metrology functions in the
fab. The size of this new opportunity is significant. For example, the total
semiconductor industry investment in CD-SEM's in 2000 is reported by Dataquest
to be $502 million. In comparison, the industry investment in film thickness
measurement tool (Therma-Wave's main market) in 2000 is reported to be $407
million. Therma-Wave is making a significant investment toward the goal of
being a major supplier in this new opportunity.
In early 2000, Therma-Wave rapidly entered this optical CD (OCD) market with
a product composed of Therma-Wave's hardware (Opti-Probe) and a newly
introduced software analysis program from Timbre Technologies, a start-up
company. Therma-wave signed an exclusive distributorship agreement with Timbre
for Fiscal 2001. In this year, major progress has been achieved. Proof of the
OCD capability was established, a beta site program was completed successfully
with a key US IC manufacturer, and the use of our OCD for pilot production was
approved. In late fiscal 2001, Tokyo Electron (the second largest semiconductor
equipment supplier) purchased Timbre Technologies, validating the importance of
this new metrology. Therma-Wave and TEL (Timbre) have continued and are
strengthening their relationship enabling Therma-wave to supply OCD to the
semiconductor industry. In 2001 Therma-Wave recorded its first orders for Opti-
Probe systems for the primary application of OCD in the fab. We anticipate
substantial growth in OCD product revenue in coming years.
META-PROBE X
New Market Requirements
We believe the semiconductor industry is rapidly moving towards the use of
copper as an alternative to aluminum for conductor layers in semiconductors for
improved device performance and enhanced fab productivity. In addition, more
process steps in semiconductor manufacturing involve thin stacks of metal or
metal alloys, which require frequent thickness and density measurements. In
addition, new device technologies, such as magnetic random access memory (MRAM)
and ferroelectric random access memory (FRAM) involve 4 or more ultra-thin
layers of metal alloys and oxides, which must be controlled for thickness and
density. Existing metrology cannot measure films as thin or film stacks as
complicated as used in these new devices, and no existing metrology technique
can measure absolute density and roughness.
The Meta-Probe Product Family
We recently announced our Meta-Probe X metrology system to address these new
requirements. The Meta-Probe X thin film metrology system utilizes a patented
technique based on x-ray reflectometry (XRR) to rapidly (in less than 10
seconds) and independently measure thickness, density, and roughness of each
film in multi-layer stacks. Unlike other metal measurement technologies, such
as 4-point probe and photo-acoustic systems, XRR provides an absolute
measurement of film thickness, density, and roughness, independent of changing
material properties. Applications of the Meta-Probe X include monitoring the
thickness of Cu seed and Ta barrier films in production stacks prior to ECD
fill for Cu metalization, as well as monitoring thickness, density, and
roughness of silicide, Ti/TiN liner/barrier stacks for advanced Aluminum
metalization, and many of the new structures currently under development, such
as MRAM and FRAM stacks. A proprietary technique allows measurement on either
patterned product or blanket test wafers. We believe that existing metal film
metrology systems are unable to perform the thickness and density measurements
with the required precision and repeatability and that a more advanced
measurement system is required. We successfully completed the beta testing of
the Meta-Probe X at customer locations during fiscal 2001 and expect to ship
several revenue units of this new product line in fiscal 2002.
8
INTEGRA INTEGRATED METROLOGY
New Market Requirements
Technology trends in advanced semiconductor manufacturing are today placing
increased demands on processing tools (such as CVD, PVD, etch, CMP, ECD, etc.)
to deliver greater levels of process performance, production availability, and
process repeatability in order to minimize risk of product loss, improve
manufacturing efficiencies, improve device yields. The transition towards 300
millimeter, continuing device shrinks, and the mixed foundry manufacturing
models are key contributors to these trends. To successfully meet these
challenges, device manufacturers and process tool original equipment
manufacturers (OEM's) are actively engaged in developing technologies for
Advanced Process Control (APC). We believe that APC implementation requires the
integration of metrology capabilities directly onboard the process tool.
Benefits of Integrated Metrology & APC
Device manufacturers can derive a wide range of benefits by implementing
integrated metrology and APC strategies in their fabs. By integrating the
measurement directly on the to process tool, they can greatly increase the rate
of sampling and decrease the delay between the process step and measurement.
Increasing the measurement frequency, often to every single wafer, allows for
rapid fault detection and correction, thereby reduce potential for scrap due to
excursions in the process tool. In addition, the data collected can be input
into real-time process control models to correct minor drifts in the processing
conditions.
INTEGRA Product Family
In 2000, Therma-Wave committed to a program of developing a broad family of
Integrated Metrology modules (with INTEGRA as the product family name) for
installation into key semiconductor process tools. As a result of our
previously announced development and cooperation agreement with Applied
Materials, Inc., substantial development effort took place in fiscal 2001 to
successfully identify and prototype our first set of integrated metrology
modules. Due to the unique physical constraints of each process tool, we
carefully select and match appropriate technologies developed in the (stand-
alone) Therma-Probe, Opti-Probe, Opti-Probe CD and Meta-Probe X product
families to the measurement requirements for a specific process tool
application. We completed development of several prototype units in fiscal 2001
(for multiple applications) and expect to complete beta-sites and begin
production shipments for at least one product type during fiscal 2002.
Employees
As of March 31, 2001, we employed 555 persons, including 120 in engineering,
research and development, 152 in manufacturing, 206 in customer support, 32 in
sales and marketing and 45 in executive and administrative functions. Many of
our employees are highly trained and hold advanced post-graduate degrees in
science and engineering. None of our employees is represented by a labor union
or covered by a collective bargaining agreement. We consider our employee
relations to be good. We believe we have low employee turnover relative to our
industry and that we have been able to attract and retain a highly talented
group of managers, designers and engineers that enables us to continually
improve our products and customer support.
Sales and Marketing
We maintain sales offices and regional sales representatives throughout the
world. In the United States, we maintain sales offices in California, Florida
and Texas. We also utilize manufacturers' sales representatives to cover those
regions of the United States with too few customers to support a direct sales
effort. In Asia, we maintain sales offices in Japan, Korea, Singapore and
Taiwan. The Japan and Singapore offices work with manufacturers' sales
representatives to sell our products to customers in Japan, Singapore,
Malaysia, Thailand and China, while the Taiwan and Korean offices sell to
customers directly. In Europe, we maintain a sales office in the United Kingdom
and work with manufacturers' sales representatives throughout the rest of
Europe.
9
In addition, we provide direct customer support in most parts of the world.
In some locations, field service is still provided by the same manufacturers'
sales representative that handles the sales function, but applications support
is provided by our employees in that territory. In the United States, we have
field service and applications engineers located in Arizona, California,
Florida, Massachusetts, New Mexico, Oregon and Texas. Customers, such as Intel,
contract dedicated site-specific field service and applications engineers. In
Asia, we provide customer support in Japan, Taiwan, Korea and Singapore. In
Europe, we maintain a customer support office in the United Kingdom to support
customers there and to assist the field service engineers of our European
manufacturers' sales representatives in the rest of Europe. Applications
personnel supporting continental Europe are located in France, Germany and
Italy.
We provide our customers with comprehensive support before, during and after
delivery of our products. Prior to shipment, our support personnel typically
assist the customer in site preparation and inspection and typically provide
customers with training at our facilities or at the customer's location. Our
customer training programs include instructions in the maintenance of our
systems and in system hardware and software tools for optimizing the
performance of our systems. Our field support personnel work with the
customers' employees to install the equipment and demonstrate equipment
readiness. In addition, we maintain a group of highly skilled applications
scientists to respond to customers' process needs worldwide when a higher level
of technical expertise is required.
We generally warrant our products for a period of up to 12 months from
system acceptance. Installation and initial training are customarily included
in the price of the system. After the expiration of the warranty period,
customers may enter into support agreements covering both field service and
field applications support. Our field service engineers may also provide
customers with repair and maintenance services on a fee basis. Our applications
engineers and scientists are also available to work with the customers on
recipe development. Additionally, for a fee, we train customers to perform
routine maintenance on their purchased tools. We also provide a 24-hour
telephone help-line.
See Note 11 to Notes to Consolidated Financial Statements for a summary of
our operations in the United States, Japan, United Kingdom and other foreign
geographic areas.
Research and Development and Engineering
The process control metrology market is characterized by continuous
technological development and product innovations. We believe that continued
and timely development of new products and enhancements to existing products is
necessary to maintain our competitive position. Accordingly, we devote a
significant portion of our personnel and financial resources to engineering and
research and development programs. As of March 31, 2001, our research,
development and engineering staff was comprised of 120 persons. We seek to
maintain our close relationships with customers to make improvements in our
products that respond to customers' needs. For example, several of the
improvements relating to the Opti-Probe product family were developed in
cooperation with some of our major customers to address their needs for more
capable thin film measurement systems.
Software development accounts for a significant portion of our research and
development efforts. We are currently transitioning all of our software
applications from DOS to the Microsoft NT operating system in order to better
serve our customers. NT is now the standard operating system used by our 300
millimeter Opti-Probe customers.
Our ongoing engineering and research and development efforts can be
classified into three categories: new products; feature enhancements, such as
features to improve precision, speed and automation; and customer-driven
product enhancements, such as new measurement recipes or algorithms. We have
research and development and engineering staffs who work both on developing new
products and features and on responding to the particular needs of customers.
10
Engineering and research and development expenses were $33.9 million, $21.7
million, and $15.1 million in fiscal 2001, 2000 and1999, respectively or 17%,
19% and 23% of net revenues for those periods, respectively. We expect
engineering and research and development expenditures will continue to
represent a substantial percentage of our revenues for the foreseeable future.
Manufacturing
Our manufacturing strategy is to produce high quality, cost effective
assemblies and systems. We currently perform the majority of our system
assembly activities in-house. In order to lower production costs in the future,
we intend to perform in-house only those manufacturing activities that add
significant value or that require unique technology or specialized knowledge.
As a result, we expect to rely increasingly on subcontractors and turnkey
suppliers to fabricate components, build assemblies and perform other
activities in a cost effective manner.
Our principal manufacturing activities include assembly and test work, both
of which are conducted at our facility in Fremont, California. Assembly
activities include inspection, subassembly and final assembly. Test activities
include modular testing, system integration and final testing. Components and
subassemblies, such as lasers, robots and stages, are acquired from third party
vendors and integrated into our finished systems. These components and
subassemblies are obtained from a limited group of suppliers, and occasionally
from a single source supplier. While we use standard components and
subassemblies wherever possible, most mechanical parts, metal fabrications and
critical components are engineered and manufactured to our specifications. We
have not entered into any formal agreements with such limited source suppliers,
other than long-term purchase orders and, in some cases, volume pricing
agreements. Those parts coming from a limited group of suppliers are monitored
by management to ensure that adequate supplies are available to maintain
manufacturing schedules and to reduce our dependence on these suppliers should
supply lines become interrupted. The partial or complete loss of such suppliers
could increase our manufacturing costs or delay product shipments while we
qualify new suppliers. Additionally, any such loss could require us to redesign
products, thereby having a material adverse effect on our business or customer
relationships. Furthermore, a significant increase in the price of one or more
of these components could adversely affect our financial condition or results
of operations.
We schedule production based upon firm customer commitments and anticipated
orders. We have structured our production process and facility to be driven by
both orders and forecasts and have adopted a modular system architecture to
increase assembly efficiency and test flexibility. Cycle times for our products
vary significantly. We believe these cycle times will improve as we continue to
emphasize manufacturability in our new product designs.
We conduct the assembly of some optical components and final testing of our
systems in clean-room environments. This procedure is intended to (1) reduce
the amount of particulates and other contaminants in the final assembled
system; and (2) test our products against our customers' acceptance criteria
prior to shipment. Following the final test, the completed system is packaged
within triple vacuum sealed bags to maintain a high level of cleanliness during
shipment and installation. As part of our ongoing quality program, all systems
are monitored during the installation process.
During fiscal year 2001, we initiated an internal quality auditing program
to improve quality and our Global Optimized Logistical Development or G.O.L.D.
project to increase manufacturing efficiency.
Internal Quality Auditing Program. The objective of this program is to
instill awareness of the benefits of ISO compliance at all department levels
through prevention of defects at all stages of or business model, from design
through servicing, and therefore to raise our customer base satisfaction level.
This supports of our corporate quality policy which states that "Therma-Wave,
Inc., will ensure Total Customer Satisfaction by is commitment to provide
products and services that satisfy all of our customers' expectations for
performance, quality and delivery."
11
The ongoing internal quality audit plan includes auditing individual
departments against all pertinent ISO elements on a yearly schedule along with
associated re-audits and audits mandated by status and importance of any issues
identified within a particular department. This plan will assure continuing
departmental ISO compliance as well as drive continuous process improvements
throughout the company.
