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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(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 5, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 333-29871
THERMA-WAVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3000561
[State or other jurisdiction of [I.R.S. Employer
incorporation or organization] Identification Number]
1250 Reliance Way
Fremont, California 94539
[Address of principal executive offices] [Zip Code]
Registrant's telephone number, including area code: (510) 490-3663
Securities registered pursuant to Section 12(b) and 12(g) of the Act:
Title of Each Class Name of each Exchange on which Registered
N/A N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate 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 of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [ ]
As of May 31, 1998, the Registrant had 9,073,532 shares of Class A Common
Stock, 1,289,785 shares of Class B Common Stock and 1,008,170 shares of Class L
Common Stock outstanding.
FORM 10-K
THERMA-WAVE, INC.
TABLE OF CONTENTS
Part I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements and Supplemental Data 18
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure 18
Part III
Item 10. Disclosures and Executive Officers of the Registrant 18
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 26
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 29
Schedule II - Valuation and Qualifying Accounts 46
Signatures 47
Exhibit 27.1 Financial Data Schedule 48
2
PART I
ITEM 1. BUSINESS
Overview
The Company is a worldwide leader in the development, manufacture, marketing
and service of process control metrology systems for use in the manufacture of
semiconductors. Semiconductor manufacturers use process control metrology
systems in their fabrication facilities ("fabs") to detect process deviations or
problems in order to minimize the effects on manufacturing yield, device
performance and reliability. The Company's metrology systems are principally
used to measure two of the most important and pervasive semiconductor
fabrication process steps: ion implantation and thin film deposition and
removal. Ion implantation involves the implantation of ions into selective areas
of the silicon wafer, which alters the electrical properties of the
semiconductor. Thin film deposition and removal is a process by which layers of
conductive or insulating films are deposited on and removed from the wafer to
give the semiconductor the desired performance characteristics. The Company's
products are designed to offer a low cost of ownership due to the integration of
proprietary technology and advanced software in a highly reliable, easy-to-use
and productive system.
The Company's process control metrology systems use proprietary and patented
technology to measure key dimensions and other physical properties of
semiconductor wafers. The Company holds 71 United States and foreign patents
primarily covering the technology utilized in its two major product lines: (i)
the Therma-Probe system and (ii) the Opti-Probe system. The Therma-Probe system,
introduced in 1985, utilizes the Company's proprietary thermal wave technology
and is the predominant nondestructive process control metrology system used to
measure the critical ion implantation process in the fabrication of
semiconductors. The Opti-Probe system, introduced in 1992, significantly
improves upon existing thin film metrology systems by successfully integrating
different measurement technologies into one system and utilizing the Company's
proprietary optical technologies.
Industry Background
Process Control Metrology Market
Semiconductor manufacturers use process control metrology systems in their
fabs to detect any process deviations or problems as quickly as possible so as
to minimize their effects on manufacturing yield, device performance and
reliability. Process control metrology systems are critical for yield
enhancement and cost reduction because they allow error/defect detection in
real-time before there can be a significant impact on yield. Higher yields
increase the revenue a manufacturer can obtain for each semiconductor wafer
processed. Furthermore, equipment that helps a manufacturer to increase yield
quickly when new semiconductor products are introduced enables the manufacturer
to offer products in volume at the time when they are likely to generate the
greatest profits. In general, demand for process control metrology systems is
driven primarily by: (i) capital expenditures of semiconductor manufacturers,
which, in turn, depend on the current and anticipated market demand for
semiconductors and products utilizing semiconductors and (ii) the increasing
complexity of the semiconductor manufacturing process as a result of the demand
for smaller, higher performance devices.
Two important areas of process control metrology are ion implant metrology and
thin film measurement.
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, which alters the electrical properties of the
silicon semiconductor. Control of the accuracy and uniformity of the ion implant
dose is critical to device performance and yield. Ion implantation is generally
performed several times during the early phases of the fabrication cycle. As a
result, there is typically a three to eight week time lag between the implant
steps and the first electrical measurements that indicate whether the ion
implantation process was properly executed. Failure to identify improper ion
implantation can be extremely costly to a semiconductor manufacturer if the
fabrication cycle is permitted to continue. To test whether the ion implantation
was properly executed on a timely basis, semiconductor manufacturers
historically used a four-point probe to perform test wafer monitoring (i.e.,
testing a non-production blank wafer that has no devices on it), which measured
electrical resistance and required physical contact between the probe and the
silicon wafer surface. As a result of the high probability of contamination of
the silicon wafer from contact with the probe, this procedure was only used on a
limited number of test wafers. As compared to product wafer monitoring (i.e.,
testing a production wafer that has devices on it), test wafer monitoring adds
considerable cost to the manufacturing process and will often fail to identify
processing problems inherent with product wafers.
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Thin Film Measurement
The majority of the 100 to 500 process steps required to fabricate
semiconductors on the silicon wafer involve the deposition and removal of a
variety of insulating and conducting thin films. Thin film metrology measures
the thickness and material properties of these thin films and, because it is
used to measure a large number of process steps, is one of the most important
metrology systems utilized at semiconductor fabs. 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 sample. This spectrum is then analyzed with
appropriate algorithms to obtain film thickness and, in some cases, other
properties of the film as well. In ellipsometry, the change of polarization of
the reflected light is measured. The polarization change is analyzed with
appropriate algorithms to obtain film thickness, and in some cases other
properties of the film.
Increasingly, these systems have been unable to meet the process control
metrology demands of the semiconductor industry. For example, the industry is
rapidly moving toward measuring product wafers rather than test wafers, both
because of the inability to control the manufacturing processes adequately using
test wafers alone, and the costs associated with the processing of nonproductive
test wafers. Measurements on product wafers, however, must be performed in small
areas and spectrometers and ellipsometers both 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
(i.e., below 20 Angstroms) to films that are hundreds of thousands times
thicker. Reflection spectrometers are most suitable for measuring thicker films,
whereas ellipsometers are most suitable for measuring very thin films. Thus,
neither system is individually capable of accurate and reliable measurements
over the full range of film thicknesses. Further, the industry is now using many
films whose optical properties are functions of the actual deposition
conditions. Obtaining an accurate measurement of the thickness of these thin
films requires the ability to make simultaneous measurements of both thickness
and optical properties. Reflection spectrometers and most ellipsometers have
very limited capabilities for simultaneous measurements of both thickness and
optical parameters.
Products and Technology
Therma-Wave currently offers two major lines of process control metrology
systems to address a wide range of customer process control needs. The Company's
Therma-Probe system was introduced in 1985 as the Company's initial product
line, and its Opti-Probe system was introduced in 1992. Both product lines
feature the Company's 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 enable continuous product enhancement as new
advances are made.
Therma-Probe System. The Therma-Probe system is the predominant ion implant
metrology system capable of measuring in a noncontact, non-contaminating manner
directly on product wafers and immediately after the ion implantation process,
both the implant dose and its uniformity across the wafer with a high degree of
precision. In addition, the Therma-Probe system has unparalleled sensitivity for
the most critical implants. By April 5, 1998, more than 375 Therma-Probe systems
had been installed in virtually every major semiconductor fab worldwide. A
typical semiconductor fab uses Therma-Probe systems to monitor and control
critical implant steps. In addition, all major manufacturers of ion implant
equipment utilize Therma-Probe systems to help develop and qualify their ion
implanters.
The Company estimates that sales of ion implant metrology systems for the
semiconductor industry were approximately $50 million in 1997. The selling price
for a current model of the Therma-Probe system ranges from $650,000 to $900,000.
The Company believes that its Therma-Probe system offers particular
technological advantages and features that distinguish it from the ion implant
metrology systems offered by its competitors:
. Proprietary Technology. To provide noncontact, non-contaminating ion
implant measurements on product wafers, the Company's Therma-Probe system
employs highly focused but low power laser beams to generate and detect
thermal wave signals in the silicon wafer that can be correlated to the
implant dose. The thermal wave technology used to measure the ion implant
dose in the silicon wafer is a highly proprietary and extensively patented
technology of the Company. The Company believes that these patents help to
maintain its competitive position.
. Ease of Use and Reliability. The Company has packaged its thermal wave
technology into an easy-to-use and reliable process control metrology
system. This system is configured specifically for use by semiconductor
device manufacturers and features automated wafer handling, automated data
collection and statistical data processing and data management.
. Installed Base. Major semiconductor manufacturers use Therma-Probe systems
to monitor and control their ion implant processes. In addition,
manufacturers of ion implant equipment utilize Therma-Probe systems to
help
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develop and qualify their implanters. The Company believes that its
significant installed base of Therma-Probe systems acts as a barrier to
entry for its current and potential competitors in the ion implant
measurement market.
. Continuous Improvement. The Company continues to develop, manufacture and
market new and improved Therma-Probe models to enhance system capability.
For example, the Company introduced the TP-500 model in 1996, which
provided enhanced performance, improved software, advanced image
processing and improved reliability. The Company recently introduced the
TP-630 model which has the capacity to accommodate wafer sizes of 300
millimeters.
The following table summarizes the Company's improvements to the Therma-Probe
system and current product development activities:
MODEL YEAR INTRODUCED Description of Innovation/Advancement
TP-200 1985 Introduced first nondestructive process control metrology system to measure
ion implantation.
TP-300 1987 Added cassette-to-cassette wafer handling and automation software to the
capability of the TP-200.
TP-400 1992 Significantly improved repeatability and added second cassette station for
tool calibration.
TP-500 1996 Built on the same platform as the OP-2600, added pattern recognition and
improved reliability and throughput.
TP-630 1998 Expands wafer measurement capability to 300 millimeters.
Opti-Probe System. The Opti-Probe system was developed by the Company to
address the limitations of conventional thin film metrology systems. The Opti-
Probe system, introduced in 1992, combines the thin film metrology capabilities
of spectrometers and ellipsometers into a single integrated system and utilizes
two new proprietary measurement technologies to enhance their capabilities. By
April 5, 1998, more than 600 Opti-Probe systems have been installed in major
semi-conductor fabs worldwide. The Company estimates that sales of thin film
measurement systems for the semiconductor industry were approximately $224
million in 1997. The selling price for a current model of the Opti-Probe system
ranges from $400,000 to $600,000.
