##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended October 2, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from_________to _________
 Commission file number 000-26911
 THERMA-WAVE, INC.
 
  Delaware
    
    94-3000561(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification Number)
 1250 Reliance Way
Fremont, California 94539
 
  (510) 668-2200
 
  þ o
 þ o
 o þ
  Class
    
    Outstanding as of November 7, 2005Common stock, $0.01 par value
    
    36,867,751




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THERMA-WAVE, INC.
 TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATIONITEM 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2005 and March 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30,
2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2005 and 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39ITEM 4. Controls and Procedures
    
    
    41PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    42ITEM 2. Unregistered Sales of Equity Securities
 and Use of Proceeds
    
    
    42ITEM
4. Submission of Matters to a Vote of Security Holders
    
    
    42ITEM 6. Exhibits
    
    
    43SIGNATURES
    
    
    44EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



THERMA-WAVE, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)
 (Unaudited)
 September 30,
    
    
    March 31,2005
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,538
    
    
    $
    13,419Accounts receivable, net of allowances for doubtful accounts and returns of $440
and $715 at September 30, 2005 and March 31, 2005, respectively
    
    
    11,713
    
    
    
    15,678Inventories
    
    
    24,618
    
    
    
    30,870Other current assets
    
    
    1,768
    
    
    
    2,680Total current assets
    
    
    52,637
    
    
    
    62,647Property and equipment, net
    
    
    1,339
    
    
    
    2,976Other assets
    
    
    1,396
    
    
    
    1,950Total assets
    
    $
    55,372
    
    
    $
    67,573LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,675
    
    
    $
    8,227Accrued liabilities
    
    
    12,320
    
    
    
    15,784Deferred revenues
    
    
    7,317
    
    
    
    15,804Term loan facility, net
    
    
    4,879
    
    
    
    Total current liabilities
    
    
    28,191
    
    
    
    39,815Non-current deferred revenues
    
    
    1,150
    
    
    
    1,425Other long-term liabilities
    
    
    1,547
    
    
    
    370Total liabilities
    
    
    30,888
    
    
    
    41,610Commitments and contingencies (Note 5)Stockholders equity:Common
stock, $0.01 par value; 75,000,000 shares authorized; 36,825,907
shares issued and outstanding at September 30, 2005; 36,318,565 shares issued
and outstanding at March 31, 2005
    
    
    368
    
    
    
    363Additional paid-in capital
    
    
    334,788
    
    
    
    334,352Notes receivable from stockholders
    
    
    (174
    )
    
    
    (174
    )Accumulated other comprehensive loss
    
    
    (917
    )
    
    
    (659
    )Deferred stock-based compensation
    
    
    (36
    )
    
    
    (76
    )Accumulated deficit
    
    
    (309,545
    )
    
    
    (307,843
    )Total stockholders equity
    
    
    24,484
    
    
    
    25,963Total liabilities and stockholders equity
    
    $
    55,372
    
    
    $
    67,573
  3




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##### Table of Contents



THERMA-WAVE, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (Unaudited)
 Three Months
    
    
    Six MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenuesProduct
    
    $
    12,348
    
    
    $
    17,528
    
    
    $
    25,068
    
    
    $
    33,717Service and parts
    
    
    4,917
    
    
    
    5,074
    
    
    
    9,736
    
    
    
    10,036Total net revenues
    
    
    17,265
    
    
    
    22,602
    
    
    
    34,804
    
    
    
    43,753Cost of revenues (1)Product
    
    
    7,320
    
    
    
    8,498
    
    
    
    13,738
    
    
    
    15,606Service and parts
    
    
    4,001
    
    
    
    3,332
    
    
    
    8,007
    
    
    
    6,655Total cost of revenues
    
    
    11,321
    
    
    
    11,830
    
    
    
    21,745
    
    
    
    22,261Gross profit
    
    
    5,944
    
    
    
    10,772
    
    
    
    13,059
    
    
    
    21,492Operating expenses:Research and development (2)
    
    
    3,052
    
    
    
    3,848
    
    
    
    6,888
    
    
    
    9,113Selling, general and administrative (3)
    