G.O.L.D. Project. In January 2001, Therma-Wave partnered with Hewlett-
Packard Consulting to develop and implement a "fast track" demand-pull
manufacturing system. We assembled several teams from across the company to
achieve this goal, and designated it the G.O.L.D. project. Our goal is to
develop barriers to our competitors by creating a sustainable and scalable
manufacturing system, increasing order fulfillment capability and continuing
our technological leadership.
Competition
The market for semiconductor capital equipment is highly competitive. We
face substantial competition from established companies in each of the markets
that we serve. Some of our competitors have greater financial, engineering,
manufacturing and marketing resources and broader product offerings than we
have. Significant competitive factors in the market for metrology systems
include system performance, ease of use, reliability, cost of ownership to the
customer, technical support and customer relationships. We believe we compete
favorably on the basis of these factors in each of our served markets. We
compete with both larger and smaller United States and Japanese companies in
the markets we serve. European companies are generally not significant
competitors in markets we serve.
Our Therma-Probe systems compete primarily with other metrology systems
designed to measure ion implant dose, such as contact and destructive four-
point probe measurement systems, including those manufactured, for example, by
KLA-Tencor Corporation and Kokusai Electric Ltd. Our Therma-Probe systems are
the semiconductor industry's predominant non-contact, non-destructive ion
implant metrology systems for product wafers. Several years ago, Jenoptik GmbH
introduced a competitive product to our Therma-Probe systems, which utilized
thermal wave technology. In November 1997, a jury found that Jenoptik's product
infringed on our United States patent. As a result of the settlement of this
litigation, Jenoptik has agreed not to sell any of its metrology 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 (or TePla AG, who have recently
purchased these rights from Jenoptik) has not had a material impact on our
market position.
Our Opti-Probe systems primarily compete with thin film metrology systems
manufactured by KLA-Tencor Corporation, Rudolph Technologies, Inc.,
Nanometrics, Inc. and Dai Nippon Screen, Mfg. Co., Ltd.
In recent years, there has been significant merger and acquisition activity
among our competitors and potential competitors. Acquisitions by our
competitors and potential competitors could allow them to expand their product
offerings, which could afford such competitors and potential competitors an
advantage in meeting customers' demands. The greater resources, including
financial, marketing and support resources, of competitors potentially engaged
in these acquisitions could permit them to accelerate the development and
commercialization of new products and the marketing of existing products to
their larger installed bases. Accordingly, such business combinations and
acquisitions could have a detrimental impact on both our market share and the
pricing of our products, which could result in a material adverse effect on our
business and results of operations.
Patents and Proprietary Rights
We believe the success of our business depends as much on the technical
competence, creativity and marketing abilities of our employees as on the
protection derived from our patents and other proprietary rights. Nevertheless,
our success will depend, at least in part, on our ability to obtain and
maintain patents and proprietary rights to protect our technology.
12
We have a policy of seeking patents where appropriate on inventions
concerning new products and improvements as part of our ongoing engineering and
research and development activities. We have acquired a number of patents
relating to our two key product families, the Therma-Probe and the Opti-Probe
systems. As of March 31, 2001, we owned 34 U.S. patents with expiration dates
ranging from 2004 to 2019 and had filed applications for 26 additional U.S.
patents. In addition, we owned 47 foreign patents with expiration dates ranging
from 2004 to 2019 and had filed applications for 94 additional foreign patents.
There can be no assurance that any of our pending patent applications will
be approved, that we will develop additional proprietary technology that is
patentable, that any patents owned by or issued to us will provide us with
competitive advantages or that these patents will not be challenged by any
third parties. Furthermore, there can be no assurance that third parties will
not design around our patents. Any of the foregoing results could have a
material adverse effect on our business, financial condition or results of
operations.
In addition to patent protection, we rely upon trade secret protection for
our confidential and proprietary information and technology. We routinely enter
into confidentiality agreements with our employees. However, there can be no
assurance that these agreements will not be breached, that we will have
adequate remedies for any breach or that our confidential and proprietary
information and technology will not be independently developed by, or become
otherwise known, to third parties.
As of March 31, 2001, we owned 11 registered trademarks in the U.S. and 2 in
Japan and had filed 9 trademark registration applications in the U.S.
Environmental Matters
Therma-Wave, like all manufacturing companies, is subject to various
federal, state and local environmental statutory requirements. We believe we
are in material compliance with existing applicable environmental laws and
regulations and possess all permits and licenses necessary to conduct our
business.
ITEM 2. PROPERTIES
Our executive and manufacturing, engineering, research and development
operations are located in a 102,000 square foot building in Fremont,
California. The facility has approximately 800 square feet of Class 10 clean
rooms for customer demonstrations and approximately 20,000 square feet of Class
1000 clean rooms for manufacturing, of which 10,000 square feet had been
completed at the end of May 2001. This facility is occupied under a lease
expiring in 2006 at an aggregate annual rental expense of approximately $1.0
million. We have the option of extending this lease for another 15 years after
2006. We own substantially all of the equipment used in our facilities. On May
31, 2000, we entered into a lease for additional building space of
approximately 28,000 square feet in Fremont, California. Sales, marketing and
customer support operations were moved to the new building. We believe that our
existing facilities, capital equipment and anticipated capital expenditures
will be adequate to meet our current requirements and that suitable additional
or substitute space is readily available if needed.
We also lease sales and customer support offices in Florida, Texas, Japan,
Korea, Taiwan, the United Kingdom and Israel.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against us. We could be
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended March 31, 2001.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Therma-Wave's common stock is traded on the NASDAQ National Market. As of
April 30, 2001, there were 88 holders of record of common stock. The following
table sets forth, for the periods indicated, the high and low closing prices
per share of our common stock as reported on the NASDAQ National Market.
High Low
------ ------
Fiscal Year 2000
Fourth Fiscal Quarter (commencing February 4, 2000 and ending
on March 31, 2000)............................................ $49.50 $30.00
Fiscal Year 2001
First Fiscal Quarter........................................... $37.13 $15.63
Second Fiscal Quarter.......................................... $30.75 $19.13
Third Fiscal Quarter........................................... $26.56 $10.44
Fourth Fiscal Quarter.......................................... $20.13 $ 8.88
To date, we have not declared or paid cash dividends to our stockholders. We
have no plans to declare or pay cash dividends in the near future. Any future
determination to pay dividends will be at the discretion of the board of
directors and will depend upon, among other factors, our results of operations,
financial conditions, capital requirements and contractual restrictions.
14
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and accompanying notes thereto included
elsewhere in this annual report on Form 10-K.
Fiscal Year
------------------------------------------------
2001(1) 2000 1999 1998 1997
-------- -------- -------- -------- --------
(SAB
101)
Statement of Operations
Data(2):
Net revenues................. $198,199 $115,679 $ 66,207 $115,459 $109,493
Cost of revenues............. 101,421 60,320 36,827 55,683 49,795
-------- -------- -------- -------- --------
Gross profit................. 96,778 55,359 29,380 59,776 59,698
Operating expenses:
Research and development... 33,881 21,748 15,130 19,057 13,050
Selling, general and
administrative............ 28,239 20,829 17,870 24,589 22,004
Amortization of goodwill
and purchased
intangibles............... -- -- -- -- 1,275
Recapitalization and other
non-recurring expenses.... -- -- -- 4,188 --
Expenses relating to
operating cost
improvements.............. -- -- 1,057 -- --
Severance charge........... 1,700 -- -- -- --
-------- -------- -------- -------- --------
Total operating
expenses................ 63,820 42,577 34,057 47,834 36,329
-------- -------- -------- -------- --------
Operating income (loss)...... 32,958 12,782 (4,677) 11,942 23,369
Interest expense............. 249 13,178 14,060 12,930 1,621
Interest income.............. (4,275) (1,637) (651) (753) (346)
Other (income) expense, net.. 2,830 3,392 (6) 194 (14)
-------- -------- -------- -------- --------
Income (loss) before
provision for income taxes.. 34,154 (2,151) (18,080) (429) 22,108
Provision (benefit) for
income taxes................ 2,025 -- (2,350) 604 9,007
-------- -------- -------- -------- --------
Income (loss) before
cumulative effect of change
in accounting principle and
extraordinary charge........ 32,129 (2,151) (15,730) (1,033) 13,101
Cumulative effect of change
in accounting principle, net
of income taxes(1).......... (6,287) -- -- -- --
Extraordinary charge......... -- (18,404) -- -- --
-------- -------- -------- -------- --------
Net income (loss)............ $ 25,842 $(20,555) $(15,730) $ (1,033) $ 13,101
======== ======== ======== ======== ========
Net income (loss) available
to common stockholders(3)... $ 25,842 $(21,497) $(16,562) $ (1,771) $ 13,101
======== ======== ======== ======== ========
Basic net income (loss) per
share(4):
Income (loss) before
cumulative effect of
change in accounting
principle and
extraordinary charge...... $ 1.37 $ (0.25) $ (1.86) $ (0.27) $ 0.29
Cumulative effect of change
in accounting principle... (0.27) -- -- -- --
Extraordinary charge....... -- (1.47) -- -- --
-------- -------- -------- -------- --------
Net income (loss)............ $ 1.10 $ (1.72) $ (1.86) $ (0.27) $ 0.29
======== ======== ======== ======== ========
Diluted net income (loss) per
share(4):
Income (loss) before
cumulative effect of
change in accounting
principle and
extraordinary charge...... $ 1.27 $ (0.25) $ (1.86) $ (0.27) $ 0.29
Cumulative effect of change
in accounting principle... (0.25) -- -- -- --
Extraordinary charge....... -- (1.47) -- -- --
-------- -------- -------- -------- --------
Net income (loss).......... $ 1.02 $ (1.72) $ (1.86) $ (0.27) $ 0.29
======== ======== ======== ======== ========
Weighted average common
shares outstanding:
Basic...................... 23,444 12,511 9,397 13,540 45,515
Diluted.................... 25,277 12,511 9,397 13,540 45,515
15
Fiscal Year
-----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
Other Financial Data:
EBITDA (excluding non-
recurring charges)(5)....... $ 39,151 $ 17,272 $ 974 $ 19,725 $27,113
Cash provided by (used in)
operating activities........ 9,600 (6,258) 745 8,113 11,860
Cash used in investing
activities.................. (32,316) (3,627) (1,389) (2,900) (1,575)
Cash provided by (used in)
financing activities........ 3,241 64,840 467 (1,532) (1,234)
Capital expenditures......... 11,988 3,261 862 2,900 1,091
March 31,
-----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
Balance Sheet Data:
Cash and short-term
investments................. $ 75,575 $ 75,200 $ 20,245 $ 20,422 $16,741
Working capital.............. 109,849 94,109 29,140 43,348 38,720
Total assets................. 191,191 133,694 72,352 89,762 68,620
Long-term debt............... 16 16 115,000 115,000 23,100
Mandatorily redeemable
convertible preferred
stock(3).................... -- -- 15,347 14,515 --
Stockholders' equity (net
capital deficiency)......... 129,082 99,485 (86,971) (70,990) 20,145
- --------
(1) Effective April 1, 2000, we changed our method of accounting for revenue
recognition in accordance with SAB 101.
(2) On May 16, 1997, we effected the recapitalization. We issued $115.0 million
in aggregate principal amount of 10 5/8% senior notes in connection with
the recapitalization.
(3) We issued shares of preferred stock as part of the recapitalization. The
fair value of the preferred stock at March 31, 1999 of $15,347 represents
the liquidation value plus accrued dividends. Dividends on the preferred
stock accrued at a rate of 6.0% per annum. In March 2000, all outstanding
shares of preferred stock were converted into an equivalent number of
common shares.
(4) For the calculation of net loss per share for the years ended March 31,
1999 and 1998: (a) net loss represents the loss attributable to the
weighted average number of shares of Class A common stock, Class B common
stock and, prior to the recapitalization, common stock outstanding after
giving effect to the 12% yield on Class L common stock and (b) weighted
average number of shares outstanding excludes unvested Class B common
stock.
(5) "EBITDA" is defined herein as income before income taxes, plus
depreciation, amortization, interest expense, interest income and other
non-operating (income) expenses, net. "EBITDA (excluding non-recurring
charges)" in the fiscal years ended March 31, 2001, 1999 and 1998 excludes
$4,700, $1,057, and $4,188 in recapitalization and other non-recurring
expenses, respectively. Including such non-recurring charges, EBITDA would
have been reduced to $34,451, $(83) and $15,537 for fiscal 2001, 1999, and
1998 respectively. We believe EBITDA and EBITDA (excluding non-recurring
charges) are widely accepted financial indicators of a company's historical
ability to service and/or incur indebtedness. However, EBITDA and EBITDA
(excluding non-recurring charges) should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles. Additionally, EBITDA and EBITDA (excluding
non-recurring charges) as defined herein may not be comparable to similarly
titled measures reported by other companies.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We are a worldwide leader in the development, manufacture, marketing and
service of process control metrology systems for use in the manufacture of
semiconductors. Process control metrology is used to monitor process parameters
in order to enable semiconductor manufacturers to reduce feature size, increase
wafer size, increase equipment productivity and improve device performance. Our
current process control metrology systems are principally used to measure ion
implantation and thin film deposition and removal. We currently sell five
product families of process control metrology systems: Therma-Probe systems,
Opti-Probe systems, Opti-Probe CD systems, Meta-Probe systems and Integra
systems.