The Company believes that its Opti-Probe system offers particular
technological advantages and features that distinguish it from traditional thin
film metrology systems:
. Proprietary Technology. Conventional spectrometers and ellipsometers are
unable to meet the current and future requirements of the semiconductor
fabs. These requirements include the ability to measure in very small
areas on product wafers, high precision and repeatability for very thin as
well as thick films, and the ability to simultaneously measure thickness
and optical parameters on one or more films. To help provide these
capabilities, the Company has developed and patented two new proprietary
optical measurement technologies and combined them with conventional
measurement technologies in one measurement system. Because of the wealth
of data that can be obtained from these combined optical technologies, it
is possible to perform measurements on the thickness and optical
parameters of one or more films simultaneously. In addition, since the
Company's proprietary technologies employ a highly focused laser beam, it
is possible to perform measurements with a spot size that is the smallest
in the industry.
. Ease of Use and Reliability. The Company believes that the Opti-Probe
system is regarded as easy-to-use and highly reliable as compared to the
thin film measurement systems of its competitors. This system is
configured specifically for use by semiconductor device manufacturers and
features automated wafer handling, advanced image processing, automated
data collection and statistical data processing and data management.
. Proprietary Software. 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
("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. The Company has a staff of
over fifty experienced applications scientists and engineers stationed
worldwide near all major customers who provide full applications support
to develop new recipes as the device manufacturing processes change.
. Continuous Improvement. While the Company has achieved rapid market share
growth in the thin film metrology market with its current Opti-Probe
systems, it continues to develop, manufacture and market new and improved
5
models. For example, in 1996, the Company introduced the OP-2600DUV which
extends the spectrometer range of the Opti-Probe further into the ultra-
violet region of the optical spectrum. The Company believes that it has
the lead position at providing the semiconductor industry with a thin film
metrology tool with full functionality in the ultra-violet spectrum. This
is of paramount importance since device manufacturers are now developing
patterning technology utilizing optical radiation in this ultra-violet
region. In addition, the Company introduced the 3000 series Opti-Probe
systems in 1996 that provide the same superior measurement capability of
the 2000 series but with increased speed, thus enhancing the systems'
productivity.
OP-5240 Product Introduction. The Company is currently finalizing the
introduction of the OP-5240 model to the customer base. This advanced system
integrates two additional measurement technologies into the Opti-Probe system.
As a result, the Opti-Probe 5240 has up to five independent but fully integrated
measurement technologies. The two additional technologies integrated into the
OP-5240 are spectroscopic ellipsometry and absolute laser ellipsometry, each of
which will expand the Opti-Probe's measurement capabilities and improve
measurement integrity.
Spectroscopic ellipsometry has long been recognized as a powerful thin film
characterization technology. However, it has generally not been successfully
transferred to fab production because it suffers from slow measurement time and
poor measurement integrity. The poor measurement integrity arises from high
sensitivity to small process changes because of the difficulties of measuring
thickness and material parameters simultaneously with only wavelength dependent
technologies. The Opti-Probe 5240 has been designed to overcome these
limitations by integrating spectroscopic ellipsometry with up to four other
independent measurement technologies to accelerate the ability to determine the
correct thin film solution. Furthermore, by integrating spectroscopic
ellipsometry, a wavelength dependent measurement, with the Company's proprietary
beam profile reflectometry, an angle dependent measurement, the Company expects
that the Opti-Probe 5240 will overcome the historical excessive sensitivity of
spectroscopic ellipsometry to small process changes.
The addition of absolute laser ellipsometry to the Opti-Probe enables stable,
reference-free absolute measurements on ultra-thin films with high precision and
repeatability. The Company believes that integrating absolute laser ellipsometry
with the Company's proprietary beam profile ellipsometry will provide fast,
precise and small spot size film measurements. The Company believes that the
successful market transition to the OP-5240 will further strengthen the
Company's technological capabilities in the thin film measurement market.
The following table summarizes the Company's improvements to the Opti-Probe
system and current product development activities:
MODEL YEAR INTRODUCED Description of Innovation/Advancement
OP-1000 1992 Introduced a new patented optical technology known as beam profile
reflectometry ("BPR") to measure thin film deposition and removal.
OP-2000 1993 Integrated BPR with a new patented optical technology known as beam profile
ellipsometry ("BPE") to enhance measurement capabilities.
OP-2600 1994 Integrated BPR, BPE and Spectrometry to further enhance measurement
capabilities.
OP-2600 DUV 1996 Integrated deep ultra-violet reflectance ("DUV Reflectance") with the
existing system to expand measurement range.
OP-3260 1996 Increased throughput of Opti-Probe system.
OP-3260 DUV 1996 Increased throughput of Opti-Probe with DUVReflectance.
OP-5240 1998 Integrates BPR, BPE and DUV Reflectance with Spectroscopic Ellipsometry and
Absolute Laser Ellipsometry.
OP-5340 1998 Expands wafer measurement capability to 300 millimeters.
Customers
The Company sells its products to leading semiconductor manufacturers
throughout the world. Certain of the Company's top customers in fiscal 1998 are
listed below:
Advanced Micro Devices, Inc. Lucent Technologies
Applied Materials Corporation Samsung America, Inc.
Chartered Semiconductor Ltd. Seocal Incorporated
Holtek Taiwan Semiconductor Mfg. Co.
Hyundai Electronics Ind. Co. Ltd. United Microelectronics Corp.
Intel Corporation Winbond Electronics
6
Sales to Intel represented approximately 23% of the Company's net revenues for
fiscal 1998. Sales to Samsung and Intel represented approximately 10% and 13%,
respectively, for fiscal 1997 and approximately 15% and 17%, respectively for
fiscal 1996. The Company's top twenty customers accounted for approximately
81%, 78% and 81% of its net revenues in fiscal years 1998, 1997 and 1996.
The Company provides its customers with comprehensive support and service
before, during and after delivery of its systems. Prior to shipment, the
Company's support personnel typically assist the customer in site preparation
and inspection and typically provide customers with training at the Company's
facilities or at the customer's location. The Company's customer training
programs include instructions in the maintenance of the Company's systems and in
system hardware and software tools for optimizing the performance of the
Company's systems. The Company's field support personnel work with the
customers' employees to install the system and demonstrate system readiness. In
addition, the Company maintains a group of highly skilled applications
scientists to respond to customer process needs worldwide when a higher level of
technical expertise is required.
The Company generally warrants its products for a period of up to 12 months
from system acceptance for materials and labor to repair the product and to
provide training and applications support. Installation and initial training are
customarily included in the price of the system. After the warranty period,
customers may enter into support agreements covering both field service and
field applications support. The Company's field service engineers may also
provide customers with call out repair and maintenance services on a fee basis.
The Company's applications engineers and scientists are also available to work
with the customers on recipe development. The Company also trains customer
employees, for a fee, to perform routine service and provides telephone
consultation services.
Sales and Marketing
The Company utilizes a combination of 14 in-house sales staff and 12
manufacturers' sales representatives (as of April 5, 1998) to sell its products
to end users. The Company sells products typically on 80% to 90% net 30-day
terms with the remainder due after customer acceptance. Some foreign customers
are required to deliver a letter of credit payable in U.S. dollars upon system
shipment.
Therma-Wave maintains sales offices and regional sales representatives
throughout the world. In the United States, the Company maintains sales offices
in California, Massachusetts and Texas. The Company also utilizes manufacturers'
sales representatives to cover those regions of the United States with too few
customers to support a direct sales effort. In Asia, the Company maintains sales
and support offices in Japan, Korea and Taiwan. The Japanese and Taiwanese
offices work with manufacturers' sales representatives to sell the Company's
products to customers in Japan and Taiwan, while the Korean office sells to
customers directly. The Company also works with manufacturers' sales
representatives in Singapore, Malaysia, Thailand and China. In Europe, the
Company maintains a sales office in the United Kingdom and works with
manufacturers' sales representatives throughout the rest of Europe.
In addition, the Company provides 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 the Company's employees in the territory.
In the United States, field service and applications engineers are located in
customer support offices in Arizona, California, Colorado, Florida,
Massachusetts, New Mexico, Oregon, Pennsylvania and Texas. Certain dedicated
site-specific field service and applications engineers are contracted by certain
customers. In Asia, the Company provides customer support through its offices in
Japan, Taiwan, Korea and Singapore. In Europe, the Company maintains a customer
support office in the United Kingdom to support customers there and to assist
the field service engineers of its European manufacturers' sale representatives
in the rest of Europe. Applications personnel to support continental Europe are
stationed in France, Germany and Italy.
See Note 8 to Notes of Consolidated Financial Statements for a summary of the
Company's U.S. operations and those of its wholly owned subsidiary in Japan.
Research and Development
The process control metrology market is characterized by continuous
technological development and product innovations. The Company believes that
continued and timely development of new products and enhancements to existing
products is necessary to maintain its competitive position. Accordingly, the
Company devotes a significant portion of its personnel and financial resources
to engineering, research and development programs. The Company's research,
development and engineering staff is comprised of 75 persons (as of April 5,
1998). The Company seeks to maintain its close relationships with customers to
make improvements in its products which respond to customers' needs. For
example, the Opti-Probe 2600 system was developed in cooperation with one of the
Company's major customers to address the need for a more capable thin film
measurement system.
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The Company's 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). The
Company has research and engineering staffs which work both in developing new
products and features and in responding to the particular needs of customers.
Engineering and research and development expenses were $19.1 million, $13.1
million and $10.1 million in fiscal years 1998, 1997 and 1996, or 17%, 12% and
13% of net revenues for those periods, respectively. The Company expects that
engineering and research and development expenditures will continue to represent
a substantial percentage of net revenues for the foreseeable future.