    
    4,922
    
    
    
    5,631
    
    
    
    12,676
    
    
    
    11,934Restructuring, severance and other
    
    
    2,264
    
    
    
    
    
    
    
    3,731
    
    
    
    373Total operating expenses
    
    
    10,238
    
    
    
    9,479
    
    
    
    23,295
    
    
    
    21,420Operating income (loss)
    
    
    (4,294
    )
    
    
    1,293
    
    
    
    (10,236
    )
    
    
    72Other income (expense):Gain on sale of product line
    
    
    171
    
    
    
    
    
    
    
    8,721
    
    
    
    Interest expense
    
    
    (90
    )
    
    
    (8
    )
    
    
    (147
    )
    
    
    (8
    )Interest income
    
    
    43
    
    
    
    48
    
    
    
    75
    
    
    
    90Other, net
    
    
    33
    
    
    
    (13
    )
    
    
    (63
    )
    
    
    (3
    )Total other income, net
    
    
    157
    
    
    
    27
    
    
    
    8,586
    
    
    
    79Income (loss) before provision for income taxes
    
    
    (4,137
    )
    
    
    1,320
    
    
    
    (1,650
    )
    
    
    151Provision for income taxes
    
    
    11
    
    
    
    3
    
    
    
    52
    
    
    
    3Net income (loss)
    
    $
    (4,148
    )
    
    $
    1,317
    
    
    $
    (1,702
    )
    
    $
    148Net income (loss) per share:Basic
    
    $
    (0.11
    )
    
    $
    0.04
    
    
    $
    (0.05
    )
    
    $
    Diluted
    
    $
    (0.11
    )
    
    $
    0.03
    
    
    $
    (0.05
    )
    
    $
    Weighted average common shares outstanding:Basic
    
    
    36,682
    
    
    
    35,824
    
    
    
    36,530
    
    
    
    35,731Diluted
    
    
    36,682
    
    
    
    37,949
    
    
    
    36,530
    
    
    
    37,882
 
 (1)
    
    Includes stock-based compensation expense (benefit) of $(2) and $(262) for the three months ended September 30, 2005 and 2004, respectively;
and $2 and $56 for the six months ended September 30, 2005 and 2004, respectively.(2)
    
    Includes stock-based compensation expense (benefit) of $(68) and $(564) for the three months ended September 30, 2005 and 2004, respectively;
and $(246) and $322 for the six months ended September 30, 2005 and 2004, respectively.(3)
    
    Includes stock-based compensation expense (benefit) of $(10) and $(304) for the three months ended September 30, 2005 and 2004, respectively;
and $5 and $243 for the six months ended September 30, 2005 and 2004, respectively.  4




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THERMA-WAVE, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six months ended September 30,2005
    
    
    2004Operating activities:Net income (loss)
    
    $
    (1,702
    )
    
    $
    148Adjustments to reconcile net income (loss) to net cash used in operating activities:Gain on sale of product line
    
    
    (8,721
    )
    
    
    Non-cash restructuring charge
    
    
    285
    
    
    
    Depreciation of property and equipment
    
    
    1,230
    
    
    
    1,322Amortization of intangible assets
    
    
    366
    
    
    
    403Stock-based compensation expense (benefit)
    
    
    (239
    )
    
    
    621Provision (credit) for doubtful accounts receivable and returns
    
    
    133
    
    
    
    (183
    )Provision for excess and obsolete inventories
    
    
    2,110
    
    
    
    1,888Loss on disposal of property and equipment
    
    
    95
    
    
    
    15Changes in operating assets and liabilities (excluding net assets sold):Accounts receivable
    
    
    3,832
    
    
    
    (3,428
    )Inventories
    
    
    3,337
    
    
    
    (7,322
    )Other assets
    
    
    967
    
    
    
    (388
    )Accounts payable
    
    
    (4,569
    )
    
    
    2,654Accrued and other liabilities
    
    
    (1,416
    )
    
    
    (313
    )Deferred revenues
    
    
    (8,692
    )
    
    
    (1,352
    )Net cash used in operating activities
    
    
    (12,982
    )
    