Therma-Probe Product Family. Therma-Probe systems utilize our proprietary
thermal wave technology and are the predominant non-destructive process control
metrology systems used to measure the critical ion implantation process on
product wafers in the fabrication of semiconductors.
Opti-Probe Product Family. Opti-Probe systems significantly improve upon
existing thin film metrology systems by successfully integrating different
measurement technologies and utilizing our proprietary optical technologies.
Opti-Probe CD Product Family. Opti-Probe CD systems are spectroscopic
ellipsometer-based systems that provide revolutionary, nondestructive Critical
Dimension (CD) metrology for the smallest features of the next generations of
IC's.
Meta-Probe Product Family. Meta-Probe thin film measurement systems utilize
a patented technique based on x-ray reflectometry to rapidly measure thickness,
density, and roughness of each film in multi-layer stacks.
Integra Product Family. Integra line of integrated metrology products is a
broad-based family of compact metrology "modules" which will be installed and
function inside an IC process system, such as an etcher or CVD deposition
system, to provide metrology on each wafer before it exits the process tool.
In fiscal 2001, we changed our method of accounting for revenue recognition
based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101),
Revenue Recognition in Financial Statements. Revenue from 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. Revenue for system sales is recognized under a multi-element
arrangement. See Note 1 of the Notes to Consolidated Financial Statements for
more information on our revenue recognition policy.
We derive our revenues from system sales, sales of replacement and spare
parts, and service contracts. During the year ended March 31, 2001, we derived
approximately 90% of our revenues from system sales, 6% from sales of
replacement and spare parts, including associated labor, and 4% from service
contracts. During the year ended March 31, 2000, we derived approximately 85%
of our revenues from system sales, 9% from sales of replacement and spare
parts, including associated labor, and 6% from service contracts. During the
year ended March 31, 1999, we derived approximately 78% of our revenues from
system sales, 12% from sales of replacement and spare parts, including
associated labor, and 10% from service contracts.
International sales accounted for approximately 59%, 63% and 69% of our
total revenues for fiscal 2001, 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.
17
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 issued during
recapitalization in 1997, 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 are being used for general corporate
purposes, including working capital.
On March 3, 2000, we called for redemption of all outstanding shares of
preferred stock. On March 24, 2000 and March 29, 2000, respectively, 169,589
and 579,150 shares of preferred stock were converted into an aggregate of
748,739 shares of common stock.
Results of Operations
The following table summarizes our historical results of operations as a
percentage of net revenues for the periods indicated.
Fiscal Year
---------------------
2001 2000 1999
----- ----- -----
(SAB
101)
Statement of Operations Data:
Net revenues.......................................... 100.0 % 100.0 % 100.0 %
Cost of revenues...................................... 51.2 52.1 55.6
----- ----- -----
Gross margin.......................................... 48.8 47.9 44.4
Operating expenses:
Research and development expenses................... 17.1 18.8 22.9
Selling, general and administrative expenses........ 14.2 18.1 27.0
Expenses relating to operating cost improvements.... -- -- 1.6
Severance charge.................................... 0.9 -- --
----- ----- -----
Total operating expenses.......................... 32.2 36.9 51.5
----- ----- -----
Operating income (loss)............................... 16.6 11.0 (7.1)
Interest expense.................................... 0.1 11.4 21.2
Interest income..................................... (2.1) (1.4) (1.0)
Other expense, net.................................. 1.4 2.9 --
----- ----- -----
Income (loss) before provision for income taxes....... 17.2 (1.9) (27.3)
Provision (benefit) for income taxes.................. 1.0 -- (3.5)
----- ----- -----
Income (loss) before cumulative effect of change in
accounting principle and extraordinary charge........ 16.2 (1.9) (23.8)
Cumulative effect of change in accounting principle,
net of income taxes.................................. (3.2) -- --
Extraordinary charge.................................. -- 15.9 --
----- ----- -----
Net income (loss)..................................... 13.0 % (17.8)% (23.8)%
===== ===== =====
18
Fiscal Year Ended March 31, 2001 Compared to Fiscal Year Ended March 31, 2000
Net Revenues. Net revenues for the fiscal year ended March 31, 2001 and 2000
were $198.2 million and $115.7 million, respectively. Fiscal 2001 results
reflected our adoption of SAB 101. Prior periods have not been restated for SAB
101. Under SAB 101, a portion of revenues are deferred until installation is
complete and the customer accepts the system. Deferred revenue relative to
service contracts is recognized over of the life of the related service
contract.
Compared to fiscal 2000, net revenues increased $82.5 million or 71.3%. The
increase in fiscal 2001 revenues was primarily attributable to the improved
conditions experienced in the semiconductor capital equipment industry during
fiscal 2001, which were primarily related to the growth of semiconductor
manufacturers and the recovery of economic conditions in the Asia Pacific
region. Revenues increased primarily due to increased units sold of both our
Therma-Probe and Opti-Probe products. Revenue from spare parts and service
contracts has also increased as our customer base continues to expand. During
fiscal year 2001, we received record orders for both our 200mm and 300mm
product lines which resulted in the increased revenue and backlog. The 300mm
product lines continued to grow as a percentage of our product mix.
Net revenues attributable to international sales for the fiscal years ended
March 31, 2001 and 2000 accounted for 59% and 63% of our total revenues for
such periods, respectively. Due to significant demand from customers in Taiwan
and stronger economic conditions in the Asia Pacific region, sales to customers
in Asia represented approximately 47% and 50% of total net revenues for the
years ended March 31, 2001 and 2000, respectively.
We believe that demand for semiconductors and semiconductor equipment may
currently be experiencing a cyclical downturn. As a result, we may expect lower
order booking rates in the near future, relative to those achieved in fiscal
2001. Fewer orders, combined with rescheduling of delivery, would result in
lower net revenue and gross profit that would materially adversely impact our
financial positions and results of operations.
Although we had a strong backlog as of March 31, 2001, we presently expect
that net revenues for the quarter ended June 30, 2001 will be lower than net
revenues in the comparable period in fiscal 2001. The anticipated timing of
shipments and customer acceptances of those orders will require us to fill a
number of production slots in order to meet our near-term sales targets.
Additionally, we are currently experiencing an increased level of customer
cancellation and rescheduling of deliveries. If we are unsuccessful in our
efforts to secure existing production orders, our results of operations will be
materially adversely impacted in the near-term. However, due to changes in
customer delivery dates and uncertainty as to customer acceptance, we can give
no assurance that we will be able to maintain our current or prior sales level.
Gross profit. Gross profit increased 75% from $55.4 million in fiscal 2000
to $96.8 million in fiscal 2001. As a percentage of net revenues, gross margin
increased from 48% in fiscal 2000 to 49% in fiscal 2001. The increase in gross
profit was primarily due to higher revenue levels. Under SAB 101, we were
required to defer a significant portion of our system revenues upon
installation and customer acceptance of the systems, but we are not allowed to
defer any of the manufacturing cost of those tools. If revenues and costs had
been recorded under our previous methods of accounting for revenue recognition,
fiscal 2001 gross margin would have been approximately 50%.
Research and Development ("R&D") Expenses. R&D expenses were $33.9 million
and $21.7 million for fiscal 2001 and 2000, respectively, representing an
increase in fiscal 2001 of $12.2 million, or 56% from fiscal 2000. R&D expenses
as a percentage of net revenues for fiscal 2001 decreased to 17% from 19% for
fiscal 2000. The increase of absolute dollars from the prior year is primarily
the result of additional resources dedicated to the development of new
products. We believe that technical leadership is essential to our success and
expect to continue to commit significant resources to R&D projects.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses were
$28.2 million and $20.8 million for fiscal 2001 and 2000, respectively.
Compared to the corresponding period of fiscal 2000,
19
SG&A expenses in fiscal 2001 increased $7.4 million, or 35.6%. SG&A expenses as
a percentage of net revenues decreased to 14% in fiscal 2001 from 18% in fiscal
2000 primarily due to higher revenue levels. The increase in fiscal 2001 SG&A
expenses was due primarily to increased headcount as well as increase in sales
expenses related to increased revenues.
Severance Charge. A $1.7 million one-time severance charge was accrued in
fiscal 2001 due to the retirement of our former chairman and CTO, Allan
Rosenwaig.
Interest Expense. Interest expense for fiscal 2001 and 2000 was $0.2 million
and $13.2 million, respectively. The decrease in interest expense from the
prior fiscal year is attributable to the redemption or repurchase of
substantially all of our outstanding senior notes in March 2000.
Other (Income) Expense. Other income, net for fiscal 2001 was $1.2 million,
compared to $14.9 million net other expense in fiscal 2000. Interest income
generated from our cash balance and short-term investment was offset by the
$3.0 million one-time charge in the fourth fiscal quarter related to the
settlement of patent lawsuits between Therma-Wave, Inc. and KLA-Tencor.
Provision for Income Taxes. For fiscal 2001, we recorded a $2.0 million
provision for income taxes. We did not record any tax provision or benefit in
fiscal 2000 because we could not conclude that it was more likely than not that
the net deferred tax assets would be fully realizable and had provided a full
valuation allowance against net deferred tax assets. Based upon our current
evaluation of our loss carry-forward potential and research and development tax
credit carry-forward benefits, we believe our effective tax rate for the fiscal
2001 should be approximately 6%.
Net Income (Loss). Net income for fiscal 2001 was $25.8 million, as compared
to a $20.6 million loss for the prior fiscal year. This improvement in fiscal
2001 was primarily a result of improved revenue, margin and decreased interest
expense. Excluding extraordinary and one-time charges, net income for fiscal
2001 and 2000 would have been $30.2 million and $407,000, respectively.
Fiscal Year Ended March 31, 2000 Compared to Fiscal Year Ended March 31, 1999
Net Revenues. Net revenues for the fiscal year ended March 31, 2000 and 1999
were $115.7 million and $66.2 million, respectively. Compared to the
corresponding period of fiscal 1999, net revenues increased $49.5 million or
75%. The increase in revenue is the result of the improvement in the
semiconductor capital equipment industry, which is primarily related to the
growth of semiconductor manufacturers and the recovery of economic conditions
in the Asia Pacific region. Revenues have increased primarily due to increased
unit sales and average selling prices of both our Therma-Probe and Opti-Probe
products. Revenue from spare parts and service contracts have also increased as
our customer base continues to expand. New orders for fiscal year 2000 were up
substantially from the prior year and resulted in a strengthened backlog.
Net revenues attributable to international sales for the fiscal years ended
March 31, 1999 and 2000 accounted for 69% and 63% of our total revenues for
such periods, respectively. Due to significant demand from customers in Taiwan
and stronger economic conditions in the Asia Pacific region, sales to customers
in Asia represented approximately 33% and 50% of total net revenues for the
year ended March 31, 1999 and 2000, respectively.
Historically, we have experienced volatility from Asian markets. Although we
have recently experienced increased sales and received an increased level of
orders from customers in the Asia Pacific region, turbulance in the Asian
markets could adversely affect our sales in the future.
Gross Margin. Gross margin increased 88% from $29.4 million in fiscal 1999
to $55.4 million in fiscal 2000. As a percentage of net revenues, gross margin
increased from 44% in fiscal 1999 to 48% in fiscal 2000. The increase in gross
margin is due to higher revenue levels and favorable sales mix.
Research and Development ("R&D") Expenses. R&D expenses were $15.1 million
and $21.7 million for fiscal 1999 and 2000, respectively. Compared to the
corresponding period of fiscal 1999, R&D expenses
20
increased $6.6 million, or 44% for fiscal 2000. R&D expenses as a percentage of
net revenues for fiscal 2000 decreased to 19% from 23% for fiscal 1999. The
increase of absolute dollars from the prior year is primarily the result of
additional resources dedicated to new products expected to be released in the
next year. We believe that technical leadership is essential to our success and
expect to continue to commit significant resources to R&D projects. In the near
term, we expect our R&D expenses to increase in absolute dollar terms.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses were
$17.9 million and $20.8 million for fiscal 1999 and 2000, respectively.
Compared to the corresponding period of fiscal 1999, SG&A expenses increased
$2.9 million, or 17%. SG&A expenses as a percentage of net revenues decreased
to 18% in fiscal 2000 from 27% in fiscal 1999 primarily due to higher revenue
levels. The increase in SG&A expenses was due primarily to the increase in
sales expenses related to increased revenues.
Expenses Relating to Operating Cost Improvements. On June 22 and September
24, 1998, we announced and implemented an operating cost improvement program
aimed at bringing operating expenses in line with our current operating
environment. All terminated employees were notified at the time the program was
announced. Leased facilities in Texas, Arizona and Osaka, Japan were closed,
and fixed assets were consolidated. Total cash outlays for fiscal 1999 and 2000
were $832,000 and $125,000, respectively. Non-cash charges of $100,000 in
fiscal 1999 were primarily for asset write-offs.