Manufacturing
The Company's manufacturing strategy is to produce high-quality, cost
effective systems and assemblies. The Company currently performs the majority of
its system assembly activities in-house. In order to lower production costs in
the future, the Company intends to perform only those manufacturing activities
that add significant value or that require unique technology or specialized
knowledge. In the future, the Company expects to rely increasingly on
subcontractors and turnkey suppliers to fabricate components, build assemblies
and perform other activities that can be undertaken more cost effectively than
by the Company.
The Company's principal manufacturing activities include assembly and test
work, all of which are conducted at the Company's facility in Fremont,
California. Assembly includes inspection, subassembly and final assembly. Test
includes modular testing, system integration and final test. Components and
subassemblies, such as lasers, robots and stages, are acquired from third party
vendors and integrated into the Company's finished systems. While the Company
uses standard components and subassemblies wherever possible, most mechanical
parts, metal fabrications and critical components are engineered and
manufactured to Company specifications. Certain of the components and
subassemblies are obtained from a limited group of suppliers, and occasionally
from a single source supplier. The Company has 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 specific 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 the Company's dependence on these suppliers, should supply lines for any
of these parts be interrupted. The partial or complete loss of such suppliers
could increase the Company's manufacturing costs or delay product shipments
while the Company qualifies new suppliers and could also require the Company to
redesign products, thereby having a material adverse effect on the Company's
results of operations and customer relationships. Further, a significant
increase in the price of one or more of the components supplied by such
suppliers could adversely affect the Company's financial position and results of
operations.
The Company schedules production based upon firm customer commitments and
anticipated orders during the planning cycle. The Company has structured its
production process and facility to be driven by both orders and forecasts and
has adopted a modular system architecture to increase assembly efficiency and
test flexibility. The Company's cycle times for its products are currently three
to four months.
The Company conducts the assembly of certain optical components and final
testing of its systems in clean-room environments where personnel are properly
clothed. This procedure is intended to reduce the amount of particulates and
other contaminants in the final assembled system and to test the Company's
products against 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 the ongoing quality program, all machines are monitored by Therma-
Wave during the installation process.
Competition
The market for semiconductor capital equipment is highly competitive. The
Company faces substantial competition from established companies in each of the
markets that it serves, some of which have greater financial, engineering,
manufacturing and marketing resources than the Company. Significant competitive
factors in the market for metrology systems include system performance, ease of
use, reliability, return on investment to the customer, and technical service
and support. The Company believes it competes favorably on the basis of these
factors in each of the Company's served markets. The Company competes with both
larger and smaller United States and Japanese companies in the markets it
serves. European companies are generally not significant competitors in the
Company's served markets.
The Company's Therma-Probe system competes primarily with other metrology
systems designed to measure ion implant dosage, particularly destructive four-
point probe measurement systems including those manufactured by KLA-Tencor
8
Instruments, Kokusai Electric Ltd. and Bio-Rad Semiconductor Systems. The
Therma-Probe system is the semiconductor industry's predominant noncontact,
nondestructive ion implant monitor for product wafers. Jenoptik GmbH has
recently begun to manufacture and market its TWIN and TWIN SC systems, each of
which nondestructively measures ion implant doses on product wafers using
thermal wave technology. The Company recently received a favorable verdict for
patent infringement by Jenoptik in the United States. As a result of the
settlement of this litigation, Jenoptik has agreed not to sell any of these
systems in the United States and to pay the Company a royalty fee for systems
sold in Japan. To date, the introduction of these products by Jenoptik has not
had a material impact on the Company's overall market position. The Company's
Opti-Probe system primarily competes with thin film metrology systems
manufactured by the Prometrix division of KLA-Tencor Instruments, Rudolph
Technologies, Nanometrics and Dai Nippon Screen.
In recent years, there has been significant merger and acquisition activity
among competitors and potential competitors of the Company. The Company
believes that this activity may continue in the future. Acquisitions by the
Company's 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 and marketing and support resources, of competitors engaged in these
acquisitions could permit them to accelerate the development and
commercialization of new competitive products and the marketing of existing
competitive products to their larger installed bases. Accordingly, such business
combinations and acquisitions by competitors and potential competitors could
have an adverse impact on both the Company's market share and the pricing of its
products, which could have a material adverse effect on the Company's business
and results of operations.
Patents and Proprietary Rights
The Company believes that the success of its business depends as much on the
technical competence, creativity and marketing abilities of its employees, as on
the protection derived from its patents and other proprietary rights.
Nevertheless, the Company's success will depend, at least in part, on its
ability to obtain and maintain patents and proprietary rights to protect its
technology.
The Company has a policy of seeking patents where appropriate on inventions
concerning new products and improvements as part of its ongoing engineering,
research and development activities. The Company has acquired a number of
patents relating to its two key products, the Opti-Probe and Therma-Probe
systems. The Company owns 26 United States patents with expiration dates ranging
from 1999 to 2013 and has filed applications for seven additional U.S. patents.
In addition, the Company owns 45 foreign patents with expiration dates ranging
from 1999 to 2013 and has filed applications for eight additional foreign
patents.
There can be no assurance that any of the Company's pending patent
applications will be approved, that the Company will develop additional
proprietary technology that is patentable, that any patents owned by or issued
to the Company will provide the Company 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 the Company's
patents. Any of the foregoing results could have a material adverse effect on
the Company's business or financial condition.
In addition to patent protection, the Company relies upon trade secret
protection for its confidential and proprietary information and technology. The
Company routinely enters into confidentiality agreements with its employees.
However, there can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach or that the
Company's confidential and proprietary information and technology will not be
independently developed by or become otherwise known by third parties.
The Company also owns seven U.S. trademark registrations and has filed
applications for five trademark applications in the United States and for two in
Japan as well as an intent to use trademark application in the United States.
Employees
As of April 5, 1998, the Company employed 451 persons, including 75 in
engineering, research and development, 105 in manufacturing, 203 in customer
support, 27 in sales and marketing and 41 in executive and administrative
functions. Many of the Company's employees are highly-trained, holding advanced
post-graduate degrees in science and engineering. None of the Company's
employees are represented by a labor union or covered by a collective bargaining
agreement. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's executive offices and manufacturing, engineering, research and
development operations are located in a 102,000 square foot building in Fremont,
California with approximately 800 square feet of Class 100 "clean rooms" for
customer demonstrations and approximately 10,000 square feet of Class 1000
"clean rooms" for manufacturing. This facility is occupied
9
under a lease expiring in 2006 at an aggregate annual rental expense of
approximately $1.0 million. The Company has the option of extending this lease
for another 15 years after 2006. In addition, the Company has a three-year
option on a six-acre lot adjacent to its current facility. The Company owns
substantially all of the equipment used in its facilities. The Company believes
that its existing facilities and capital equipment are adequate to meet its
current requirements and that suitable additional or substitute space is readily
available as needed.
The Company also leases sales and customer support offices in California,
Florida, Massachusetts, Arizona, Texas, Japan, Korea, Taiwan and the United
Kingdom.
ITEM 3. LEGAL PROCEEDINGS
On July 19, 1994, the Company filed a patent infringement suit against
Jenoptik GmbH ("Jenoptik"), a German company, in the United States District
court for the Northern District of California. The Company alleged that the
manufacture and sale by Jenoptik of Jenoptik's TWIN and TWIN SC systems
infringed several of the Company's United States patents that are related to the
Company's Therma-Probe ion implant metrology system. Jenoptik denied
infringement and claimed that the Company's patents were invalid and
unenforceable.
On November 26, 1997, the Company received a favorable jury verdict in its
United States patent infringement suit against Jenoptik. The jury found all six
of the Company's patents valid and concluded that Jenoptik infringed all thirty-
one claims at issue from these patents.
On February 1, 1996, the Company filed another patent infringement suit
against Jenoptik in the Patent Court in Dusseldorf, Germany. The Company alleged
that the manufacture and sale by Jenoptik of Jenoptik's TWIN and TWIN SC systems
infringed the Company's German counterpart to one of the Company's United States
patents being asserted against Jenoptik in the United States lawsuit. This
German counterpart patent was found to be invalid by a patent court in Munich,
Germany. The Company is in the process of appealing that decision.
The Company has been contacted by KLA-Tencor Corporation ("KLA-Tencor")
regarding the possible infringement of two of its patents by the Company's Opti-
Probe 5240 system. The Company has notified KLA-Tencor of the possible
infringement of one of its patents by a number of KLA-Tencor's products. The
Company is currently investigating these claims made by KLA-Tencor and, based
upon information currently available, does not believe that any conflict with
KLA-Tencor regarding these matters will have a material adverse effect on the
Company's business or financial condition.
The Company is also involved in various legal proceedings from time to time
arising in the ordinary course of business, none of which are expected to have a
material adverse effect on the Company's business or financial condition.
Environmental Matters
The Company, like all manufacturing companies, is subject to various federal,
state and local environmental statutory requirements. The Company believes that
it is in material compliance with existing applicable environmental laws and
regulation and has all necessary permits and licenses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of May 31, 1998, the Company had outstanding an aggregate of 9,073,532
shares of Class A Common Stock ("Class A Common"), 1,289,785 shares of Class B
Common Stock ("Class B Common") and 1,008,170 shares of Class L Common Stock
("Class L Common").
The Company does not expect to pay dividends on its Common Stock for the
foreseeable future. The payment of dividends by the Company to the holders of
Common Stock is currently prohibited by the Company's bank credit facility and
limited by the indenture under which the Company's 10 5/8% Senior Notes due 2004
(the "Notes") were issued.
