KEY EMPLOYEE STOCK AGREEMENT

EXHIBIT 10.23





KEY EMPLOYEE STOCK AGREEMENT

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This KEY EMPLOYEE STOCK AGREEMENT (the "Agreement") is made as of October 30, 1991 by and among Toray Industries, Inc., a Japanese corporation ("Toray"), TS Subsidiary Corp., a Delaware corporation ("TS Sub"), Therma-Wave, Inc., a Delaware corporation (the "Company") and the key-employees of the Company who are signatories hereto (individually a "Key Employee," and collectively, the "Key Employees"), with reference to the following:



WHEREAS, Toray, TS Sub, Shimadzu Corporation, a Japanese corporation ("Shimadzu," and together with Toray and TS Sub, the "Purchasers"), and the Company are entering into an Agreement and Plan of Merger of even date herewith (the "Merger Agreement");



WHEREAS, the respective Boards of Directors of Toray, Shimadzu and the Company have each determined that it is in the best interests of their respective stockholders for Toray and Shimadzu to acquire a controlling interest in the Company, upon the terms and subject to the conditions set forth in the Merger Agreement;



WHEREAS, in furtherance thereof, the Purchasers shall make a cash tender offer (the "Offer") to acquire all of the issued and outstanding shares of common stock, par value $.001 per share, of the Company (the "Common Stock") and preferred stock, par value $.001 per share of the Company (the "Preferred Stock," and together with the Common Stock, the "Shares") for $2.80 per share of Common Stock and for $8.3976 per share of Series A Preferred Stock, $13.4362 per share of Series B Preferred Stock, $16.1492 per share of Series C Preferred Stock, $8.3976 per share of Series D Preferred Stock and $8.3976 per share of Series F Preferred Stock (as to each class and series, the "Per Share Price"), net to the seller in cash, in accordance with the terms and subject to the conditions provided for in the Merger Agreement;

WHEREAS, pursuant to the Merger Agreement, all options (other than Key Employee Options, as defined below) to purchase Common Stock (the "Employee Options") granted under the Company's 1986 Stock Option Plan, as amended (the "Stock Option Plan"), which are outstanding immediately prior to the effective time of the merger of TS Sub with and into the Company ("Merger No. 1") shall be canceled at such effective time (the "Merger No. 1 Effective Time") and each holder thereof shall thereafter be entitled to receive from the Company at times specified in the Merger Agreement a cash payment equal to the difference between the Per Share Price and the per share exercise price of each Employee option (the "Option Per Share Price"), multiplied by the number of Shares subject to such Employee Option (the "Option Merger Consideration");



WHEREAS, Toray, TS Sub and the Company have great confidence and place great trust in the Key Employees of the Company, and



WHEREAS, Toray, TS Sub and the Company desire to induce the Key Employees to maintain certain levels of ownership of Common Stock and Key Employee Options following the dates that the offer is closed and the Shares validly tendered are accepted for payment (the "Closing") and each of Merger No. 1 and the subsequent merger of a newly formed Delaware corporation with and into the Company pursuant to the Merger Agreement ("Merger No. 2"), are consummated;



NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto hereby agrees follows:



1. Definitions. At used in this Agreement, the following terms shall have the following respective meanings:





(a) "Accrual Commencement Date" shall mean for each share of Common Stock, the later of (i) the date of Closing, or (ii) the date the underlying Key Employee Option vested (or in the case of unvested Common Stock, would have vested) in accordance with the applicable stock option agreement.



(b) "Accruals" shall mean a return of 12% per annum, compounded annually, on: (i) the Per Share Price for periods following the date of issuance of the share of Common Stock, and (iii) the Option Per Share Price for periods prior to the exercise and conversion of the Key Employee Option into Common Stock.



(c) "As Converted Basis" shall mean the number that is the product of the outstanding shares of Preferred Stock in each series and the following conversion numbers: (i) as to each share of Series A, 3 shares of Common Stock, (ii) as to each share of Series B, 4.8 shares of Common Stock (iii) as to each share of Series C, 5.76923 shares of Common Stock, (iv) as to each share of Series D, 3 shares of Common Stock and (v) as to each share of Series F, 3 shares of Common Stock.