Interest Expense. Interest expense for fiscal 1999 and 2000 was $14.1
million and $13.2 million, respectively. As a percentage of net revenues,
interest expense decreased from 21% in fiscal 1999 to 11% in fiscal 2000. The
decrease in interest expense from the prior fiscal year is attributable to the
redemption or repurchase of substantially all of our outstanding senior notes
in March 2000.
Other (income) expense. Other expenses, net for fiscal 2000 was $3.4
million. During the fourth quarter of fiscal 2000, there was a one-time charge
of $3.5 million related to the buy out of the seven and one half years
remaining in the term of a consulting agreement with Bain Capital.
Provision for Income Taxes. For fiscal 1999, we recorded a benefit for
income taxes of $2.4 million. Our tax benefit for fiscal 1999 reflects a tax
benefit rate of 13% based upon our loss carryback potential. For fiscal 2000,
we have not recorded any tax benefit because we believe that it is more likely
than not that the net deferred tax assets will not be fully realizable and have
provided a full valuation allowance against net deferred tax assets.
Net Loss. Net loss for fiscal 2000 was $20.6 million, compared to $15.7
million in fiscal 1999. Excluding extraordinary and one time charges, net
income for fiscal 2000 would have been $407,000. Also, in March 2000, all
outstanding shares of preferred stock were converted into an equal number of
shares of common stock, increasing the income available to common stockholders
beginning in the fourth quarter of fiscal 2000. Dividends accrued for preferred
stockholders totaled $0.9 million in fiscal 2000.
Backlog
At March 31, 2001, 2000 and 1999, our backlogs were $57.3 million, $41.9
million, and $16.0 million respectively. Effective April 1, 2000, our backlog
consists of product orders for which a customer purchase order has been
received and accepted and which are scheduled for shipment within twelve
months. Orders that are scheduled for shipment beyond the twelve-month window
are not included in backlog until they fall within the twelve-month window.
Orders are subject to rescheduling or cancellation by the customer, usually
without penalty. Backlog also includes recurring fees payable under support
contracts with our customers and orders for spare parts and billable service.
Because of possible changes in product delivery schedules and cancellation of
product orders and because our sales will sometimes reflect orders shipped in
the same quarter that they are received, our backlog at any particular date is
not necessarily indicative of actual sales for any succeeding period.
21
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital, consisting
primarily of accounts receivable and inventories. We believe that because of
the relatively long manufacturing cycle of certain of our systems, our
inventories will continue to represent a significant portion of working
capital. Since the recapitalization, we have funded our operating activities
principally from funds generated from operations, tax refunds and net proceeds
from our initial public offering.
Cash flow provided by (used in) operating activities was $9.6 million,
$(6.3) million and $0.7 million for the years ended March 31, 2001, 2000 and
1999, respectively. Excluding extraordinary charges and non-recurring charges,
cash flow provided by operating activities for the year ended March 31, 2000
would have been $15.6 million. The increase in cash flow from operating
activities from fiscal 2000 to 2001 is primarily due to the increase of revenue
level. The decrease in cash flow from operating activities from fiscal 1999 to
2000 is mainly due to the increased investment in working capital and the
termination of the Bain Capital consulting agreement.
During the year ended March 31, 2001, net cash used in investing activities
was $32.3 million, primarily attributable to capital expenditures of $12.0
million and a net increase in short-term investments of $19.9 million.
Purchases of property and equipment were $12.0 million, $3.3 million and $0.9
million for the years ended March 31, 2001, 2000 and 1999, respectively.
Capital expenditures for fiscal 2001 included approximately $4.6 million for
expansion of our clean room at our Fremont, California manufacturing facility
and $2.3 million for leasehold improvements to our new sales, marketing and
customer support facility in Fremont.
Cash provided by financing activities was $3.2 million during the year ended
March 31, 2001, most of which represented proceeds received during the year to
exercise stock options and purchase of common stock under our 2000 Employee
Stock Purchase Plan. We announced on April 26, 2001 the repurchase of up to
1.0 million shares of our common stock at prevailing market prices. We intend
to finance the repurchase of our common stock from our existing cash, cash
equivalents and short-term investments.
In May 1997, we issued $115.0 million in aggregate principal amount of
senior notes that, together with a $20.1 million equity contribution, was used
to finance the recapitalization. In the recapitalization, we used $26.9 million
to repay outstanding borrowings, $96.9 million to redeem a portion of our
common stock, $11.0 million to pay related fees and expenses and $0.3 million
for general working capital purposes.
In conjunction with the recapitalization, we entered into a senior credit
facility with various lending institutions, and Bankers Trust Company, as
agent. The bank credit facility bears interest, at our option, at (1) the base
rate plus 1.75% or (2) the Eurodollar rate plus 3.00%. Our borrowings under the
bank credit facility are secured by substantially all of our assets, a pledge
of all of the capital stock of any domestic subsidiaries and a pledge of 65% of
the capital stock of our first-tier foreign subsidiaries. The bank credit
facility matures on May 16, 2002.
During the quarter ended June 30, 1998, we amended the bank credit facility
to have our borrowing availability subject to a borrowing base formula, which
provided a maximum revolving credit facility of $30.0 million, and to adjust
the financial covenants requiring us to maintain minimum levels of EBITDA
during each six-month period ending on the last day of each fiscal quarter and
minimum levels of cumulative EBITDA from April 7, 1996 to the last day of each
fiscal quarter. In August 1999, we entered into a second amendment to our bank
credit facility to further adjust these financial tests. The second amendment
also provided that if we had not consummated a qualified initial public
offering by the end of December 31, 1999, then the loan commitment amount would
be reduced by $5.0 million to $25.0 million. In March 2000, we entered into a
third amendment to permit the redemption and conversion of the mandatorily
redeemable preferred stock into common stock. These amendments were effected in
light of the impact of the downturn in the semiconductor industry on our
operating results. Without the first amendment to our bank credit facility, on
June 30, 1998, we would have violated the financial test relating to the
maintenance of minimum levels of
22
EBITDA for the six-month period ending on that date. We may borrow amounts
under the amended bank credit facility to finance our working capital
requirements and other general corporate purposes. The amended bank credit
facility requires us to meet financial tests and contains covenants customary
for this type of financing. At March 31, 2001, 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.
In June 2001, we replaced our Bankers Trust bank credit facility and the
$3.5 million outstanding letter of credit with a new $10 million loan and
security agreement and a $3.5 million letter of credit with Comerica Bank. The
new bank credit facility allows us to borrow money bearing interest either at a
floating rate per annum equal to the prime rate or at a rate per annum equal to
LIBOR plus 1.5%. We may request advances in an aggregate outstanding amount not
to exceed $7.5 million minus the aggregate face amount of outstanding letters
of credit, including any drawn but unreimbursed letters of credit. Our
borrowings under the bank credit facility are secured by substantially all of
our assets. The Comerica bank credit facility matures on March 28, 2004.
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 have been used
for general corporate purposes, including working capital.
Our principal sources of funds following the offering have been and are
anticipated to be cash and short-term investments on hand ($75.6 million as of
March 31, 2001), cash flows from operating activities and, if necessary,
borrowings under our bank credit facilities. We believe that these funds will
provide us with sufficient liquidity and capital resources for us to meet our
current and future financial obligations. No assurance can be given, however,
that this will be the case. We may require additional equity or debt financing
to meet our working capital requirements or to fund our research and
development activities. There can be no assurance that additional financing
will be available when required or, if available, will be on terms satisfactory
to us.
Inflation
The impact of inflation on our business has not been material for the fiscal
years ended March 31, 2001, 2000 and 1999.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supersedes and amends
a number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported on the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivative. We currently do not
hold any derivative instruments that are affected by the adoption of SFAS No.
133.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
The following discussion about market risk disclosures involves forward-
looking statements. Actual results could differ materially from those projected
in the forward-looking statements. We are exposed to market risks related to
changes in interest rates and foreign currency exchange rates. We do not have
any derivative financial instruments.
Interest Rate Risk
As of March 31, 2001, our cash included money market securities and
commercial paper. Due to the short term duration of our investment portfolio,
an immediate 10% change in interest rates would not have a material effect on
the fair market value of our portfolio, therefore, we would not expect our
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates on our securities portfolio.
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.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Report of Independent Accountants.......................................... 26
Consolidated Balance Sheets as of March 31, 2001 and 2000.................. 27
Consolidated Statements of Operations for the years ended March 31, 2001,
2000 and 1999............................................................. 28
Consolidated Statements of Mandatorily Redeemable Convertible Preferred
Stock and Stockholders' Equity (Net Capital Deficiency) for the years
ended March 31, 2001, 2000 and 1999....................................... 29
Consolidated Statements of Cash Flows for the years ended March 31, 2001,
2000 and 1999............................................................. 30
Notes to Consolidated Financial Statements................................. 31
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Therma-Wave, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Therma-Wave, Inc. and its subsidiaries at April 1, 2001 and April
2, 2000, and the results of their operations and their cash flows for each of
the three years in the period ended April 1, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(ii) on page 53 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, during the
year ended April 1, 2001 the Company changed its method of recognizing revenue.
PricewaterhouseCoopers LLP
San Jose, California
April 26, 2001, except for Note 12,
as to which the date is June 8, 2001
26
THERMA-WAVE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31,
--------------------
2001 2000
--------- ---------
ASSETS
Current assets:
Cash................................................... $ 55,725 $ 75,200
Short-term investments................................. 19,850 --
Accounts receivable, net of allowance for doubtful
accounts of $1,096 and $1,472 at March 31, 2001 and
2000, respectively.................................... 43,348 24,400
Inventory.............................................. 47,181 23,689
Deferred income tax assets, current.................... 2,054 --
Other current assets................................... 1,871 1,720
--------- ---------
Total current assets................................. 170,029 125,009
Property and equipment, net.............................. 14,478 4,999
Deferred income tax assets, non-current.................. 3,405 1,685
Other assets............................................. 3,279 2,001
--------- ---------
Total assets......................................... $ 191,191 $ 133,694
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 12,547 $ 10,111
Accrued liabilities.................................... 30,471 19,835
Deferred revenue....................................... 17,096 732
Capital lease obligations, current portion............. 66 222
--------- ---------
Total current liabilities............................ 60,180 30,900
Long-term debt........................................... 16 16
Capital lease obligations, long-term portion............. -- 357
Deferred income tax liabilities, non-current............. -- 1,685
Deferred rent and other.................................. 1,913 1,251
Commitments and contingencies (Note 7)
Stockholders' equity
Common stock, $0.01 par value; 35,000,000 shares
authorized, 23,994,699 and 23,646,878 shares issued
and outstanding at March 31, 2001 and 2000............ 240 236
Additional paid-in capital............................. 230,646 226,199
Accumulated deficit.................................... (100,129) (125,971)
Notes receivable from stockholders..................... (212) (241)
Accumulated other comprehensive loss................... (1,463) (738)
--------- ---------
Total stockholders' equity........................... 129,082 99,485
--------- ---------
Total liabilities and stockholders' equity........... $ 191,191 $ 133,694
========= =========
See accompanying notes to consolidated financial statements.
27
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Fiscal Years Ended March
31,
----------------------------
2001 2000 1999
-------- -------- --------
(SAB
101)
Net revenues..................................... $198,199 $115,679 $ 66,207
Cost of revenues................................. 101,421 60,320 36,827
-------- -------- --------
Gross profit..................................... 96,778 55,359 29,380
Operating expenses:
Research and development....................... 33,881 21,748 15,130
Selling, general and administrative............ 28,239 20,829 17,870
Expenses relating to operating cost
improvements.................................. -- -- 1,057
Severance charge............................... 1,700 -- --
-------- -------- --------
Total operating expenses..................... 63,820 42,577 34,057
-------- -------- --------
Operating income (loss).......................... 32,958 12,782 (4,677)
Other (income) expense:
Interest expense............................... 249 13,178 14,060
Interest income................................ (4,275) (1,637) (651)
Other (income) expense......................... 2,830 3,392 (6)
-------- -------- --------
Total other (income) expense................. 1,196 (14,933) (13,403)
-------- -------- --------
Income (loss) before provision for income taxes.. 34,154 (2,151) (18,080)
Provision (benefit) for income taxes............. 2,025 -- (2,350)
-------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle and extraordinary
charge.......................................... 32,129 (2,151) (15,730)
Cumulative effect of change in accounting
principle, net of income taxes.................. (6,287) -- --
Extraordinary charge............................. -- (18,404) --
-------- -------- --------
Net income (loss)................................ 25,842 (20,555) (15,730)
Preferred stock dividends........................ -- 942 832
-------- -------- --------
Net income (loss) available to common
stockholders.................................... $ 25,842 $(21,497) $(16,562)
======== ======== ========
Basic net income (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle and
extraordinary charge.......................... $ 1.37 $ (0.25) $ (1.86)
Cumulative effect of change in accounting
principle..................................... (0.27) -- --
Extraordinary charge........................... -- (1.47) --
-------- -------- --------
Basic net income (loss) per share................ $ 1.10 $ (1.72) $ (1.86)
======== ======== ========
Diluted net income (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle and
extraordinary charge.......................... $ 1.27 $ (0.25) $ (1.86)
Cumulative effect of change in accounting
principle..................................... (0.25) -- --
Extraordinary charge........................... -- (1.47) --
-------- -------- --------
Diluted net income (loss) per share.............. $ 1.02 $ (1.72) $ (1.86)
======== ======== ========
Weighted average number of shares outstanding:
Basic.......................................... 23,444 12,511 9,397
Diluted........................................ 25,277 12,511 9,397
See accompanying notes to consolidated financial statements.