The Company completed a recapitalization (the "Recapitalization") on May
16, 1997. In connection with the Recapitalization, the Company issued:
(a) An aggregate of 8,614,997 shares of old Common Stock to the Bain
Capital Funds and Sutter Hill (which were later converted into an
aggregate of 7,264,236 shares of Class A Common and an aggregate of
807,138 shares of Class L Common) for an aggregate of $17.1 million;
(b) An aggregate of (i) 1,226,331 shares of Class A Common; (ii) 136,258
shares of Class L Common; and (iii) 1,128,749 shares of Class B Common
to Dr. Allan Rosencwaig, Anthony W. Lin, W. Lee Smith, David Willenborg
and Jon Opsal (collectively, the "Management Investors") for an
aggregate of $2.9 million;
(c) An aggregate of (i) 509,433 shares of Class A Common; (ii) 56,604
shares of Class L Common; and (iii) 750,000 shares of Preferred Stock
to Toray Industries, Inc., Toray Industries (America), Inc. and
Shimadzu Corporation (collectively, the "Existing Stockholders") in
exchange for their 6,101,252 shares of old Common Stock;
(d) An aggregate of (i) 9,853 shares of Class A Common and (ii) 1,095
shares of Class L Common to the Existing Stockholders in exchange for
an aggregate of 1,261 shares of Preferred Stock; and
(e) 63,679 shares of Class A Common and 7,075 shares of Class L Common to
Antares International Partners for an aggregate of $150,000.
The sales and issuances listed above in paragraphs (a), (b) and (e), were
deemed exempt from registration under the Securities Act by virtue of Section
4(2) thereof, as transactions not involving a public offering. The issuance of
securities listed in paragraphs (c) and (d) were deemed exempt from registration
under the Securities Act by virtue of Section 3(a)(9).
11
ITEM 6. SELECTED FINANCIAL DATA
The Statements of Operations Data for each of the years in the five-year
period ended March 31, 1998 and the Balance Sheet Data as of March 31, 1998,
1997, 1996, 1995 and 1994 are derived from the Consolidated Financial Statements
of the Company, which have been audited by Ernst & Young LLP, independent
auditors. The Selected Financial Data should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes to the
Consolidated Financial Statements and the Management's Discussion and Analysis
of Financial Condition and Results Of Operations.
The Company's fiscal years 1998, 1997, 1996, 1995 and 1994 ended on April 5,
1998, April 6, 1997, March 31,1996, April 2, 1995 and March 27, 1994,
respectively. For presentation purposes, any reference herein to a fiscal year
refers to the year ended March 31 of such year.
FISCAL YEAR
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS)
Net revenues $115,459 $109,493 $79,293 $55,675 $ 20,770
Cost of revenues 55,683 49,795 35,027 25,024 11,262
-----------------------------------------------------------------------
Gross margin 59,776 59,698 44,266 30,651 9,508
Operating expenses:
Research and development 19,057 13,050 10,072 5,942 3,586
Selling, general and
administrative 24,589 22,004 18,704 13,299 9,092
Amortization of goodwill and
purchased intangibles - 1,275 1,912 1,912 1,912
Recapitalization and other
non-recurring expenses 4,188 - - - -
-----------------------------------------------------------------------
Total operating expenses 47,834 36,329 30,688 21,153 14,590
-----------------------------------------------------------------------
Operating income (loss) 11,942 23,369 13,578 9,498 (5,082)
Other income (expense):
Interest expense (12,930) (1,621) (1,722) (1,998) (1,543)
Interest income 753 346 247 102 331
Other income (expense) (194) 14 (138) (115) (125)
-----------------------------------------------------------------------
(12,371) (1,261) (1,613) (2,011) (1,337)
-----------------------------------------------------------------------
Income (loss) before provision (429) 22,108 11,965 7,487 (6,419)
for income taxes
Provision for income taxes 604 9,007 4,684 - -
-----------------------------------------------------------------------
Net (loss) income $ (1,033) $ 13,101 $ 7,281 $ 7,487 $ (6,419)
=======================================================================
BALANCE SHEET DATA:
Total Assets $ 89,762 $ 68,620 $53,056 $45,081 $ 23,039
Long Term Obligations 115,000 23,100 25,556 24,838 24,171
Redeemable Preferred Stock 14,515 - - - -
Total Stockholders' Equity (Net (70,990) 20,145 6,903 (379) (22,845)
Capital Deficiency)
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company is a worldwide leader in the development, manufacture, marketing
and service of process control metrology systems for use in the manufacture of
semiconductors. The Company's process control metrology systems are principally
used to measure ion implantation and thin film deposition and removal. The
Company has developed two major lines of process control metrology systems: (i)
the Therma-Probe system and (ii) the Opti-Probe system. The Therma-Probe
system, introduced in 1985, utilizes the Company's proprietary thermal wave
technology and is the predominant nondestructive process control metrology
system used to measure the critical ion implantation process on product wafers
in the fabrication of semiconductors. The Opti-Probe system, introduced in
1992, significantly improves upon existing thin film metrology systems by
successfully integrating different measurement technologies into one system and
utilizing the Company's proprietary optical technologies.
When used in this discussion, the words "expects", "anticipates" and similar
expressions are intended to identify forward-looking statements. Such forward-
looking statements are subject to a number of risks and uncertainties that could
cause actual results to differ materially from the statements made. The Company
has experienced and expects to continue to experience significant fluctuations
in its operating results. The Company's expense levels are based, in part, on
expectations of future revenues. If revenue levels in a particular quarter do
not meet expectations, operating results are adversely affected. A variety of
factors could have an influence on the level of the Company's revenues in a
particular quarter.
The Company's operations are characterized by relatively high fixed costs due
to the need for continued investment in research and development and extensive
ongoing customer service and support capability. As a result, changes in net
revenues tend to have a significant impact on operating income levels. Other
factors that may have an influence on the Company's operating results include
the timing of the receipt of orders from major customers, product mix,
competitive pricing pressures, the relative proportions of domestic and
international sales, the Company's ability to design, manufacture and introduce
new products on a cost-effective and timely basis, the delay between incurrence
of expenses to further develop marketing and service capabilities and
realization of any benefits from such improved capabilities, and the
introduction of new products by the Company's competitors. The Company's
business depends upon the capital expenditures of semiconductor manufacturers,
which, in turn, depend upon the current and anticipated market demand for
semiconductors and products utilizing semiconductors. The semiconductor industry
is cyclical and has historically experienced periodic downturns, which have
often resulted in a decrease in the semiconductor industry's demand for capital
equipment, including process control metrology systems. The semiconductor
industry is currently experiencing a downturn. A decrease in the overall level
of capital expenditures is expected to continue throughout the remainder of
1998.
The Company derives its revenues from product sales, sales of replacement and
spare parts and service contracts. In fiscal year 1998, the Company derived 89%
of its revenues from product sales, 6% from sales of replacement and spare parts
(and associated labor) and 5% from service contracts. Revenue from product sales
and replacement and spare parts is generally recognized at the time of shipment.
Revenue from service contracts is deferred and recognized on a straight-line
basis over the period of the contract.
The Company's fiscal years 1998, 1997 and 1996 ended on April 5, 1998, April
6, 1997 and March 31,1996, respectively. For presentation purposes, any
reference herein to a fiscal year or to the year ended March 31 refers to the
period ended on such dates.
13
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of operations
as a percentage of net revenues for the periods indicated. The historical
financial data for fiscal years 1998, 1997 and 1996 were derived from the
audited consolidated financial statements of the Company and should be read in
conjunction with the consolidated financial statements, and notes thereto,
included elsewhere herein.
FISCAL YEAR ENDED MARCH 31,
-------------------------------------------------------------------
Statement of Operations Data: 1998 1997 1996
------------------- ----------------- -----------------
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 48.2 45.5 44.2
------------------- ----------------- -----------------
Gross margin 51.8 54.5 55.8
Operating expenses:
Research and development 16.5 11.9 12.7
Selling, general and administrative 21.3 20.1 23.6
Amortization of goodwill and purchased intangibles - 1.2 2.4
Recapitalization and other non-recurring expenses 3.6 - -
------------------- ----------------- -----------------
Operating income 10.4 21.3 17.1
Interest expense 11.2 1.5 2.1
Interest income (0.6) (0.4) (0.3)
Other, net 0.2 - 0.2
------------------- ----------------- -----------------
Income (loss) before income taxes (0.4) 20.2 15.1
Provision for income taxes 0.5 8.2 5.9
------------------- ----------------- -----------------
Net income (loss) (0.9)% 12.0 % 9.2%
=================== ================= =================
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
Net Revenues. Net revenues for the fiscal year ended March 31, 1998
increased by $6.0 million, or 5.4%, to $115.5 million from $109.5 million for
the fiscal year ended March 31, 1997. This is primarily attributed to higher
Opti-Probe sales and increased service revenues, partially offset by a decrease
in Therma-Probe sales. Therma-Probe sales decreased as a result of the decrease
in the number of new semiconductor manufacturing facilities being constructed.
International sales, primarily export sales from the United States to foreign
countries, accounted for approximately 52.3% and 59.7% of the Company's total
revenues for fiscal years 1998 and 1997, respectively. The Company anticipates
that international sales will continue to account for a significant portion of
its total net revenues. Since a substantial majority of the Company's
international sales are denominated in U.S. dollars, sales to international
customers may be affected by fluctuations in the U.S. dollar, which could
increase the sales price in local currencies of the Company's products.
Gross Margin. Gross margin percentages for the fiscal years ended March 31,
1998 and 1997 were 51.8% and 54.5%, respectively. Compared to the corresponding
periods of fiscal 1997, the gross margin percentage decreased by 2.7 percentage
points. This decrease is primarily attributable to increased investment in the
Company's service organization.
Research and Development Expenses. Research and development expenses were
$19.1 million and $13.1 million for the fiscal years ending March 31, 1998 and
1997, respectively. Compared to fiscal year 1997, research and development
costs increased $6.0 million, or 46.0%. The increase in research and
development costs is due to the increased headcount and project expense
increases related to new product development. The Company believes that
technical leadership is essential to its success and expects to continue to
commit significant resources to research and development projects.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $24.6 million and $22.0 million, and as a
percentage of net revenues were 21.3% and 20.1% for the fiscal years ended March
31, 1998 and 1997, respectively. The increase is a result of increased spending
in marketing and related expenses for new products, slightly offset by a
decrease in sales commissions.
Amortization of Goodwill and Purchased Intangibles. Amortization of goodwill
and purchased intangibles decreased $1.3 million from the prior year as such
intangibles related to the acquisition of the Company by Toray and Shimadzu in
December 1991 were fully amortized in fiscal year 1997.