(d) "First Exercise Date" shall mean the later of (i) April 1, 1996, or (ii) the first date following the fourth anniversary of the Closing that the following conditions have been satisfied: (x) an Independent Investment Bank shall have delivered to the Key Employees and Toray its written opinion as to the Market Value of the Company as of the financial quarter ended December 31, 1995; provided, however, that the parties hereto shall use their best efforts to cause such written opinion to be delivered no later than March 31, 1996, and (y) the Company shall have delivered to each Key Employee a letter setting forth the status and, if applicable, terms of his employment and compensation on and after April 1, 1996; provided, however, that the Company shall deliver such letter in any event no later than December 31, 1995.





(e) "Independent Investment Bank" shall mean a recognized, U.S. based, national investment banking firm with experience in mergers, acquisitions and corporate valuations, that has not had any material relationship with the Company, Toray, Shimadzu or any of the Key Employees during the preceding five years except as set forth herein.



(f) "Key Employee Shares" shall mean for each Key Employee the aggregate of Shares not tendered into the Offer by such Key Employee, Key Employee Options and any Unvested Common Stock held by such Key Employee.



(g) "Market Value" shall mean a dollar amount representing the value of the entire equity interest in the Company and shall be determined by employing such valuation methodologies as are customary and appropriate for mergers and acquisitions in general and for high technology companies in particular. The Market Value will be calculated assuming the entire equity interest in the Company were being sold in a manner and pursuant to a process designed to reflect fully the Company's value as a whole (including any control premium inherent therein) in a unitary transaction to a willing buyer, but without regard to any tax liability as a result of such sale. Discount rates and corporate multiples used in the valuation shall be those prevailing in the United States. The Market Value shall take into account the Company's global operations including the operating results of Therma-Wave (Japan) K.K. and any successor corporation thereto ("TWKK") and any other affiliate of Toray or Shimadzu to the extent that: (a) such affiliate uses the Company's technology, and (b) the Company has not been compensated for such use on n arm's length basis, through license payments or otherwise, after the date of the Closing; Market Value shall also be adjusted to account for assistance provided to the Company and TWKK by Toray, Shimadzu or any of their affiliates except to the extent such party has been compensated for such assistance on an arm's length basis. The Market Value shall be adjusted to exclude: (i) debt incurred to pay the



consideration in the Offer, Merger No. 1 and Merger No. 2 and the related debt service, (ii) to the extent not included in (i) above, amounts paid by the Company pursuant to the Merger Agreement in respect of cancellation of Employee Options (as defined therein), (iii) all goodwill amortization arising out of the transactions set forth in the Merger Agreement, (iv) the consideration received by the Company or any of its affiliates for the sale and issuance of any of its capital stock from and after the effective time of Merger No. 2 (the "Merger No. 2 Effective Time"), (v) any extraordinary corporate charges or actions undertaken by the Company for the long-term benefit of its business, the results of which may not fall within the valuation horizon ("Extraordinary Charges"), (vi) the historical and projected impact of such Extraordinary Charges and (vii) the historical and projected impact of Extraordinary Charges excluded from any earlier determination of Market Value, even if the impact thereof falls within the valuation horizon. The Independent Investment Bank will determine, after consultation with the Board of Directors and the Key Employees, whether charges or actions constitute Extraordinary Charges; such determination shall be final and binding on the parties hereto. The Market Value shall be adjusted to include any dividends paid by the Company from and after the date hereof. The Key Employees and Toray shall consult with each other concerning the provision of valuation information to the Independent Investment Bank and procedures to be followed by the Independent Investment Bank in conducting its valuation.



(h) "Per Share Market Value" as to any Share shall mean the Market Value divided by 22,149,540, less any dividends paid with respect to such Share.



(i) "Second Exercise Date" shall mean the later of (i) April 1, 1997, or (ii) the first date following the fifth anniversary of the Closing that an Independent Investment Bank shall have delivered to the Key Employees and Toray its written opinion as to the Market Value of the Company as of the financial quarter ended December 31, 1996, provided, however, that the



parties hereto shall use their best efforts to cause such written opinion to be delivered prior to March 31, 1997.



(j) "Third Exercise Date" shall mean the later of (i) April 1, 1998, or (ii) the first date following the sixth anniversary of the Closing that an Independent Investment Bank shall have delivered to the Key Employees and Toray its written opinion as to the Market Value of the Company as of the financial quarter ended December 31, 1997; provided, however, that the parties hereto shall use their best efforts to cause such written opinion to be delivered prior to March 31, 1998.