28
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands, except share data)
Class A Class B Class L
Preferred Stock Common Stock Common Stock Common Stock Common Stock Additional
------------------ ----------------- ------------------ ------------------ ------------------ Paid-In
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital
-------- -------- ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
Balance at
March 31, 1998.. 748,739 $ 14,515 -- $ -- 9,073,532 $ 91 1,289,785 $ 13 1,008,170 $ 10 $ 20,625
Net loss........ -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustments..... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
loss............
Preferred stock
dividends....... -- 832 -- -- -- -- -- -- -- -- (832)
Repurchased
shares.......... -- -- -- -- -- -- (171,693) (2) -- -- (39)
-------- -------- ---------- ----- ---------- ----- ---------- ----- ---------- ----- --------
Balance at March
31, 1999........ 748,739 15,347 -- -- 9,073,532 91 1,118,092 11 1,008,170 10 19,754
Net loss........ -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustments..... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
loss............
Issuance of
common stock.... -- -- -- -- -- -- 12,810 -- -- -- 75
Preferred stock
dividends....... -- 942 -- -- -- -- -- -- -- -- (942)
Conversion of
Class A, B and L
into common
stock........... -- -- 12,524,132 125 (9,073,532) (91) (1,130,902) (11) (1,008,170) (10) (13)
Issuance of
common stock in
connection with
IPO............. -- -- 10,350,000 104 -- -- -- -- -- -- 190,635
Conversion of
preferred
stock........... (748,739) (16,289) 748,739 7 -- -- -- -- -- -- 16,282
Issuance of
common stock.... -- -- 24,007 -- -- -- -- -- -- -- 408
-------- -------- ---------- ----- ---------- ----- ---------- ----- ---------- ----- --------
Balance at March
31, 2000........ -- -- 23,646,878 236 -- -- -- -- -- -- 226,199
Net income...... -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustments..... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
income..........
Receipts from
stockholders.... -- -- -- -- -- -- -- -- -- -- --
Tax benefits
from employee
stock option
plans........... -- -- -- -- -- -- -- -- -- -- 478
Issuance of
common stock.... -- -- 347,821 4 -- -- -- -- -- -- 3,969
-------- -------- ---------- ----- ---------- ----- ---------- ----- ---------- ----- --------
Balance at March
31, 2001........ -- $ -- 23,994,699 $ 240 -- $ -- -- $ -- -- $ -- $230,646
======== ======== ========== ===== ========== ===== ========== ===== ========== ===== ========
Note Accumulated
Receivable Other
Accumulated from Comprehensive Comprehensive
Deficit Stockholders Loss Total Income (Loss)
----------- ------------ ------------- --------- -------------
Balance at
March 31, 1998.. $ (89,686) $(288) $(1,755) $(70,990)
Net loss........ (15,730) -- -- (15,730) $(15,730)
Currency
translation
adjustments..... -- -- 575 575 575
-------------
Comprehensive
loss............ $(15,155)
=============
Preferred stock
dividends....... -- -- -- (832)
Repurchased
shares.......... -- 47 -- 6
----------- ------------ ------------- ---------
Balance at March
31, 1999........ (105,416) (241) (1,180) (86,971)
Net loss........ (20,555) -- -- (20,555) $(20,555)
Currency
translation
adjustments..... -- -- 442 442 442
-------------
Comprehensive
loss............ $(20,113)
=============
Issuance of
common stock.... -- -- -- 75
Preferred stock
dividends....... -- -- -- (942)
Conversion of
Class A, B and L
into common
stock........... -- -- -- --
Issuance of
common stock in
connection with
IPO............. -- -- -- 190,739
Conversion of
preferred
stock........... -- -- -- 16,289
Issuance of
common stock.... -- -- -- 408
----------- ------------ ------------- ---------
Balance at March
31, 2000........ (125,971) (241) (738) 99,485
Net income...... 25,842 -- -- 25,842 $ 25,842
Currency
translation
adjustments..... -- -- (725) (725) (725)
-------------
Comprehensive
income.......... $ 25,117
=============
Receipts from
stockholders.... -- 29 -- 29
Tax benefits
from employee
stock option
plans........... -- -- -- 478
Issuance of
common stock.... -- -- -- 3,973
----------- ------------ ------------- ---------
Balance at March
31, 2001........ $(100,129) $(212) $(1,463) $129,082
=========== ============ ============= =========
See accompanying notes to consolidated financial statements.
29
THERMA-WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended March 31,
-----------------------------
2001 2000 1999
-------- --------- --------
Operating activities:
Net income (loss).............................. $ 25,842 $ (20,555) $(15,730)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation................................. 1,042 2,775 2,590
Amortization................................. 451 1,715 2,004
Amortization of deferred financing costs..... -- 1,481 1,607
Deferred income taxes........................ (5,459) -- 5,977
Loss on disposal of property, plant and
equipment................................... 1,467 -- --
Extraordinary charge......................... -- 18,404 --
Changes in assets and liabilities:
Accounts receivable........................ (18,948) (12,220) 9,918
Inventories................................ (23,492) (9,577) 4,310
Other assets............................... (1,402) 6,198 (4,136)
Accounts payable........................... 2,436 6,077 15
Accrued and other liabilities.............. 27,663 (556) (5,810)
-------- --------- --------
Net cash provided by (used in) operating
activities.............................. 9,600 (6,258) 745
Investing activities:
Purchases of property and equipment............ (11,988) (3,261) (862)
Short-term investments......................... (19,850) -- --
Other.......................................... (478) (366) (527)
-------- --------- --------
Net cash used in investing activities.... (32,316) (3,627) (1,389)
Financing activities:
Issuance (Redemption) of Senior Notes.......... -- (126,520) --
Proceeds from initial public offering.......... -- 190,739 --
Principal payments under capital lease
obligations................................... (514) (304) (114)
Proceeds from issuance of common stock......... 3,973 483 --
Tax benefits from employee stock option plans.. 478 -- --
Other.......................................... (696) 442 581
-------- --------- --------
Net cash provided by financing
activities.............................. 3,241 64,840 467
-------- --------- --------
Net (decrease) increase in cash and cash
equivalents................................... (19,475) 54,955 (177)
Cash and cash equivalents at beginning of
period........................................ 75,200 20,245 20,422
-------- --------- --------
Cash and cash equivalents at end of period..... $ 55,725 $ 75,200 $ 20,245
======== ========= ========
Supplementary disclosures:
Cash paid for interest....................... $ 226 $ 16,422 $ 12,469
======== ========= ========
Cash paid for income taxes................... $ 1,403 $ 10 $ 293
======== ========= ========
See accompanying notes to consolidated financial statements.
30
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Therma-Wave, Inc. (the "Company"), a Delaware corporation, develops,
manufactures, and markets process control metrology systems for use in the
manufacture of semiconductors. These systems are based on our proprietary
thermal wave, optical and X-ray technologies. We market and sell our products
worldwide to major semiconductor manufacturers.
Basis of Presentation
Our fiscal year is a 52 to 53-week year ending on the Sunday on or following
March 31 of each year. Fiscal years 2001, 2000 and 1999 ended on April 1, 2001,
April 2, 2000 and April 4, 1999, respectively. For convenience, the
accompanying financial statements have been presented as ending on the last day
of the nearest calendar month.
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the March 31, 2001 presentation.
Recapitalization
In December 1996, the Board of Directors approved the Recapitalization
Agreement (the "Recapitalization Agreement"). Pursuant to the Recapitalization
Agreement, which closed on May 16, 1997, we: (i) redeemed from Toray
Industries, Inc., ("Toray") and Shimadzu Corporation ("Shimadzu") approximately
86.6% of our outstanding capital stock for $96.9 million; (ii) converted our
remaining outstanding capital stock of 6.1 million shares to newly issued
shares of preferred stock and common stock; (iii) repaid substantially all of
our outstanding borrowings of approximately $26.9 million; (iv) canceled our
receivable from Toray and Shimadzu of $1.4 million which was recorded as a
reduction of additional paid-in capital; and (v) paid the estimated fees and
expenses of approximately $11.3 million related to the Recapitalization. In
order to finance the transactions effected by the Recapitalization Agreement,
we: (i) issued $115.0 million in aggregate principal amount of senior notes in
a private debt offering; (ii) received an equity contribution of approximately
$20.0 million in cash from an investor group, including investment funds
associated with Bain Capital, Inc. ("Bain"), and members of our senior
management team; and (iii) converted equity securities of Toray and Shimadzu
having a value of $15.0 million into newly issued shares of preferred stock and
common stock.
Revenue Recognition
Effective April 1, 2000, we changed our method of accounting for revenue
recognition in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. Historically, revenue from systems and spare parts was generally
recognized at the time of shipment. Revenue on service contracts is deferred
and recognized on a straight-line basis over the period of the contract.
Estimated contractual warranty obligations are recorded when related sales are
recognized. Under SAB 101, equipment sales are accounted for as multiple-
element arrangement sales as described in SAB 101. The total revenue is
allocated to each component of the multi-element arrangement. Revenue on each
element is recognized when the contractual obligations have been performed,
risk of loss has passed to the customer, collection is probable and customer
acceptance has been obtained if applicable.
Change in Accounting Principle
In accordance with guidance provided in SAB 101, we recorded $6.3 million
(net of income tax benefit of $401,000), or $0.25 per diluted share, as the
cumulative effect of the change in accounting principle as of the beginning of
the fiscal year. For periods prior to fiscal 2001, data was not available to
provide pro-forma information as if the accounting change was retroactive to
prior periods.
31
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred revenue balance as of April 1, 2000 was $10.9 million. This amount
consisted of deferred service revenue as well as $9.4 million of equipment
revenue that was deferred from previous years under SAB 101. During the year
ended March 31, 2001, we recognized $6.9 million out of the $9.4 million
revenue that was included in the cumulative effect adjustment as of April 1,
2000. Deferred revenue balance as of March 31, 2001 was $17.1 million.
Concentration of Credit Risk/Major Customers
We sell our products to major semiconductor manufacturing companies
throughout the world. We perform continuing credit evaluations of our customers
and, generally, do not require collateral. Letters of credit may be required
from our customers in certain circumstances.
Sales to customers representing 10% or more of net revenues were as follows:
Year Ended
March 31,
----------------
Customer 2001 2000 1999
-------- ---- ---- ----
A............................................................ 22% 14% 23%
B............................................................ -- -- 18%
C............................................................ 13% 10% --
Accounts receivable from two customers accounted for approximately 25% and
17% of total accounts receivable at March 31, 2001. There were no customers
with accounts receivable balances greater than 10% of accounts receivable at
March 31, 2000.
Certain of the components and subassemblies included in our systems are
obtained from a single source or a limited group of suppliers. Although we seek
to reduce dependence on those sole and limited source suppliers, the partial or
complete loss of certain of these sources could have at least a temporary
adverse effect on our results of operations and damage customer relationships.
Further, a significant increase in the price of one or more of these components
could adversely affect our results of operations.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates, and such
differences could affect the results of operations reported in future periods.
Foreign Currency Translations and Transactions
We have determined that the functional currency of our foreign operations is
the local foreign currency. The accumulated effects of foreign translation rate
changes related to net assets located outside the United States are included as
a component of stockholders' equity (net capital deficiency). Foreign currency
transaction gains (losses) are included in other income and expense in the
accompanying consolidated statements of operations and amounted to $3,000,
$48,000 and $(23,000) for the years ended March 31, 2001, 2000 and 1999,
respectively.
Cash and Cash Equivalents
We maintain our cash and cash equivalents in depository accounts, money
market accounts and commercial paper with several financial institutions. We
consider all highly liquid investments purchased with original maturities of
three months or less to be cash equivalents.
32
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Short-Term Investments
Currently all investments are classified as available-for-sale securities.
In fiscal year 2001, all investments were made in commercial paper or
municipal bonds and were hold to maturity. Therefore there were no unrealized
gains or losses. All realized gains and losses, interest and dividends on
available-for-sale securities were included in interest income (expense).