Recapitalization and other Non-Recurring Expenses. Recapitalization and other
non-recurring expenses for the year ended March 31, 1998 was $4.2 million. Such
charges were primarily non-cash charges related to the arrangements for the
Company's executive officers in connection with the Recapitalization.
14
Operating Income. Operating income for the fiscal year ended March 31, 1998
decreased by $11.5 million, or 48.9%, to $11.9 million from $23.4 million for
the fiscal year ended March 31, 1997. As a percentage of net revenues, operating
income for the fiscal year ended March 31, 1998 decreased to 10.4% from 21.3%
for the comparable period ended March 31, 1997.
Interest Expense. Interest expense for the fiscal year ended March 31, 1998
increased by $11.3 million to $12.9 million from $1.6 million for the year ended
March 31, 1997. As a percentage of net revenues, interest expense for the fiscal
year ended March 31, 1998 was 11.2% as compared to 1.5% for the year ended March
31, 1997. The increased interest expense is attributed to the additional debt
incurred as part of the Recapitalization.
Provision for Income Taxes. Income taxes for the fiscal year ended March 31,
1998 decreased by $8.4 million, or 93.3%, to $0.6 million from $9.0 million for
the year ended March 31, 1997. The effective tax rate increased to 140.8% from
40.7%, primarily due to the increase in the valuation allowance and other items,
offset by the benefit from the Company's foreign sales corporation.
Net (Loss) Income. For the reasons stated above, earnings for the fiscal year
ended March 31, 1998 decreased to a net loss of $1.0 million from $13.1 million
of net income for the fiscal year ended March 31, 1997.
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
Net Revenues. Net revenues for the fiscal year ended March 31, 1997
increased by $30.2 million, or 38.1%, to $109.5 million from $79.3 million for
the fiscal year ended March 31, 1996. This increase in the Company's net
revenues is primarily attributable to the increased market penetration of the
Opti-Probe and the overall expansion of the semiconductor industry. Of the
increase in net revenues, 85.4% was attributable to increases in Opti-Probe
sales and 11.1% was attributable to increases in Therma-Probe sales.
International sales for the fiscal year ended March 31, 1997, increased to $65.4
million, or 59.7% of net revenues, from $45.8 million, or 57.8% of net revenues,
for the comparable period ended March 31, 1996. The Company expects
international sales to continue to represent a substantial portion of net
revenues.
Gross Margin. Gross margin for the fiscal year ended March 31, 1997
increased by $15.4 million, or 34.9% to $59.7 million from $44.3 million for the
fiscal year ended March 31, 1996. This increase is primarily attributable to
increased shipments of both the Therma-Probe and Opti-Probe systems. As a
percentage of net revenues, gross margin for the fiscal year ended March 31,
1997 decreased to 54.5% from 55.8% for the comparable period ended March 31,
1996. This decrease in gross margin as a percentage of net revenues is due to a
change in product mix, which was partially offset by operating leverage
associated with increased sales volumes and improved average selling prices.
Research and Development Expenses. Research and development costs for the
fiscal year ended March 31, 1997 increased by $3.0 million, or 29.6%, to $13.1
million from $10.1 million for the fiscal year ended March 31, 1996 due to an
increase in the number of employees in the research and development department.
Research and development as a percentage of net revenues for the fiscal year
ended March 31, 1997 decreased to 11.9% from 12.7% for the comparable period
ended March 31, 1996. The decrease in research and development as a percentage
of net revenues is primarily attributable to net revenues increasing at a higher
rate than research and development.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the fiscal year ended March 31, 1997 increased by
$3.3 million, or 17.6%, to $22.0 million from $18.7 million for the fiscal year
ended March 31, 1996 due to an increase in headcount in relevant departments and
increased commission expense on a larger net revenue base. Selling, general and
administrative as a percentage of net revenues for the fiscal year ended March
31, 1997 decreased to 20.1% from 23.6% for the comparable period ended March 31,
1996. The decrease in selling, general and administrative as a percentage of net
revenues is primarily due to the relatively fixed nature of such costs, with the
exception of sales representative commission expenses.
Operating Income. Operating income for the fiscal year ended March 31, 1997
increased by $9.8 million, or 72%, to $23.4 million from $13.6 million for the
fiscal year ended March 31, 1996. As a percentage of net revenues, operating
income for the fiscal year ended March 31, 1997 increased to 21.3% from 17.1%
for the comparable period ended March 31, 1996.
Interest Expense. Interest expense for the fiscal year ended March 31, 1997
decreased by $0.1 million, or 5.9%, to $1.6 million from $1.7 million for the
comparable period ended March 31, 1996. As a percentage of net revenues,
interest expense for the fiscal year ended March 31, 1997 was 1.5% as compared
to 2.1% for the comparable period ended March 31, 1996.
Provision for Income Taxes. Income taxes for the fiscal year ended March 31,
1997 increased by $4.3 million, or 92.3%, to $9.0 million from $4.7 million for
the comparable period ended March 31, 1996. In addition to higher earnings, this
increase was
15
also caused by an increase in the effective tax rate to 40.7% from 39.1% for the
comparable period ended March 31, 1996. The lower effective rate for the fiscal
year ended March 31, 1996 reflects utilization of net operating loss carry-
forwards.
Net Income. For the reasons stated above, net income for the fiscal year ended
March 31, 1997 increased $5.8 million, or 79.9%, to $13.1 million from $7.3
million.
BACKLOG
At March 31, 1998, the Company's backlog was $33.4 million compared to $41.8
million at March 31, 1997. This decline in backlog is primarily due to the
current downturn in the semiconductor industry, which has resulted in decreased
demand for semiconductor capital equipment. See "Factors that May Affect
Results." The Company's backlog consists of product orders for which a customer
purchase order has been received and accepted and which is scheduled for
shipment within six months. Orders that are scheduled for shipment beyond the
six-month window are not included in backlog until they fall within the six-
month window. Orders are subject to rescheduling or cancellation by the
customer, usually without penalty. Backlog also consists of recurring fees
payable under support contracts with the Company's customers and orders for
spare parts and billable service. Because of possible changes in product
delivery schedules and cancellation of product orders and because the Company's
sales will sometimes reflect orders shipped in the same quarter that they are
received, the Company's backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements are for working capital,
consisting primarily of accounts receivable, inventories, capital expenditures
and debt service. Historically, the Company has funded its operating activities
principally from working capital and working capital lines of credit.
Cash flow provided by operating activities was $8.1 million, $11.9 million and
$5.9 million for the years ended March 31, 1998, 1997 and 1996, respectively.
The decrease in cash flow provided by operating activities from fiscal year 1997
to 1998 is mainly due to the decrease in net income primarily due to higher
interest expense associated with borrowings used to finance the
Recapitalization. This decrease was partially offset by a lower investment in
working capital and by the increase in non-cash recapitalization and other non-
recurring expenses. The improvement in cash flow provided by operating
activities in fiscal 1997 compared to 1996 is due to higher net income.
Purchases of property and equipment were $2.9 million, $1.1 million and $4.4
million for the years ended March 31, 1998, 1997 and 1996.
The Company issued $115.0 million in aggregate principal amount of senior
notes to finance the Recapitalization, including the repayment of notes payable
and redemption of common stock.
In connection with the Recapitalization, the Company entered into the Bank
Credit Facility. The Bank Credit Facility provides for borrowings of up to $30.0
million for working capital and other general corporate purposes, and bears
interest, at the Company's option, at (i) the Base Rate (as defined in the Bank
Credit Facility) plus 1.75% or (ii) the Eurodollar Rate (as defined in the Bank
Credit Facility) plus 3.00%. The Company's borrowings under the Bank Credit
Facility are secured by substantially all of the Company's assets and a pledge
of substantially all of the capital stock of the Company's domestic subsidiaries
and 65% of the capital stock of the Company's first-tier foreign subsidiaries.
The Bank Credit Facility matures on May 16, 2002. At March 31, 1998, there was
$3.5 million outstanding pursuant to a letter of credit that was collateralized
by the Bank Credit Facility and remaining unused borrowing capacity under the
Bank Credit Facility of $26.5 million. The Bank Credit Facility requires the
Company to meet certain financial tests and contains covenants customary for
this type of financing. The Company recently amended its Bank Credit
Facility to have its $30.0 million of borrowing availability subject to a
borrowing base formula and to make certain necessary adjustments to the
financial tests and covenants contained therein in light of current market
conditions.
The Company's principal sources of funds are cash flows from operating
activities, cash on hand ($20.4 million as of April 5, 1998) and borrowings
under the Bank Credit Facility. The Company believes that these funds will
provide the Company with sufficient liquidity and capital resources for the
Company to meet its current and future financial obligations, as well as to
provide funds for the Company's working capital needs, capital expenditures and
other needs. No assurance can be given, however, that this will be the case.
Depending upon its profitability, the Company may require additional equity or
debt financing to meet its working capital requirements or to fund its
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 the Company. The Company's future operating performance and
ability to service or refinance the Senior Notes and to repay, extend or
refinance the Bank Credit Facility will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond the Company's control.
16
Impact of Currency Exchange Rates
Foreign exchange rate fluctuations have historically not had a significant
impact on the Company's results of operations since the Company's export sales
are denominated in United States dollars. Due to the unpredictability of
currency exchange rates, there can be no assurance that the Company will not
experience negative currency translation adjustments in the future, nor can the
Company predict the effect of exchange rate fluctuations upon future operating
results.
FACTORS THAT MAY AFFECT RESULTS
Current Slowdown and Volatility in the Semiconductor Equipment Industry
The Company's business depends and will depend in the future upon the capital
equipment expenditures of semiconductor manufacturers, which, in turn depend on
the current and anticipated market demand for integrated circuits and products
utilizing integrated circuits. In addition, the Company's business depends upon
the new construction of semiconductor fabrication facilities and, as to existing
fabrication facilities, enhancements to improve yields. The semiconductor
industry has been cyclical in nature and historically has experienced periodic
downturns. The semiconductor industry is presently experiencing a downturn due
primarily to excess DRAM capacity and a slowdown in product demand as a result
of lower than expected sales of high-end personal computers and the economic
conditions in the Asia Pacific region. This slowdown has caused the
semiconductor industry to reduce purchases of semiconductor manufacturing
equipment and construction of new fabrication facilities. These conditions
have adversely affected the Company's results of operations for the first
quarter of Fiscal 1999, and bookings, revenues and operating results will
continue to be adversely affected as long as the current downturn in the
semiconductor industry continues. Even during periods of reduced revenues, in
order to remain competitive, the Company will be required to invest in
research and development and to maintain extensive ongoing worldwide customer
service and support capability, which could adversely affect its financial
results.