(k) "Unvested Common Stock" shall mean outstanding Common Stock that is subject to repurchase by the Company pursuant to restricted stock purchase agreements between the Company and certain Key Employees with respect to Common Stock acquired under the Stock Option Plan.



2. Tender of Stock; Treatment of Stock Options. In the Offer, each Key Employee shall validly tender and not withdraw that number of shares of Common Stock, if any, specified and the Key Employee's signature page hereto. Each Key Employee shall execute and deliver a consent agreement in substantially the form as set forth in Exhibit A hereto (the "Consent Agreement") by which the number of Employee Options held by each Key Employee specified on his signature page hereto shall be canceled and converted into the right to receive the Option Merger Consideration payable in accordance with the Consent Agreement. The remaining number of options hold by each Key Employee pursuant to the Stock Option Plan specified on his signature page hereto (the "Key Employee Options") and shares of Common Stock, if any, specified on his signature page hereto shall remain outstanding subject to the terms contained herein.





3. Key Employee Put Options.



(a) Subject to Section 5(a) hereof, for a period of thirty (30) days following the First Exercise Date, each Key Employee shall have the right to require Toray to purchase any shares of Common Stock held by him each at a purchase price equal to the Per Share Price, plus Accruals from the Accrual Commencement Date to the date of payment.



(b) Subject to Section 5(a) hereof, for a period of thirty (30) days following each of the Second Exercise Date and the Third Exercise Date, each Key Employee shall have the right to require Toray to purchase any shares of Common Stock held by him at a purchase price equal to the Per Share Market Value of the Company, based on Market Value determined as of the end of the financial quarter ended December 31 prior to the Second Exercise Date or the Third Exercise Date, as the case may be (collectively, the Key Employees' rights under subsections (a) and (b) of this Section 3 are hereinafter referred to as the "Put Options").



(c) Each Key Employee may exercise his Put Option rights hereunder with respect to some or all of the shares of Common Stock held by him, but the minimum amount with respect to each exercise shall be the lesser of 30% of the number of such Key Employee's Key Employee Shares specified on his signature page hereto or all of his remaining Key Employee Shares.



4. Toray Call Option. For a period of two years following the Third Exercise Date, Toray shall have the right to require each Key Employee to sell to Toray all, but not less than all, of his shares of Common Stock, including shares issuable upon exercise of Key Employee Options, at a purchase price equal to the Per Share Market Value, determined as of the most recently completed financial quarter (the "Call Option"). Following notice of exercise and prior to any such



purchase and sale, the Key Employee shall be obligated to exercise each Employee option held by him that is vested as of the date notice is delivered from Toray pursuant to Section 6(c) hereof.



5. Options Upon Termination of Employment.



(a) If a Key Employee's employment with the Company is terminated for any reason an or prior to the fourth anniversary of the Closing, he shall not have any Put Option rights pursuant to Section 3 hereof, but he shall have the right to require the Company to purchase, and the Company shall have the right to purchase, in each case, all but not less than all of his shares of Common Stock, including shares issuable upon exercise of Key Employee Options (other than those forfeited in accordance with the Key Employee's stock option agreement(s)), as follows:



(i) if such termination resulted from death, Disability,

termination by the Company without Cause or resignation with Good Reason

(as such terms are defined in such Key Employee's Employment Agreement, a

form of which is set forth in Exhibit B hereto), the respective rights to

cause a purchase shall be exercisable for ninety (90) days following such

termination and each share of Common Stock held by the Key Employee shall

be purchased at the Per Share Price with Accruals from the Accrual

Commencement Date to the date of purchase; and



(ii) if such termination resulted, from resignation without Good

Reason or termination by the Company for Cause, the respective rights to

cause a repurchase shall be exercisable for thirty (30) days following the

fourth anniversary of the Closing and each share of Common Stock shall be

purchased at the Per Share Price with Accruals from the Accrual

Commencement Date to the date of such termination.





(iii) Promptly after the fourth anniversary of the Closing,

Toray shall contribute to the Company the aggregate amount of any

consideration paid by the Company pursuant to this Section 5(a), and the

Company shall issue in exchange a number of shares of Common Stock equal to

the aggregate number of shares of Common Stock purchased by the Company

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