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are provided on the straight-
line basis over the estimated useful lives of the respective assets, generally
three to five years. Leasehold improvements and assets recorded under capital
leases are amortized on the straight-line basis over the shorter of the
assets' useful lives or lease terms. Depreciation and amortization expense for
fiscal years 2001, 2000 and 1999 are $1.0 million, $2.8 million and $2.6
million, respectively.
Long-lived Assets
We review for the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. No such impairment losses have
been identified by us.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
the issuance of the senior notes associated with the recapitalization in 1997.
These amounts are stated net of accumulated amortization and amortized on the
straight-line basis over the term of the related notes. In connection with the
redemption of the senior notes in March 2000, all unamortized deferred
financing costs were expensed as part of the extraordinary charge.
Research and Development Expenses
Expenditures for research and development are expensed as incurred.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). We account for employee stock options in
accordance with Accounting Principles Board Opinion No. 25 and have adopted
the "disclosure only" alternative described in SFAS No. 123.
Income Taxes
We account for income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities measured using enacted
33
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
tax rates expected to apply to taxable income in the years in which the
temporary differences are expected to be recovered or settled. The measurement
of deferred tax assets is reduced, if necessary, by the amount of any tax
benefits that, based on available evidence, are not expected to be realized.
Net Income (Loss) Per Share
We have adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires
us to report both basic net income (loss) per share, which is based on the
weighted-average number of common shares outstanding excluding contingently
issuable or returnable shares such as unvested common stock or shares that
contingently convert into common stock upon certain events, and diluted net
income (loss) per share, which is based on the weighted average number of
common shares outstanding and dilutive potential common shares outstanding.
Prior to our initial public offering and the reclassification of our common
stock, Class A common stock, Class B common stock and Class L common stock
shared 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 year ended March 31, 1999 used in the net loss per share
calculation represents the loss attributable to the weighted average number of
shares of Class A common stock, Class B common stock and common stock
outstanding after giving effect to the 12% yield on Class L common stock. As a
result of the loss incurred by us in fiscal 1999, all potential common shares
were anti-dilutive and excluded from the diluted net income (loss) per share
calculation.
Advertising Costs
We expense advertising and promotional costs, which are not material, as
they are incurred.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes a new model for accounting
for derivatives and hedging activities and supercedes and amends a number of
existing accounting standards. SFAS No. 133 requires that all derivatives be
recognized in the balance sheet at their fair market value, and the
corresponding derivative gains or losses be either reported in the statement of
operations or as a deferred item, depending on the type of hedge relationship
that exists with respect to such derivative. We do not currently hold any
derivative instruments that are affected by the adoption of SFAS No. 133.
34
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. BALANCE SHEET COMPONENTS
March 31,
------------------
2001 2000
-------- --------
(in thousands)
Inventory:
Purchased materials.................................... $ 22,197 $ 7,752
Systems in process..................................... 19,571 12,370
Finished systems....................................... 5,413 3,567
-------- --------
Total inventory...................................... $ 47,181 $ 23,689
======== ========
Property and equipment:
Laboratory and test equipment.......................... $ 5,244 $ 4,274
Office furniture and equipment......................... 10,212 7,718
Machinery and equipment................................ 2,546 2,525
Leasehold improvements................................. 10,324 3,289
-------- --------
Total property and equipment, gross.................. 28,326 17,806
Accumulated depreciation and amortization.............. (13,848) (12,807)
-------- --------
Total property and equipment, net.................... $ 14,478 $ 4,999
======== ========
Accrued liabilities:
Interest payable....................................... $ 20 $ 21
Accrued compensation and related expenses.............. 11,304 6,388
Accrued warranty costs................................. 3,742 4,575
Commissions payable.................................... 1,825 2,275
Other accrued liabilities.............................. 13,580 6,576
-------- --------
Total accrued liabilities............................ $ 30,471 $ 19,835
======== ========
35
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. NET INCOME (LOSS) PER SHARE
The following tables set forth the computation of net income (loss) before
extraordinary charge per share of common stock:
Years Ended March 31,
-------------------------
2001 2000 1999
------- ------- --------
Numerator (in thousands):
Net income (loss)................................ $25,842 $(2,151) $(15,730)
Less: preferred stock dividend................... -- (942) (832)
Less: income attributable to Class L common
stock........................................... -- -- (944)
------- ------- --------
$25,842 $(3,093) $(17,506)
======= ======= ========
Denominator (in thousands):
Common stock..................................... 23,444 12,511 --
Class A common stock............................. -- -- 9,074
Class B common stock (vested).................... -- -- 323
------- ------- --------
Weighted average shares outstanding used for basic
income (loss) per share........................... 23,444 12,511 9,397
Unvested shares.................................... 333 -- --
Dilutive stock options............................. 1,500 -- --
------- ------- --------
Weighted average shares outstanding used for
diluted income (loss) per share................... 25,277 12,511 9,397
======= ======= ========
The following table summarizes securities outstanding (in thousands) 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.
March 31,
----------------
2001 2000 1999
---- ----- -----
Common Stock Subject to Repurchase (unvested).................. -- 550 767
Mandatorily Redeemable Convertible Preferred Stock............. -- -- 749
Stock Options.................................................. 948 2,892 1,779
The stock options outstanding at March 31, 2001, 2000 and 1999 that we
excluded from the above calculation, had a weighted average exercise price of
$15.89, $8.84 and $9.64, respectively.
4. FINANCING ARRANGEMENTS
Bank Credit Facility
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 all of our domestic subsidiaries and a pledge of 65% of the capital
stock of our first-tier foreign subsidiaries. The bank credit facility expires
on May 16, 2002. During the quarter ended June 30, 1998, we amended the bank
credit facility to have our borrowing availability 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 nine-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
36
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 first two amendments were effected in light of the impact
of the downturn in the semiconductor industry on our operating results to give
us greater flexibility under our bank credit facility.
At March 31, 2001, 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.
5. INCOME TAXES
The domestic and foreign components of income (loss) before provision
(benefit) for income taxes are as follows (in thousands):
Fiscal Year Ended March
31,
-------------------------
2001 2000 1999
------- ------- --------
Domestic.......................................... $32,994 $(2,657) $(19,016)
Foreign........................................... 1,160 506 936
------- ------- --------
Total........................................... $34,154 $(2,151) $(18,080)
======= ======= ========
The components of the provision (benefit) for income taxes are as follows
(in thousands):
Fiscal Year Ended
March 31,
----------------------
2001 2000 1999
------- ----- -------
Current:
Federal............................................ $ 7,118 $ -- $(8,344)
State.............................................. (129) -- 4
Foreign............................................ 495 -- 13
------- ----- -------
7,484 -- (8,327)
Deferred:
Federal............................................ (5,459) -- 5,807
State.............................................. -- -- --
Foreign............................................ -- -- 170
------- ----- -------
(5,459) -- 5,977
------- ----- -------
$ 2,025 $ -- $(2,350)
======= ===== =======
37
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation between the U.S. federal statutory rate and the effective
tax rate reflected in the statements of operations is as follows:
Fiscal Year Ended
March 31,
---------------------
2001 2000 1999
----- ----- -----
Provision at Federal
Statutory Rate........... 35.0 % (35.0)% (35.0)%
State taxes............... 1.0 (2.9) --
Foreign sales
corporation.............. (3.3) -- --
Tax credits............... (11.1) (2.3) (5.5)
Change in valuation
allowance................ (16.3) 27.4 26.1
Non-deductible expenses... 0.4 13.3 --
Other..................... 0.3 (0.5) 1.4
----- ----- -----
Total................... 6.0 % -- % (13.0)%
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands):
March 31,
-----------------
2001 2000
------- --------
Deferred tax assets:
Accrued costs and expenses.............................. $ 8,702 $ 2,601
Depreciation and amortization........................... 1,309 --
Other................................................... 3,452 3,629
Net operating loss and tax credits carryforwards........ 1,431 8,319
------- --------
Total gross deferred tax assets....................... 14,894 14,549
Less: valuation allowance................................. (9,435) (12,864)
------- --------
Total deferred tax assets............................. 5,459 1,685
------- --------
Deferred tax liabilities:
Deferred revenue on foreign sales....................... -- (996)
Depreciation and amortization........................... -- (397)
Other................................................... -- (292)
------- --------
Net deferred tax liabilities............................ -- (1,685)
------- --------
Total net deferred tax assets......................... $ 5,459 $ --
======= ========
The net changes in the total valuation allowance for the years ended March
31, 2001 and 2000 were $(3.4) million and $6.9 million, respectively. At March
31, 2001, management has recognized deferred tax assets equal to the carryback
capacity of net operating losses.
At March 31, 2001, we have federal and state research and development tax
credits of $500,000 and $800,000, respectively. The federal research and
development tax credits will begin to expire in 2012, while the California
research tax credits may be carried forward indefinitely.
38
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. EXPENSES RELATING TO OPERATING COST IMPROVEMENTS
On June 22 and September 24, 1998, we announced and implemented an operating
cost improvement program aimed at bringing operating expenses in line with our
operating environment at that time. All terminated employees were notified of
their severance and related benefits at the time the program was announced.
This program resulted in a reduction of approximately 100 employees primarily
involved in customer service and manufacturing positions. Certain leased
facilities and fixed assets were consolidated. Total cash outlays for fiscal
2000 and 1999 were $125,000 and $832,000, respectively. The program was
concluded in fiscal 2000. Expenses relating to operating cost improvements are
summarized as follows:
Provision
Year Ended Balance Balance
March 31, 1999 Utilized March 31, 1999 Utilized March 31, 2000
-------------- -------- -------------- -------- --------------
Severance.... $ 837 $762 $ 75 $ 75 $ --
Facilities... 120 70 50 50 --
Other........ 100 100 -- -- --
------ ---- ---- ---- -----
$1,057 $932 $125 $125 $ --
====== ==== ==== ==== =====
7. COMMITMENTS AND CONTINGENCIES
We lease our facilities under noncancellable operating leases that require
us to pay maintenance and operating expenses, such as taxes, insurance and
utilities. We are required pursuant to the terms of a facility lease to
maintain a $3.5 million standby letter of credit.
Property and equipment includes equipment recorded under capital leases of
approximately $895,000, $1.3 million and $895,000, and related accumulated
amortization of $830,000, $761,000 and $620,000 at March 31, 2001, 2000 and
1999, respectively.
Rent expense was approximately $2.2 million, $1.5 million and $1.7 million
for the fiscal years ended March 31, 2001, 2000 and 1999, respectively.
At March 31, 2001, future minimum lease payments under capital and
noncancellable operating leases are as follows (in thousands):
Capital Operating
Leases Leases
------- ---------
Fiscal Year
2002....................................................... $ 70 $ 2,268
2003....................................................... -- 2,210
2004....................................................... -- 1,894
2005....................................................... -- 1,757
2006....................................................... -- 1,506
Thereafter................................................. -- 1,167
----- -------
Future Minimum Lease Payments.............................. 70 $10,802
=======
Less: Amounts Representing Interest........................ (4)
-----
Present Value of Minimum Lease Payments.................... 66
Less: Current Portion...................................... (66)
-----
$ --
=====
39
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Bonus Arrangements
Pursuant to the terms of certain management bonus arrangements, we may be
obligated to pay up to an aggregate of $3.7 million after March 31, 2002 based
upon achieving certain operating results and each employee's continued
employment. We must achieve a minimum cumulative EBITDA (as defined in such
bonus agreements) of $177.0 million for the five year period ended March 31,
2002 in order for the deferred bonus of $3.7 million to be payable. If we
achieve cumulative EBITDA levels from $133.3 million to $177.0 million for the
five year period ended March 31, 2002, a fraction of the deferred bonus is
payable based on the amount EBITDA exceeds $133.3 million, up to the maximum
deferred bonus amount of $3.7 million. No amounts have been accrued to date as
the achievement of the required operating results is not considered probable as
of March 31, 2001.
Legal Proceedings
There are no material legal proceedings pending against us. We settled
patent lawsuits with KLA-Tencor Corporation and accrued a $3.0 million one-time
charge during the year ended March 31, 2001. The settlement was recorded as
other (income) expense and was paid in cash in April 2001. We are 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.
8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Common Stock
In connection with the Recapitalization, our outstanding equity securities
consisted of 9,073,532 shares of Class A common stock; 1,334,875 shares of
Class B common stock; 1,008,170 shares of Class L common stock; and 748,739
shares of preferred stock. The shares of Class A common stock and Class L
common stock each entitled the holder to one vote per share on all matters to
be voted upon by our stockholders and are otherwise identical, except that the
shares of Class L common stock were entitled to a preference over Class A
common stock with respect to any distribution by the company to holders of its
capital stock equal to the original cost of such share ($19.085) plus an amount
which accrued on a daily basis at a rate of 12% per annum, compounded annually.
The Class B common stock was identical to the Class A common stock except that
the Class B common stock was non-voting and was convertible into Class A common
stock at any time following our initial public offering at the option of the
holder.
On February 9, 2000, we completed our initial public offering of common
stock. We issued 10,350,000 shares of common stock, including the exercise of
the underwriters' overallotment option, at a price of $20.00 per share. Net
proceeds, net of underwriting discounts and offering costs, were $190,739,000.