Global Market Risks
Because a significant portion of the Company's revenue is from sales outside
the United States, the Company's results can be significantly affected by weak
economic conditions in the foreign markets in which the Company distributes its
products. Companies in the Asia Pacific region, including Japan, Korea and
Taiwan, which accounts for a significant portion of the Company's business in
that region, have recently experienced weaknesses in their currency, banking and
equity markets. These weaknesses are currently affecting demand for the
Company's products.
Operating Cost Improvements
On June 22, 1998, the Company announced and implemented an operating cost
improvement program aimed at bringing operating expenses in line with the
Company's current operating environment. These efforts are in response to the
continued cutbacks in capital equipment investment by semiconductor
manufacturers. As a result of the implementation of this program, the Company
expects to record a charge in the first quarter of fiscal 1999, which will
consist principally of severance and related charges.
Year 2000
Many computer systems used by the Company may not properly recognize a date
using "00" as the year 2000 (Year 2000). This could result in system/program
failures or logic errors that would disrupt normal business activities. The
Company is in the process of identifying and modifying or replacing computer
systems that potentially subject the Company to risk.
In addition, certain software programs used to operate systems manufactured
and sold by the Company may not be Year 2000 compliant. The Company is
currently notifying its customers of its plans on evaluating such software
programs to determine if they are Year 2000 ready.
The Company has initiated communications with suppliers to raise their
awareness of the Year 2000 issue and to determine the extent to which the
Company is vulnerable to their failure to remediate their own Year 2000 issues.
The Company cannot reasonably predict the degree to which its suppliers will be
successful in mitigating the potential negative effects of the Year 2000 date-
recognition problem.
If computer systems used by the Company or its suppliers, or the software
applications used in systems manufactured and sold by the Company, fail or
experience significant difficulties, the Company's results of operations could
be materially affected. At this time, the Company cannot reasonably estimate
the cost of its Year 2000 compliance program.
17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Ernst & Young LLP, Independent Auditors, and consolidated
financial statements required by this Item are incorporated by reference from
pages 31 to 45 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- --------------------------- --- --------------------------------------------------------------
Allan Rosencwaig 57 Chairman of the Board, President, and Chief Executive Officer
Anthony W. Lin 47 Executive Vice President, Chief Financial Officer and Director
Charlotte Holland 40 Vice President, Finance and Administration
David Mak 41 Vice President, Manufacturing
Jon L. Opsal 57 Vice President, Research and Development
James E. Rhoades 55 Vice President, Sales
W. Lee Smith 49 Vice President, Strategic Marketing
David Willenborg 48 Vice President, Marketing
G. Leonard Baker, Jr 56 Director
David Dominik 41 Director
Adam W. Kirsch 36 Director
Allan Rosencwaig co-founded the Company in January 1982 and has served as its
Chairman and Chief Executive Officer since that time. Prior to founding the
Company, Dr. Rosencwaig was a Group Leader at the Lawrence Livermore National
Laboratory from 1977 to 1982 and a Member of Technical Staff at AT&T Bell
Laboratories from 1969 to 1977. Dr. Rosencwaig holds Bachelor of Science, Master
of Science and Ph.D. degrees in Physics from the University of Toronto.
Anthony W. Lin joined the Company in June 1985 and has held a variety of
administrative positions since that time, including Corporate Controller,
Director of Finance, Vice President, Finance and Administration and Vice
President, Customer Support. Mr. Lin has served as a Director of the Company
since the Recapitalization. Prior to joining the Company, Mr. Lin was Corporate
Controller for MAD Intelligence Systems, a manufacturer of computer systems from
1984 to 1985, Accounting Manager at Altos Computer Systems from 1982 to 1984,
Staff Accountant at Deloitte, Haskins & Sells from 1979 to 1982 and Senior
Financial Analyst at Digital Equipment Corporation from 1976 to 1979. Mr. Lin
holds a Bachelor of Science degree in Chemistry from National Taiwan University
and a Master of Business Administration degree from Harvard University and is
licensed by the State of California as a Certified Public Accountant.
Charlotte Holland joined the Company in August 1990 and, since that time, has
served as Director of Finance and Corporate Controller. Prior to joining the
Company, Ms. Holland served as Field Service Controller, Assistant Corporate
Controller and Financial Reporting Manager for Network Equipment Technologies,
Inc., General Accounting Manager and Financial Reporting Manager for Convergent
Technologies, Inc., Senior Accountant for Atari, Inc. and Senior Accountant for
Peat, Marwick, Mitchell & Co. Ms. Holland holds a Bachelor of Science degree in
Business Administration from San Jose State University and is licensed by the
State of California as a Certified Public Accountant.
David Mak joined the Company in October 1992 and, since that time, has served
as the Manufacturing Manager and Director of Manufacturing. Prior to joining the
Company, Mr. Mak served in a variety of positions at Tencor Instruments,
including Manufacturing Engineering Manager, Mechanical Design Engineering
Manager, and Project Manager. Mr. Mak also served as Senior Mechanical Engineer
for Priam Corp., Advisory Engineer for Optimem, and Product Engineer for Memorex
Corp. Mr. Mak holds a Bachelor of Science degree in Mechanical Engineering from
the Polytechnic Institute of New York.
Jon L. Opsal joined the Company in September 1982 and has served in several
research and management positions since that time, including Senior Scientist,
Manager of Analytical Software, Manager of the Physics Department, Manager of
Research and Development and Director of Research and Development. Prior to
joining the Company, Dr. Opsal was an engineer at the Lawrence Livermore
National Laboratory from 1978 to 1982 and a Research Associate and Assistant
Professor at Michigan State
18
University from 1974 to 1978. Dr. Opsal holds a Bachelor of Arts degree in
Physics and Mathematics from Eastern Washington University and Master of Science
and Ph.D. degrees in Physics from Michigan State University.
James E. Rhoades joined the Company in 1992 and, prior to holding his current
position as Vice President, Sales, served as the International Sales Manager and
Director of International Sales. Prior to joining the Company, Mr. Rhoades
served as the Director of International Sales for Silicon Valley Group, a
manufacturer of automated wafer processing equipment, since 1990. Mr. Rhoades
holds a Bachelor of Science degree in Business Administration from San Jose
State University and a Master of Arts degree in International Commerce and
Finance from the American Institute of Foreign Trade.
W. Lee Smith joined the Company in March 1983 and, since that time, has served
as its Research Group Leader, Applications Manager, Director of Applications,
Vice President, Product Development and Vice President, Marketing. From 1976 to
1983, Dr. Smith was a Physicist and Nonlinear Optics Group Leader at the
Lawrence Livermore National Laboratory. Dr. Smith holds a Bachelor of Science
degree in Physics from North Carolina State University and a Ph.D. in Physics
from Harvard University.
David Willenborg co-founded the Company with Dr. Rosencwaig in January 1982
and, since that time, has served as Director of Engineering, Vice President,
Engineering and Vice President, Technology. Prior to founding the Company, Mr.
Willenborg was an engineer at the Lawrence Livermore National Laboratory from
1975 to 1982 and at McDonnell-Douglas Aerospace from 1972 to 1973. Mr.
Willenborg holds Bachelor of Science and Master of Science degrees in Electrical
Engineering from the University of Illinois.
G. Leonard Baker, Jr. has served as a Director of the Company since the
Recapitalization. Mr. Baker has been a General Partner of Sutter Hill Ventures
since 1974. Mr. Baker joined Sutter Hill Ventures in 1973, and, prior to that
time, was Manager of Product Planning for Europe, Africa and India at Cummins
Engine Company, where he also held various manufacturing positions. He serves on
the board of several companies primarily in the high-technology area.
David Dominik has served as a Director of the Company since the
Recapitalization. Mr. Dominik has been a General Partner of Information
Partners, L.P. since January 1990 and Managing Director of Information Partners,
Inc. since June 1993. In addition, Mr. Dominik has been a Managing Director of
Bain Capital Inc. ("Bain Capital") since May 1993. Mr. Dominik also serves as a
director of Oasis Healthcare Inc. and several privately held companies.
Adam W. Kirsch has served as a Director of the Company since the
Recapitalization. Mr. Kirsch has been a Managing Director of Bain Capital since
May 1993 and a general partner of Bain Venture Capital since 1990. Mr. Kirsch
joined Bain Venture Capital in 1985 as an associate, and, prior to joining Bain
Venture Capital, Mr. Kirsch was a consultant at Bain & Company where he worked
in mergers and acquisitions. He serves on the board of several companies
including Brookstone, Inc., Dade International Inc. and Wesley Jessen
VisionCare, Inc. and several other private companies.
At present, all Directors are elected and serve until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal.
All members of the Board of Directors set forth herein were elected pursuant to
a stockholders agreement that was entered into in connection with the
Recapitalization. See "Certain Relationships and Related Transactions." There
are no family relationships between any of the Directors or executive officers
of the Company. Executive officers of the Company are elected by and serve at
the discretion of the Board of Directors.
19
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
fiscal 1998 and 1997 for the Chief Executive Officer and the four other most
highly compensated executive officers (the "Named Executives") of the Company.