    
    (5,935
    )Investing activities:Sale of product line
    
    
    8,950
    
    
    
    Purchases of property and equipment
    
    
    (52
    )
    
    
    (604
    )Purchase of patents
    
    
    (138
    )
    
    
    (361
    )Net cash provided by (used in) investing activities
    
    
    8,760
    
    
    
    (965
    )Financing activities:Borrowings from term loan facility
    
    
    5,000
    
    
    
    Proceeds from issuance of common stock
    
    
    599
    
    
    
    339Net cash provided by financing activities
    
    
    5,599
    
    
    
    339Effect of exchange rates on cash
    
    
    (258
    )
    
    
    (133
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,119
    
    
    
    (6,694
    )Cash and cash equivalents at beginning of period
    
    
    13,419
    
    
    
    23,899Cash and cash equivalents at end of period
    
    $
    14,538
    
    
    $
    17,205Supplementary disclosures:Application
of customer deposit to sale of product line
    
    $
    1,000
    
    
    $
    
  5




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##### Table of Contents



THERMA-WAVE, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (As of September 30, 2005)
 1. Basis of Presentation
   Use of Estimates
  Liquidity
   6




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Revenue Recognition
  
     Persuasive evidence of an arrangement exists
 Delivery has occurred or services have been rendered:
 The sellers price to the buyer is fixed or determinable:
 Collectibility is reasonably assured:
 7




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##### Table of Contents



a.
    
    Systems Sold Through Resellers. The Company accounts separately for the services provided by
the resellers, including sales services and any post-shipment services that the resellers may
be contractually obligated to provide according to the terms of the specific sales contract.
 b.
    
    Standard Product Warranty. The Company offers a standard product warranty of one year,
usually, beginning on the date of customer final acceptance. Additional periods of warranty
are sometimes included in the price of the system sale or are sold separately. When service
coverage outside the one-year warranty is included in the price of the system sale, the
Company defers the fair market value of that service coverage as a liability for deferred
service contract revenues and recognize those revenues ratably over the service delivery time
periods applicable to the contract.
 c.
    
    Systems Under Trial and Evaluation Agreements. Revenues are not recognized for shipments of
systems under trial and evaluation agreements until the customer places a firm order for the
system and all other revenue recognition criteria are satisfied.
 d.
    
    Payment Terms. Payment terms usually are net 30 to net 60 days. In rare circumstances, the
Company agrees to extended payment terms greater than net 60 days. In those instances, which
generally involve foreign sales, revenue recognition is deferred until payment is received.
   Service and Parts Revenues.
  Stock-Based Compensation
   8




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##### Table of Contents



Three Months Ended September 30,
    
    Six Months Ended September 30,2005
    
    2004
    
    2005
    
    2004Assumptions for Estimating Fair Value of Option GrantsRisk-free interest rate
    
    
    4.0
    %
    
    
    3.1
    %
    
    
    3.9
    %
    
    
    3.1
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    74
    %
    
    
    96
    %
    
    
    74
    %
    
    
    97
    %Expected life in years
    
    
    3.2
    
    
    
    5.0
    
    
    
    3.2
    
    
    
    5.0Weighted average fair value per share
    
    $
    1.10
    
    
    $
    2.70
    
    
    $
    0.99
    
    
    $
    2.77
  Three Months Ended September 30,
    
    Six Months Ended September 30,2005
    
    2004
    
    2005
    
    2004Assumptions for Estimating Fair Value of ESPPPurchase RightsRisk-free interest rate
    
    
    3.1
    %
    
    
    1.2
    %
    
    
    3.3
    %
    
    
    1.2
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    71
    %
    
    
    60
    %
    
    
    59
    %
    
    
    60
    %Expected life in years
    
    
    0.50
    
    
    
    1.3
    
    
    
    0.50
    
    
    
    1.3Weighted average fair value per share
    
    $
    0.64
    
    
    $
    2.70
    
    
    $
    0.77
    
    
    $
    2.77
 9




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Three Months Ended September 30,
    
    
    Six Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share data)(In thousands, except per share data)Pro forma Net Loss Under SFAS No. 123Net income (loss) (in thousands)As reported
    