In conjunction with our initial public offering and an amendment to our
articles of incorporation, 9,073,532, 1,130,902 and 1,008,170 shares of our
outstanding Class A common stock, Class B common stock and Class L common stock
were converted into 9,073,532, 1,130,902 and 2,319,698 shares of common stock,
respectively.
We have outstanding unvested shares of common stock that are subject to
repurchase by us if the holder is no longer employed by us. Such shares vest
over five years from the date of issuance. As of March 31, 2001, 2000 and 1999,
respectively, 333,151, 550,117 and 767,084 shares of common stock were subject
to repurchase.
40
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mandatorily Redeemable Convertible Preferred Stock
The Series A Mandatorily Redeemable Convertible Voting Preferred Stock
("Preferred Stock") had a liquidation preference of $18.40 and was convertible
at any time into one share of Common Stock at the option of the holder.
Dividends on each share of the Preferred Stock were cumulative and accrued at
the rate of 6% per annum. The Preferred Stock had a scheduled redemption on May
17, 2004, and was otherwise redeemable by the Company at any time from time
after the earlier of (a) June 30, 1998 or (b) an initial public offering. Each
share of Preferred Stock was convertible into one share of Common Stock (as
adjusted for stock splits, stock dividends, recapitalizations and similar
transactions). The Preferred Stock entitled the holder to one vote for each
share of common stock issuable upon conversion of the Preferred Stock.
On March 3, 2000, we called for redemption of all outstanding shares of
Preferred Stock. On March 24, 2000 and March 29, 2000, respectively, 169,589
and 579,150 shares of Preferred Stock were converted into an aggregate of
748,739 shares of common stock.
Stock Based Compensation
We have elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations in accounting for our employee stock awards because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123") requires use of option valuation models
for use in valuing employee stock options. Under APB No. 25, when the exercise
price of our employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Stock Options. During fiscal year 1998, we adopted several stock option
plans (the "1997 Plans") whereby the Board of Directors may have granted
incentive stock options and nonstatutory stock options to employees, directors
or consultants.
In connection with the initial public offering, we adopted the 2000 Equity
Incentive Plan, whereby the Board of Directors may grant incentive stock
options and nonstatutory stock options to employees, directors or consultants.
No future grants are available under the 1997 Plans upon the effectiveness of
the 2000 Equity Incentive Plan. We have reserved (1) 3,300,000 shares of common
stock (2) any shares returned to the 1997 Plans as a result of termination of
options and (3) annual increases to be added on the date of each annual meeting
of stockholders commencing in 2000 equal to 1.0% of the outstanding shares of
common stock, or such lesser amount as may be determined by the Board of
Directors, for issuance under the 2000 Equity Incentive Plan.
Vesting provisions for stock options granted under our stock option plans
are determined by the Board of Directors. Unless the Board of Directors
specifically determines otherwise at the time of the grant, the option shall
vest 25% on each of the first four anniversaries from the date of grant. Stock
options expire ten years from the date of grant. Common shares issued on
exercise of options prior to vesting are subject to repurchase if the holder is
no longer employed by us.
41
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of our stock option activity, and related information for the
years ended March 31, 2001, 2000 and 1999 are as follows:
Options Outstanding
--------------------
Weighted
Average
Exercise
Shares Number Price per
Available of shares Share
---------- --------- ---------
Balance at 3/31/98............................. 5,720,721 1,764,279 $10.69
Granted...................................... (320,100) 320,100 4.44
Exercised.................................... -- -- --
Cancelled.................................... 305,407 (305,407) 10.31
---------- ---------
Balance at 3/31/99............................. 5,706,028 1,778,972 9.64
Termination of Plans......................... (4,416,453) -- --
Authorization................................ 300,000 -- --
Granted...................................... (1,216,297) 1,216,297 7.49
Exercised.................................... -- (13,451) 6.00
Cancelled.................................... 89,337 (89,337) 6.64
---------- ---------
Balance at 3/31/00............................. 462,615 2,892,481 8.84
Authorization................................ 3,236,728 -- --
Granted...................................... (1,348,425) 1,348,425 20.45
Exercised.................................... -- (92,316) 6.38
Cancelled.................................... 228,817 (228,817) 13.20
---------- ---------
Balance at 3/31/01............................. 2,579,735 3,919,773 12.64
========== =========
The following table summarizes information about stock options outstanding
as of March 31, 2001:
Options
Options Outstanding Exercisable
-------------------------------- ------------------
Weighted
Weighted Average
Average Weighted Exercise
Remaining Average Price
Contractual Number Exercise Number per
Life Outstanding Price of shares Share
----------- ----------- -------- --------- --------
Range of Exercise prices:
$ 4.00.................... 7.34 270,000 $ 4.00 270,000 $ 4.00
$ 6.00-$7.00.............. 7.96 1,278,467 $ 6.68 463,142 $ 6.49
$ 8.93-$15.89............. 6.70 1,239,495 $12.42 1,071,945 $12.42
$18.25-$35.50............. 9.31 1,131,811 $21.67 17,008 $25.03
--------- ---------
7.91 3,919,773 $12.64 1,822,095 $ 9.78
========= =========
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, which also requires that the information be determined as if
we have accounted for our employee stock options granted subsequent to March
31, 1996 under the fair value method. The fair value for these options was
estimated using the Black-Scholes option pricing model.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because our options
42
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
have characteristics significantly different from those of options of publicly
traded companies and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the
fair value of our options.
For the years ended March 31, 2001, 2000, the fair value of each option
grant was estimated on the date of the grant using the Black-Scholes option-
pricing model with the following assumptions:
2001 2000 1999
------ ----- -----
Risk-free interest rate................................ 5.7% 6.8% 5.0%
Dividend yield......................................... 0% 0% 0%
Expected volatility.................................... 90% 65% 0%
Expected life in years................................. 5 5 5
Per option fair value.................................. $12.64 $3.94 $0.96
Employee Stock Purchase Plan. In connection with the initial public
offering, we also adopted the 2000 Employee Stock Purchase Plan, whereby
employees may purchase shares of common stock, at a discounted price through
payroll deductions or lump sum cash payments. We have reserved 500,000 shares
of common stock for issuance under the 2000 Employee Stock Purchase Plan. As of
March 31, 2001, 271,072 shares of common stock have been issued under the Stock
Purchase Plan.
For the years ended March 31, 2001 and 2000, the following weighted-average
assumptions were used to determine the fair value of purchase rights under the
2000 Employee Stock Purchase Plan:
2001 2000
---- ----
Risk-free interest rate.......................................... 5.7% 6.8%
Expected volatility.............................................. 90% 65%
Expected life in years........................................... 1 1
Had compensation costs been determined based upon the fair value at the
grant date for awards under the above stock option plans and employee stock
purchase plans, consistent with the methodology prescribed under SFAS No. 123,
our pro forma net income (loss) available to common stockholders and pro forma
diluted net income (loss) per share under SFAS No. 123 would have been:
2001 2000 1999
------- -------- --------
Net income (loss) (in thousands)
As reported................................... $25,842 $(21,497) $(16,562)
Pro forma..................................... $20,890 $(22,769) $(16,717)
Diluted net income (loss) per share
As reported................................... $ 1.02 $ (1.72) $ (1.86)
Pro forma..................................... $ 0.83 $ (1.82) $ (1.88)
43
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. RELATED PARTY TRANSACTIONS
We had revenue transactions with Toray and Shimadzu totaling $16,000,
$24,000 and $31,000 for the years ended March 31, 2001, 2000 and 1999,
respectively. We incurred expenses of approximately $62,000 and $118,000 for
the fiscal years ended March 31, 2000 and 1999, respectively, for employee
related costs paid on our behalf by Toray and Shimadzu. We incurred no such
expenses in fiscal year 2001.
On March 31, 2001, we had loans to management of $259,000 used to acquire
our capital stock (notes receivable from stockholders) and $1.0 million used to
pay certain tax liabilities incurred by certain executives in connection with
the Recapitalization (the "Tax Notes"). The notes receivable from stockholders
bear interest at the applicable federal rate in effect at the time of the
Recapitalization. The Tax Notes do not bear interest. The executives have
pledged their stock as security for the notes.
In connection with the Recapitalization, we entered into an Advisory
Agreement with Bain Capital, a majority stockholder, pursuant to which Bain
Capital agreed to provide management services. The management fees incurred,
excluding out-of pocket expenses, during the fiscal years ended March 31, 2001,
2000 and 1999 were $0, $750,000 and $1.0 million, respectively. We bought out
the seven and one half years remaining in the term of the agreement with $3.5
million of net proceeds from the our initial public offering in March 2000.
10. RETIREMENT PLAN
We have a retirement plan under Section 401(k) of the Internal Revenue Code
covering substantially all employees. Discretionary company contributions
accrued, which are based on achieving certain operating profit goals, were
$730,000, $400,000 and $0 in fiscal 2001, 2000 and 1999, respectively.
11. SEGMENT INFORMATION
We operate in one segment as we manufacture, market and service process
control metrology systems within the semiconductor equipment market. All
products and services are marketed in each geographic region in which we
operate. Our current product offerings qualify for aggregation under SFAS No.
131 as our products are manufactured and distributed in the same manner, have
similar long-term gross margins and are sold to the same customer base.
Revenue in each geographic area is recognized according to our revenue
recognition policy as described in Note 1 of Notes to Consolidated Financial
Statements. Transfers and commission arrangements between geographic areas are
at prices sufficient to recover a reasonable profit. Export sales were $117.3
million, $65.3 million and $39.9 million of the net sales in fiscal 2001, 2000
and 1999, respectively.
44
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of operations in geographic areas (in thousands).
Other foreign areas include Taiwan, Israel and Korea, each of which is
individually not material for separate disclosure.
Other
U.S. Japan U.K. Foreign Eliminations Consolidation
-------- ------ ------ ------- ------------ -------------
Fiscal year ended March
31, 1999
Sales to unaffiliated
customers.............. $ 60,356 $2,542 $1,956 $1,353 $ -- $ 66,207
Transfers between
geographic locations... (2,811) 1,047 1,212 2,408 (1,856) --
-------- ------ ------ ------ -------- --------
Total net sales......... 57,545 3,589 3,168 3,761 (1,856) 66,207
Operating income
(loss)................. (5,652) 338 606 28 3 (4,677)
Long-lived assets....... 16,147 555 43 308 -- 17,053
All other identifiable
assets................. 51,391 2,482 2,133 1,642 (2,349) 55,299
-------- ------ ------ ------ -------- --------
Total assets............ $ 67,538 $3,037 $2,176 $1,950 $ (2,349) $ 72,352
======== ====== ====== ====== ======== ========
Fiscal year ended March
31, 2000
Sales to unaffiliated
customers.............. $108,781 $2,650 $1,788 $2,460 $ -- $115,679
Transfers between
geographic locations... (940) 953 1,270 1,993 (3,276) --
-------- ------ ------ ------ -------- --------
Total net sales......... 107,841 3,603 3,058 4,453 (3,276) 115,679
Operating income
(loss)................. 12,729 87 409 513 (956) 12,782
Long-lived assets....... 7,759 433 49 444 -- 8,685
All other identifiable
assets................. 121,240 4,100 2,822 2,108 (5,261) 125,009
-------- ------ ------ ------ -------- --------
Total assets............ $128,999 $4,533 $2,871 $2,552 $ (5,261) $133,694
======== ====== ====== ====== ======== ========
Fiscal year ended March
31, 2001
Sales to unaffiliated
customers.............. $190,288 $3,102 $1,871 $2,938 $ -- $198,199
Transfers between
geographic locations... (5,211) 2,023 1,107 2,787 (706) --
-------- ------ ------ ------ -------- --------
Total net sales......... 185,077 5,125 2,978 5,725 (706) 198,199
Operating income
(loss)................. 31,896 246 54 -- 762 32,958
Long-lived assets....... 20,050 401 43 668 -- 21,162
All other identifiable
assets................. 173,835 2,935 2,801 2,394 (11,936) 170,029
-------- ------ ------ ------ -------- --------
Total assets............ $193,885 $3,336 $2,844 $3,062 $(11,936) $191,191
======== ====== ====== ====== ======== ========
12. SUBSEQUENT EVENTS
On April 10, 2001, we settled our patent lawsuits with KLA-Tencor
Corporation. A $3.0 million one-time charge was accrued as other expense during
the year ended March 31, 2001 and was paid in cash in April 2001.
In June 2001, we replaced our Bankers Trust bank credit facility and the
$3.5 million outstanding letter of credit with a new $10 million loan and
security agreement and a $3.5 million letter of credit with Comerica Bank. The
new bank credit facility allows us to borrow money bearing interest either at a
floating rate per annum equal to the prime rate or at a rate per annum equal to
LIBOR plus 1.5%. We may request advances in an aggregate outstanding amount not
to exceed $7.5 million minus the aggregate face amount of outstanding letters
of credit, including any drawn but unreimbursed letters of credit. Our
borrowings under the Comerica bank credit facility are secured by substantially
all of our assets. The Comerica bank credit facility matures on March 28, 2004.