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------------- ------------------
OTHER ANNUAL SECURITIES ALL OTHER
FISCAL COMPENSATION UNDERLYING COMPENSATION ($)
NAME AND POSITION YEAR SALARY ($) BONUS($) ($) (1) OPTIONS
- ----------------- ------ ----------------------------------------------------- -----------------------------------
Allan Rosencwaig, Chairman, 1998 $437,363 $318,623 (2) - 671,875 $44,155 (4)
President and Chief 1997 332,846 243,989 (3) - 4,463 (4)
Executive Officer
Anthony W. Lin, Executive 1998 236,276 123,901 (2) - 127,656 1,371
Vice President and Chief 1997 211,460 84,760 (3) - -
Financial Officer
Jon Opsal, Vice President, 1998 186,482 68,247 (2) - 127,656 792
Research and Development 1997 168,184 56,637 (3) - -
David Willenborg, Vice 1998 166,368 52,930 (2) - 100,781 4,335
President, Marketing 1997 154,479 50,778 (3) - -
Jim Rhoades, Vice 1998 123,603 156,018 (5) - 38,649 -
President, Sales
(1) None of the perquisites and other benefits paid to each named executive
officer exceeded the lesser of $50,000 or 10% of the total annual salary
and bonus received by each named executive officer.
(2) Reflects bonuses paid to Messrs. Rosencwaig, Lin, Opsal and Willenborg in
Fiscal 1999 as a result of the Company achieving certain performance
targets in Fiscal 1998.
(3) Reflects bonuses paid to Messrs. Rosencwaig, Lin, Opsal and Willenborg in
Fiscal 1998 as a result of the Company achieving certain performance
targets in Fiscal 1997.
(4) Reflects insurance premiums paid by the Company on behalf of Dr.
Rosencwaig.
(5) Reflects sales commissions earned by Mr. Rhoades during Fiscal 1998. Mr.
Rhoades was not a Named Executive in Fiscal 1997.
(6) Does not include amounts received by the Named Executives in Fiscal 1998
from the Company's prior owner. See "Relationships and Related Transactions
Stock Repurchase Agreement."
20
Option Grants in Last Fiscal Year
The following table sets forth information regarding stock options granted by
the Company to the Named Executives during the Company's last fiscal year:
NUMBER OF
SECURITIES % OF TOTAL MARKET
UNDERLYING OPTIONS EXERCISE OR PRICE ON
OPTIONS GRANTED IN BASE PRICE DATE OF
NAME GRANTED (a) FISCAL YEAR ($/SHARE) GRANT (b)
- ------------------- ------------- ------------- ------------- -----------
Allan Rosencwaig 134,375 7.3% $ 8.93 $0.24
134,375 7.3 10.68 0.24
134,375 7.3 12.43 0.24
134,375 7.3 14.18 0.24
134,375 7.3 15.89 0.24
Anthony Lin 25,531 1.4 8.93 0.24
25,531 1.4 10.68 0.24
25,531 1.4 12.43 0.24
25,531 1.4 14.18 0.24
25,531 1.4 15.89 0.24
Jon L. Opsal 25,531 1.4 8.93 0.24
25,531 1.4 10.68 0.24
25,531 1.4 12.43 0.24
25,531 1.4 14.18 0.24
25,531 1.4 15.89 0.24
David Willenborg 20,156 1.1 8.93 0.24
20,156 1.1 10.68 0.24
20,156 1.1 12.43 0.24
20,156 1.1 14.18 0.24
20,156 1.1 15.89 0.24
Jim Rhoades 7,730 0.4 8.93 0.24
7,730 0.4 10.68 0.24
7,730 0.4 12.43 0.24
7,730 0.4 14.18 0.24
7,730 0.4 15.89 0.24
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
EXPIRATION STOCK PRICE APPRECIATION FOR
NAME DATE (c) OPTION TERM (d)
- ------------------ ------------ --------------------------------
5% ($) 10% ($)
--------------------------------
Allan Rosencwaig 6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
Anthony Lin 6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
Jon L. Opsal 6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
David Willenborg 6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
6/15/07 0 0
Jim Rhoades 7/15/07 0 0
7/15/07 0 0
7/15/07 0 0
7/15/07 0 0
7/15/07 0 0
(a) All options listed in the table were immediately exercisable upon grant.
(b) Market price was determined based on the price paid for shares of Class B
Common Stock in the Recapitalization.
(c) Options will expire on the earlier of 90 days after the date of termination
of employment or the date indicated above.
(d) Amounts reflect certain assumed rates of appreciation set forth in the
executive compensation disclosure rules of the Commission. Actual gains, if
any, on stock option exercises depend on future performance of the Company's
stock and overall market conditions. At an annual rate of appreciation of
5% per year for the option term, the price of the Class B Common Stock would
be approximately $0.39 per share. At an annual rate of appreciation of 10%
per year for the option term, the price of the Class B Common Stock would be
approximately $0.62 per share.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth information for the Named Executives concerning
stock option exercises during the Company's fiscal year and options outstanding
at the end of the last fiscal year:
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
NAME ON EXERCISE REALIZED ($) OPTIONS AT FISCAL YEAR END FISCAL YEAR END ($)(a)
- --------------------- ------------- -------------- ---------------------------- ----------------------------
UNEXERCISABLE/EXERCISABLE UNEXERCISABLE/EXERCISABLE
---------------------------- ----------------------------
Allan Rosencwaig - - 0/671,875 $0/0
Anthony W. Lin - - 0/127,656 0/0
Jon L. Opsal - - 0/127,656 0/0
David Willenborg - - 0/100,781 0/0
Jim Rhoades - - 0/ 38,650 0/0
21
(a) Assumes a fair market value of the Class B Common Stock at April 5, 1998
equal to $6.00 per share.
Compensation Committee Interlocks and Insider Participation
The Company currently does not have a compensation committee. The compensation
arrangements for each of its executive officers following the Recapitalization
was established pursuant to the terms of the respective employment agreements
between the Company and each executive officer. The terms of the employment
agreements were established pursuant to arms-length negotiations between
representatives of Bain Capital and each executive officer. On a going forward
basis, any changes in the compensation arrangements of the executive officers of
the Company will be determined by the Board of Directors, which is controlled by
the representatives of Bain Capital.
Committees of the Board Of Directors
The Board of Directors of the Company (the "Board of Directors" or the
"Board") has an Audit Committee. The Audit Committee will make recommendations
to the Board of Directors regarding the independent auditors to be nominated for
election by the stockholders and will review the independence of such auditors,
approve the scope of the annual audit activities of the independent auditors,
approve the audit fee payable to the independent auditors and review such audit
results.
Employment Agreements
In connection with the Recapitalization, the Company entered into an
employment agreement with Allan Rosencwaig (the "Employment Agreement"). The
Employment Agreement provides that Dr. Rosencwaig will serve as the Chairman of
the Board, President and Chief Executive Officer for a period that will end on
the fifth anniversary of the consummation of the Recapitalization (the
"Employment Period"); provided that the Employment Period will automatically
terminate upon Dr. Rosencwaig's resignation, death or disability or termination
for Good Reason (as defined therein), or upon termination by the Company, with
or without Cause (as defined therein). Under the Employment Agreement,
Dr.Rosencwaig will receive: (i) an annual base salary of at least $400,000
(subject to annual review by the Board and certain annual increases beginning in
1998); (ii) an annual bonus based upon the achievement by the Company of certain
operating targets and the attainment of certain individual goals by Dr.
Rosencwaig, each to be determined by the Board on an annual basis; and (iii)
certain fringe benefits. In addition, Dr. Rosencwaig is also entitled to receive
a deferred payment in the event the Company achieves certain operating results.
See "-- Stock Plans." If the Employment Period is terminated by the Company
without Cause, by Dr. Rosencwaig for Good Reason or as a result of his
disability, Dr. Rosencwaig will be entitled to receive his base salary, bonus
(equal to 50% of base salary) and fringe benefits for 30 months following such
termination. If the Employment Period is terminated by the Company for Cause or
if Dr. Rosencwaig resigns without Good Reason, Dr. Rosencwaig will be entitled
to receive his base salary through the date of termination. Under the Employment
Agreement, Dr. Rosencwaig has agreed not to: (i) compete with the Company during
the period in which he is employed by the Company; (ii) disclose any
confidential information during the period in which he is employed by the
Company and for five years thereafter; (iii) solicit any customer, supplier,
licensee, licensor, franchisee or other business relation of the Company while
he is employed by the Company and for a period of 30 months thereafter; and (iv)
solicit or hire any management employee of the Company for a period of 30 months
following the date of termination. In addition, Dr. Rosencwaig has agreed to
disclose to the Company any and all Inventions (as defined in such employment
agreement) relating to Company's business conceived or learned by him during his
employment with the Company and acknowledge that such Inventions will be the
property of the Company.
In connection with the Recapitalization, the Company also entered into
substantially similar employment agreements (the "Executive Employment
Agreements") with Messrs. Willenborg, Smith, Opsal and Lin (collectively, the
"Executives"). Each of the employment agreements provide that such Executive
will serve with the Company in his current position for a period that will end
on the fifth anniversary of the consummation of the Recapitalization (the
"Executive Employment Period"); provided that the Executive Employment Period
will automatically terminate upon such Executive's resignation, death or
disability or termination for Good Reason (as defined therein), or upon
termination by the Company, with or without Cause (as defined therein). Under
the Executive Employment Agreements, Messrs. Willenborg, Smith, Opsal and Lin
will receive (i) an annual base salary of $168,480; $143,859; $197,077; and
$243,023, respectively (subject to review by the Board and the President or
Chief Executive Officer); (ii) an annual bonus based upon the achievement by the
Company of certain operating targets and the attainment of certain individual
goals by such Executive, each to be determined by the Board and the Company's
President or Chief Executive Officer on an annual basis; and (iii) certain
fringe benefits. In addition, each Executive is also entitled to receive a
deferred payment in the event the Company achieves certain operating results.