    $
    (4,148
    )
    
    $
    1,317
    
    
    $
    (1,702
    )
    
    $
    148Add: Stock-based employee compensation expense (benefit)
included in the determination of net income (loss),
as reported
    
    
    (80
    )
    
    
    (1,130
    )
    
    
    (239
    )
    
    
    621Deduct: Stock-based employee compensation expense as
determined using the fair value method
    
    
    (224
    )
    
    
    (950
    )
    
    
    (523
    )
    
    
    (2,351
    )Pro forma net loss
    
    $
    (4,452
    )
    
    $
    (763
    )
    
    $
    (2,464
    )
    
    $
    (1,582
    )Basic net income (loss) per shareAs reported
    
    $
    (0.11
    )
    
    $
    0.04
    
    
    $
    (0.05
    )
    
    $
    Pro forma
    
    $
    (0.12
    )
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (0.04
    )Diluted net income (loss) per shareAs reported
    
    $
    (0.11
    )
    
    $
    0.03
    
    
    $
    (0.05
    )
    
    $
    Pro forma
    
    $
    (0.12
    )
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (0.04
    )
    Recently Issued Accounting Pronouncements
   10




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 
   11




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##### Table of Contents



2. Balance Sheet Components
 (in thousands)
    
    September 30,
    
    
    March 31,2005
    
    
    2005Inventory:Purchased materials
    
    $
    10,254
    
    
    $
    11,339Systems in process
    
    
    8,411
    
    
    
    9,700Finished systems
    
    
    2,588
    
    
    
    4,537Inventory at customer locations
    
    
    3,365
    
    
    
    5,294Total inventory
    
    $
    24,618
    
    
    $
    30,870
 September 30,
    
    
    March 31,2005
    
    
    2005Property and equipment:Laboratory and test equipment
    
    $
    4,054
    
    
    $
    4,659Office furniture and equipment
    
    
    10,115
    
    
    
    10,802Machinery and equipment
    
    
    732
    
    
    
    709Leasehold improvements
    
    
    7,495
    
    
    
    8,649Total property and equipment
    
    
    22,396
    
    
    
    24,819Accumulated depreciation and amortization
    
    
    (21,057
    )
    
    
    (21,843
    )Total property and equipment, net
    
    $
    1,339
    
    
    $
    2,976
  (in thousands)
    
    September 30,
    
    
    March 31,2005
    
    
    2005Accrued liabilities:Accrued compensation and related expenses
    
    $
    2,898
    
    
    $
    3,352Accrued warranty
    
    
    837
    
    
    
    1,656Commissions payable
    
    
    815
    
    
    
    1,830Income taxes
    
    
    4,996
    
    
    
    4,972Restructuring liabilities
    
    
    1,920
    
    
    
    178Other accrued liabilities
    
    
    854
    
    
    
    3,796Total accrued liabilities
    
    $
    12,320
    
    
    $
    15,784
 3. Comprehensive Gain (Loss)
  4. Net Income (Loss) Per Share
  12




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedSeptember 30, 2005
    
    
    September 30, 2004
    
    
    September 30, 2005
    
    
    September 30, 2004Basic:Net income (loss)
    
    $
    (4,148
    )
    
    $
    1,317
    
    
    $
    (1,702
    )
    
    $
    148Weighted shares outstanding
    
    
    36,682
    
    
    
    35,824
    
    
    
    36,530
    
    
    
    35,731Net income (loss) per share
    
    $
    (0.11
    )
    
    $
    0.04
    
    
    $
    (0.05
    )
    
    $
    Diluted:Net income (loss)
    
    $
    (4,148
    )
    
    $
    1,317
    
    
    $
    (1,702
    )
    
    $
    148Weighted shares outstanding
    
    
    36,682
    
    
    
    35,824
    
    
    
    36,530
    
    
    
    35,731Effect of dilutive securities:Stock options
    
    
    
    
    
    
    2,125
    
    
    
    
    
    
    
    2,151Dilutive weighted shares outstanding
    
    
    36,682
    
    
    
    37,949
    
    
    
    36,530
    
    
    
    37,882Net income (loss) per share
    
    $
    (0.11
    )
    