45
THERMA-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. QUARTERLY STATEMENTS OF OPERATIONS (UNAUDITED)
Fiscal Year 2001 (SAB 101) Fiscal Year 2000
---------------------------------------- ---------------------------------------------
Q1(1) Q2(1) Q3(1) Q4 Year Q1 Q2 Q3 Q4 Year
------- ------- ------- ------- -------- ------- ------- ------- -------- --------
Net revenue............. $39,641 $47,770 $57,029 $53,759 $198,199 $21,141 $25,913 $31,977 $ 36,648 $115,679
Gross profit............ 19,540 23,363 29,396 24,479 96,778 8,913 12,237 15,580 18,629 55,359
Operating income........ 6,140 7,792 12,222 6,804 32,958 1,003 2,304 4,093 5,382 12,782
Net income (loss)
available to common
stockholders........... $ 416 $ 8,380 $12,302 $ 4,744 $ 25,842 $(2,545) $(1,213) $ 330 $(18,069) $(21,497)
======= ======= ======= ======= ======== ======= ======= ======= ======== ========
Basic net income (loss)
per share.............. $ 0.02 $ 0.36 $ 0.52 $ 0.20 $ 1.10 $ (0.31) $ (0.19) $ (0.05) $ (1.00) $ (1.72)
======= ======= ======= ======= ======== ======= ======= ======= ======== ========
Diluted net income
(loss) per share....... $ 0.02 $ 0.34 $ 0.49 $ 0.19 $ 1.02 $ (0.31) $ (0.19) $ (0.05) $ (0.87) $ (1.72)
======= ======= ======= ======= ======== ======= ======= ======= ======== ========
- --------
(1) Quarterly amounts for the first three quarters of fiscal 2001 have been
restated from those previously reported in our quarterly reports on Form
10-Q to reflect the retroactive adoption of SAB 101 as of April 1, 2000.
Year Ended March 31,
2001
-----------------------
Q1 Q2 Q3
------- ------- -------
Net revenue--Previously reported....................... $41,586 $50,263 $57,310
Net revenue--As restated............................... 39,641 47,770 57,029
Gross profit--Previously reported...................... 21,034 25,378 29,214
Gross profit--As restated.............................. 19,540 23,364 29,396
Operating income--Previously reported.................. 7,634 9,806 12,040
Operating income--As restated.......................... 6,140 7,792 12,222
Income (loss) before cumulative effect of change in
accounting principle and extraordinary charge--
Previously restated................................... 7,676 10,705 12,084
Income (loss) before cumulative effect of change in
accounting principle and extraordinary charge--As
restated.............................................. 6,703 8,380 12,302
Net income (loss) available to common stockholders--
Previously reported................................... 7,676 10,705 12,084
Net income (loss) available to common stockholders--As
restated.............................................. 416 8,380 12,302
Basic net income per share:
Income before cumulative effect of change in accounting
principle
--Previously reported................................. $ 0.33 $ 0.46 $ 0.52
Income before cumulative effect of change in accounting
principle
--As restated......................................... 0.29 0.36 0.52
Net income--Previously reported........................ 0.33 0.46 0.52
Net income--As restated................................ 0.02 0.36 0.52
Diluted net income per share:
Income before cumulative effect of change in accounting
principle
--Previously reported................................. $ 0.31 $ 0.43 $ 0.48
Income before cumulative effect of change in accounting
principle
--As restated......................................... 0.27 0.34 0.49
Net income--Previously reported........................ 0.31 0.43 0.48
Net income--As restated................................ 0.02 0.34 0.49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of Therma-Wave, Inc.
appears in the Proxy Statement for our 2001 annual stockholders meeting, under
the "Management" section. This portion of the Proxy Statement in incorporated
herein by reference.
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS
Information concerning compensation of executive officers of Therma-Wave,
Inc. appears in the Proxy Statement, under the "Management" section. This
portion of the Proxy Statement in incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial owners
and management appears in Therma-Wave's proxy statement, under the "Principle
Stockholders" section. This portion of the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
appears in Therma-Wave's proxy statement, under the "Related Party
Transactions" section. This portion of the Proxy Statement is incorporated
herein by reference.
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(i) Consolidated Financial Statements--See "Item 8. Financial
Statements and Supplementary Data"
(ii) Financial Statement Schedule:
Form 10-K
page number
-----------
Schedule II--Valuation and Qualifying Accounts............ 53
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the
related instructions, are inapplicable or not material, or the
information called for thereby is otherwise included in the financial
statements and therefore has been omitted.
(b) Reports on Form 8-K
None filed within the past quarter.
(c) Exhibits
Exhibit
Number Description
------- -----------
(3) 3.1 Restated Certificate of Incorporation of Therma-Wave.
3.2 Amended and Restated By-Laws of Therma-Wave.
(1) 4.2 Indenture, dated as of May 15, 1997, by and among Therma-Wave and
IBJ Schroder Bank & Trust Company, as trustee.
(3) 4.3 Supplemental Indenture, dated February 23, 2000, by and between
Therma-Wave and The Bank of New York as Trustee.
(1) 4.4 Form of Series B 10 5/8% Senior Notes.
(2) 4.5 Form of certificate representing shares of Common Stock.
# (1) 10.1 Employment Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Dr. Allan Rosencwaig.
# 10.2 Leave of Absence Agreement between Therma-Wave, Inc. and Allan
Rosencwaig.
# (1) 10.3 Employment Agreement, dated as of May 16, 1997, by and between
Therma-Wave and W. Lee Smith.
# (1) 10.4 Employment Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Jon L. Opsal.
# (1) 10.6 Executive Stock Agreement, dated as of May 16, 1997, by and Therma-
Wave and Dr. Allan Rosencwaig.
# (1) 10.8 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and W. Lee Smith.
# (1) 10.9 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Jon L. Opsal.
48
Exhibit
Number Description
------- -----------
(1) 10.11 Development License Agreement, dated June 12, 1992, by and among
Therma-Wave and Therma-Wave K.K., Toray Industries, Inc. and
Shimadzu Corporation.
(1) 10.12 New Development Agreement, dated December 22, 1995, by and between
Therma-Wave and Toray Industries, Inc.
(1) 10.13 Lease Agreement, dated as of May 26, 1995, by and between Therma-
Wave and Sobrato Interests.
(1) 10.14 Advisory Agreement, dated as of May 16, 1996, between Therma-Wave
and Bain Capital, Inc.
(1) 10.15 Credit Agreement, dated as of May 16, 1997, between Therma-Wave
and Bankers Trust Company, as agent, and certain financial
institutions named therein.
(1) 10.16 Pledge Agreement, dated as of May 16, 1997, between Therma-Wave
and Bankers Trust Company, as agent.
(1) 10.17 Security Agreement, dated as of May 16, 1997, between Therma-Wave
and Bankers Trust Company, as agent.
# (1) 10.18 Therma-Wave, Inc. 1997 Stock Purchase and Option Plan.
(1) 10.19 Registration Agreement, dated as of May 16, 1997, between Therma-
Wave and the stockholders named therein.
# (1) 10.20 Stock Repurchase Agreement, dated as of January 26, 1996, between
Toray Industries, Inc. and the key employees of Therma-Wave named
therein.
# (1) 10.21 Key Employee Stock Agreement, dated as of October 30, 1991 and
amended as of December 16, 1994, by and among Toray Industries,
Inc., TS Subsidiary Corp., Therma-Wave, Inc. and the key employees
named therein.
# (3) 10.22 Therma-Wave, Inc. 2000 Equity Incentive Plan.
(2) 10.23 First Amendment to Credit Agreement, dated as of June 30, 1998,
between Therma-Wave and Bankers Trust Company, as agent,
(incorporated herein by reference to Exhibit 10.1 of Therma-Wave's
Quarterly Report on Form 10-Q for the quarter ended July 5, 1998.)
# (3) 10.24 Employment Agreement, dated as of August 3, 1998, by and between
Therma-Wave and Martin M. Schwartz.
# (2) 10.25 Employment Agreement, dated as of August 10, 1998, by and between
Therma-Wave and L. Ray Christie.
# (3) 10.26 Amended and Restated Therma-Wave 2000 Employee Stock Purchase
Plan.
(2) 10.27 Second Amendment to Credit Agreement, dated as of August 3, 1999,
between Therma-Wave and Bankers Trust Company, as agent.
# (2) 10.28 Employee Stock Purchase and Option Plan.
# (2) 10.29 1997 Special Employee Stock Purchase and Option Plan.
(3) 10.30 Third Amendment to Credit Agreement, dated as of March 1, 2000,
between Therma-Wave and Bankers Trust Company, as agent.
# (3) 10.31 Therma-Wave Executive Deferred Compensation Plan, effective
January 1, 2000.
(3) 10.32 Lease between Minos Management, Inc. as Landlord, and Therma-Wave
as Tenant, dated May 31, 2000.
49
Exhibit
Number Description
------- -----------
# (3) 10.33 Form of Indemnification Agreement.
* (4) 10.34 Development and Cooperation Agreement entered into by and among
Applied Materials, Inc. and Therma-Wave, Inc., effective as of
July 24, 2000.
* (4) 10.35 Technology Escrow Agreement entered into by and among Applied
Materials, Inc. and Therma-Wave, Inc., effective as of July 24,
2000.
10.36 Loan and Security Agreement, Dated March 28, 2001, by and between
Therma-Wave, Inc. and Comerica Bank-California.
(1) 21.1 Subsidiaries of Therma-Wave.
23.1 Consent of Independent Accountants.
99.1 Risk Factors.
- --------
* Confidential treatment has been granted for portions of this agreement.
# Denotes management contract or compensatory plan.
(1) Incorporated herein by reference to the similarly numbered exhibit to
Therma-Wave's Registration Statement on Form S-4 (Registration No. 333-
29871).
(2) Incorporated herein by reference to the similarly numbered exhibit to
Therma-Wave's Registration Statement on Form S-1 (Registration No. 333-
76019).
(3) Incorporated herein by reference to the similarly numbered exhibit to
Therma-Wave's Annual Report on Form 10-K for the period ended March 31,
2000 (Registration No. 333-29871).
(4) Incorporated herein by reference to the similarly numbered exhibit to
Therma-Wave's Quarterly report on Form 10-Q for the period ended September
30, 2000 (Registration No. 000-26911).
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Therma-Wave, Inc.
/s/ Martin M. Schwartz
By: _________________________________
Martin M. Schwartz
Chairman of the Board, President,
Chief Executive Officer and
Director
Dated: June 20, 2001
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Martin M. Schwartz and L. Ray Christie, and each
of them, his/her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him/her and in her/her name, place and
stead, in any and all capacities, to sign any or all amendments to this annual
report on Form 10-K under the Securities Exchange Act of 1934, as amended, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he/she might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents or any of them, or their or his/her substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Martin M. Schwartz Chairman of Board, June 20, 2001
______________________________________ President, Chief
Martin M. Schwartz Executive Officer and
Director (Principal
Executive Officer)
/s/ L. Ray Christie Vice President, Chief June 20, 2001
______________________________________ Financial Officer and
L. Ray Christie Secretary (Principal
Financial and Accounting
Officer)
/s/ Allan Rosencwaig Director June 20, 2001
______________________________________
Allan Rosencwaig
/s/ G. Leonard Baker Director June 20, 2001
______________________________________
G. Leonard Baker
51
Signature Title Date
--------- ----- ----
/s/ David Dominik Director June 20, 2001
______________________________________
David Dominik
/s/ Ian K. Loring Director June 20, 2001
______________________________________
Ian K. Loring
/s/ Frank Alvarez Director June 20, 2001
______________________________________
Frank Alvarez
/s/ John D'Errico Director June 20, 2001
______________________________________
John D'Errico
/s/ David Aspnes Director June 20, 2001
______________________________________
David Aspnes
52
THERMA-WAVE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
-----------------------------------------------------------
Charged to
Balance at Charged to Other
Beginning Costs and Accounts Deductions-- Balance at
Description of Period Expenses Describe Describe(1) End of Period
----------- ---------- ---------- ---------- ------------ -------------
Year ended March 31,
2001:
Reserves and
allowances deducted
from asset accounts;
Allowance for
Doubtful Accounts,
Returns and
Allowances.......... $1,472 $ -- $ -- $376 $1,096
Year ended March 31,
2000:
Reserves and
allowances deducted
from asset Accounts:
Allowance for
Doubtful Accounts,
Returns and
Allowances.......... $1,911 $ -- $ -- $439 $1,472
Year ended March 31,
1999:
Reserves and
allowances deducted
from asset accounts;
Allowance for
Doubtful Accounts,
Returns and
Allowances.......... $3,016 $(631) $ -- $474 $1,911
- --------
(1) Represents specific customer accounts written off.
53
SKU# 1882 PS01