See "-- Stock Plans." If the Executive Employment Period is terminated by the
Company without Cause, by such Executive for Good Reason or as a result of his
disability, each Executive will be entitled to receive his base salary, bonus
(equal to 30% to 36% of base salary) and fringe benefits for 15 months following
such termination. If the Executive Employment Period is terminated by the
Company for Cause or if such Executive resigns without Good Reason, such
Executive will be entitled to receive his base salary through the date of
termination. Under the Executive Employment Agreements, each Executive has
agreed not to: (i) compete with the Company during the period in which he is
employed by the
22
Company; (ii) disclose any confidential information during the period in which
he is employed by the Company and for all times thereafter; (iii) solicit any
customer, supplier, licensee, licensor, franchisee or other business relation of
the Company while he is employed by the Company and for 39 months thereafter;
and (iv) solicit or hire any management employee of the Company for a period of
five years following the date of termination. In addition, each Executive has
agreed to disclose to the Company any and all Inventions (as defined in such
employment agreement) relating to the Company's business conceived or learned by
him during his employment with the Company and acknowledge that such Inventions
will be the property of the Company.
Compensation of Directors
Directors serving on the Board of Directors are not entitled to receive any
compensation for serving on the Board. Directors are reimbursed for their out-
of-pocket expenses incurred in connection with such services.
Stock Plans
1997 Stock Purchase and Option Plan
In connection with the Recapitalization, the Board of Directors adopted the
Therma-Wave, Inc. 1997 Stock Purchase and Option Plan (the "1997 Stock Plan"),
which authorizes the granting of stock options and the sale of Class A Common or
Class B Common to current or future employees, directors, consultants or
advisors of the Company or its subsidiaries. Under the 1997 Stock Plan, the
Board is authorized to sell or otherwise issue any class or classes of Common
Stock at any time prior to the termination of the 1997 Stock Plan in such
quantity, at such price, on such terms and subject to such conditions as
established by the Board up to an aggregate of 3,000,000 shares of Class A
Common and 3,000,000 shares of Class B Common (including shares of Common Stock
with respect to which options may be granted), subject to adjustment upon the
occurrence of certain events to prevent any dilution or expansion of the rights
of participants that might otherwise result from the occurrence of such events.
Options to purchase an aggregate of 1,128,747 shares of Class B Common were
granted under the 1997 Stock Plan in connection with the Recapitalization. In
July 1997, the Company sold an aggregate of 206,128 shares of Class B Common,
which are subject to annual vesting over a five-year period, and granted options
to purchase an aggregate of 206,128 shares of Class B Common under the 1997
Stock Plan to certain members of management.
Each of the Management Investors entered into a Stock Agreement, which
provided for the sale of the Class L Common, Class A Common and Class B Common
and established the terms of the options granted pursuant to the 1997 Stock
Plan. Pursuant to the Stock Agreements, the Company: (i) sold shares of Class L
Common and Class A Common at the same price per share as paid by the Bain
Capital Funds (the "Rollover Stock"); (ii) sold shares of Class B Common at the
same price as paid by the Bain Capital Funds, which are subject to annual
vesting over a five year period (5% per quarter) (the "Time Vesting Stock"); and
(iii) granted options to acquire shares of Class B Common, which were divided
into five equal traunches with the exercise prices of $8.93, $10.68, $12.43,
$14.18 and $15.89 per share. The aggregate exercise price of the options granted
under the Stock Agreements was approximately $16.6 million. The options granted
under the Stock Agreements were immediately exercisable. The shares of Class B
Common issuable upon the exercise of such options will vest (regardless of
whether the option has been exercised) on the fifth anniversary of their date of
grant provided that the Management Investor has been continuously employed by
the Company during such period (the "Option Shares"). In addition, some or all
of such shares of Class B Common are subject to earlier vesting upon certain
events, including all of such shares vesting immediately on a sale of the
Company.
Pursuant to the terms of the Stock Agreement, each Management Investor is
entitled to pay the exercise price for his options through the issuance of a
promissory note to the Company. The promissory note will be full recourse and
will be repayable upon the earliest of: (i) the consummation of a sale of the
Company; (ii) the later of (a) the fifth anniversary of its date and (b) the
date which is two weeks after the effectiveness of a registration statement
filed under the Securities Act as a result of the exercise of demand
registration rights granted to the Management Investors; (iii) the termination
of the Management Investor's employment with the Company; (iv) the tenth
anniversary of its date; and (v) the date such Management Investor violates the
non-competition provision of his employment. The promissory note will bear
interest at the lesser of: (i) the applicable federal rate at such time or (ii)
the highest rate permitted by applicable law, and will be payable at such time
as the principal under the note is due. The Management Investor is required to
prepay the promissory note upon the receipt of: (i) any cash dividends on the
Option Shares; (ii) any proceeds from the transfer of the Option Shares; and
(iii) any deferred payments under such Management Investor's employment
agreement. The indebtedness evidenced by the promissory note will be secured by
a pledge of all the shares of Common Stock purchased with the proceeds of the
loan. Under the terms of their respective employment agreements, each of the
Management Investors is entitled to receive a deferred payment in an amount that
is sufficient to repay the outstanding principal of such promissory note if the
Company achieves certain operating results.
23
The following table summarizes the shares of capital stock that were purchased
by the Management Investors under the Stock Agreements:
NO. OF SHARES PURCHASED
----------------------------------------------
Class A CLASS B CLASS L PURCHASE OPTIONS
NAME Common COMMON COMMON PRICE (1) GRANTED
- ---- --------- --------- --------- ----------- ---------
Allan Rosencwaig 993,279 671,875 110,364 $2,497,608 671,875
Anthony W. Lin 40,588 127,656 4,510 125,611 127,656
Jon L. Opsal 23,427 127,656 2,603 85,183 127,656
W. Lee Smith 40,738 100,781 4,526 119,636 100,781
David Willenborg 128,299 100,781 14,255 325,890 100,781
(1) Substantially all of the purchase price for such shares was funded by cash
payments received by each Management Investor from Toray in satisfaction of
Toray's obligations under the Stock Repurchase Agreement (as defined
herein). See "Certain Relationships and Related Transactions Stock
Repurchase Agreement."
In addition, the Stock Agreements granted the Company and the Bain Capital
Funds (in the event that the Company does not elect to exercise such option) the
right upon certain conditions to repurchase the shares of Class L Common, Class
A Common and Class B Common (including shares received upon the exercise of
options) held by a Management Investor in the event that the Management Investor
ceases to be employed by the Company. The shares that are subject to such
repurchase option and the repurchase price (either fair market value or original
cost) are dependent upon the circumstances under which such Management
Investor's employment was terminated. In general, if the Management Investor is
terminated by the Company with "cause" or the Management Investor resigns (other
than for "good reason"): (i) the unvested Option Shares are subject to
repurchase at a price per share equal to their original cost; (ii) the unvested
Time Vesting Stock will be subject to repurchase at a price per share equal to
the lesser of fair market value or their original cost; (iii) the vested Option
Shares are subject to repurchase at a price per share equal to fair market
value; and (iv) the vested Time Vesting Stock and the Rollover Stock will be
subject to repurchase at a price per share equal to fair market value, provided
that if the Company completes a public offering prior to such Management
Investor's termination, the Rollover Stock, the vested Time Vesting Stock and
the vested Option Shares are not subject to repurchase. If the Management
Investor is terminated without "cause" or the Management Investor resigns for
"good reason": (i) the unvested Option Shares and the unvested Time Vesting
Shares will be subject to repurchase at a price per share equal to their
original cost; (ii) the vested Option Shares and the vested Time Vesting Stock
will be subject to repurchase at a price per share equal to the greater of fair
market value or their original cost; and (iii) the Rollover Stock will not be
subject to repurchase. The Stock Agreements also: (i) restrict the transfer of
the Management Investors' securities, subject to certain exceptions; (ii) grant
each Management Investor certain participation rights in connection with certain
transfers made by the Bain Capital Funds; and (iii) require each Management
Investor to consent to a sale of the Company approved by holders representing a
majority of the shares of Common Stock held by the Bain Capital Funds.
1997 Employee Stock Purchase and Option Plan
On October 31, 1997, the Board of Directors approved the 1997 Employee Stock
Purchase and Option Plan ("1997 Employee Stock Plan"), which authorizes the
granting of stock options and the sale of Class A Common or Class B Common to
current or future employees, directors, consultants or advisors of the Company
or its subsidiaries. The 1997 Employee Stock Plan authorizes the granting of
stock options up to an aggregate of 689,375 shares of Class A Common and 689,375
shares of Class B Common, subject to adjustment upon the occurrence of certain
events to prevent any dilution or expansion of the rights of participants that
might otherwise result from the occurrence of such events.
Options to purchase an aggregate of 448,384 shares of Class B Common were
granted during fiscal 1998. Such options will vest and become exercisable in
four equal installments beginning on the first anniversary of the grant date and
continuing thereafter on an annual basis. Unvested options will terminate in
the event that the optionee ceases to be employed with the Company and vested
but unexercised options will terminate immediately if the optionee is terminated
for cause or after 30 days if the optionee ceases to be employed by the Company
for any other reason. All of the options granted have an exercise price equal
to the fair market value of the Class B Common on the date of grant.
1997 Special Employee Stock Purchase and Option Plan
On October 31, 1997, the Board of Directors approved the 1997 Special Employee
Stock Purchase and Option Plan ("1997 Special Employee Stock Plan"), which
authorizes the granting of stock options and the sale of Class A Common or Class
B Common to current or future employees, directors, consultants or advisors of
the Company or its subsidiaries. The 1997 Special Employee Stock Plan
authorizes the granting of stock options up to an aggregate of 53,125
24
shares of Class A Common and 53,125 shares of Class B Common, subject to
adjustment upon the occurrence of certain events to prevent any dilution or
expansion of the rights of participants that might otherwise result from the
occurrence of such events.
Options to purchase an aggregate of 53,125 shares of Class B Common were
granted during fiscal 1998. Such options will vest and become exercisable in
four equal installments beginning on the first anniversary of the grant date and
continuing thereafter on an annual basis. Unvested options will terminate in
the event that the optionee ceases to be employed with the Company and vested
but unexercised options will terminate immediately if the optionee is terminated
for cause or after 30 days if the optionee ceases to be employed by the Company
for any other reason. All of the options granted have an exercise price equal
to the fair market value of the Class B Common on the date of grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company as of May 31, 1998 by: (i) each person or entity known
to the Company to own more