    $
    0.03
    
    
    $
    (0.05
    )
    
    $
    
  Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six Monthsended
    
    
    ended
    
    
    ended
    
    
    endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    

2004
    
    
    2005
    
    

2004Securities
Excluded from Diluted Net Income (Loss) per ShareStock options
    
    
    5,565
    
    
    
    2,661
    
    
    
    5,565
    
    
    
    2,661Warrants
    
    
    162
    
    
    
    47
    
    
    
    162
    
    
    
    47
 5. Commitments and Contingencies
   2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Thereafter
    
    Total(In thousands)Contractual obligations By Fiscal Year March 31:Operating lease obligations
    
    $
    641
    
    
    $
    1,319
    
    
    $
    1,098
    
    
    $
    1,136
    
    
    $
    1,143
    
    
    $
    1,012
    
    
    $
    6,349
 Operating Leases
 13




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Six Months EndedSeptember 30, 2005(In thousands)Calculation of gain on sale of product line:Proceeds from sale of product line:Cash payment by TEL
    
    $
    8,950TEL deposit applied to sale of product line
    
    
    1,000Total proceeds from sale of product line
    
    
    9,950Less: Net assets sold and transaction expenses:Property and equipment, net
    
    
    79Inventory
    
    
    803Patents, net
    
    
    271Accrued warranty assumed by TEL
    
    
    (243
    )Legal expenses
    
    
    296Transaction costs and other
    
    
    23Total net assets sold, and transaction expenses:
    
    
    1,229Gain on sale of product line
    
    $
    8,721
 14




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6. Financing Arrangements
        15




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Indemnification
  Legal Proceedings
  16




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##### Table of Contents



7. Restructuring, Severance and Other Costs
  Liability as of
    
    
    
    
    
    
    Payments and
    
    
    Liability as ofMarch 31, 2005
    
    
    Provision
    
    
    Reductions
    
    
    September 30, 2005(In thousands)Restructuring, severance and other costs incurredFY 2006
Restructuring ProgramsSeverance and workforce reduction
    
    $
    
    
    
    $
    1,448
    
    
    $
    (1,434
    )
    
    $
    14Consolidation of excess facilities
    
    
    
    
    
    
    2,129
    
    
    
    (359
    )*
    
    
    1,770Other
    
    
    
    
    
    
    54
    
    
    
    (54
    )
    
    
    FY 2005 Restructuring Program
    
    
    178
    
    
    
    100
    
    
    
    (142
    )
    
    
    136Total
    
    $
    178
    
    
    $
    3,731
    
    
    $
    (1,989
    )
    
    $
    1,920
 
 *
    
    includes non cash fixed asset write-off of approximately $285,000 related to July 29, 2005 restructuring plan
for North American operations. Restructuring
programs in fiscal year 2006.
  Restructuring of the Companys Asian operations.
  Restructuring of the Companys North American operations.
   17




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##### Table of Contents



Restructuring
program in fiscal year 2005.
  8. Accrued Warranty
  ProvisionsFor Warranties
    
    
    SettlementsIssued
    
    
    ofBeginning
    
    
    During
    
    
    Pre-Existing
    
    
    EndingBalance
    
    
    the Period
    
    
    Warranties
    
    
    Balance(In thousands)Accrued WarrantyThree Months Ended September 30, 2005
    
    $
    1,303
    
    
    $
    283
    
    
    $
    (749
    )*
    
    $
    837Three Months Ended September 30, 2004
    
    $
    1,626
    
    
    $
    279
    
    
    $
    (326
    )
    
    $
    1,579
 
 *
    
    Includes $469,000 reclassified to Accrued Commission related to Hermes agreement. See Note 5
of Notes to the Unaudited Condensed Consolidated Financial Statements, titled Commitments and
Contingencies. ProvisionsFor Warranties
    
    
    SettlementsIssued
    
    
    ofBeginning
    
    
    During
    
    
    Pre-Existing
    
    
    EndingBalance
    
    
    the Period
    
    
    Warranties
    
    
    Balance(In thousands)Accrued WarrantySix Months Ended September 30, 2005
    
    $
    1,656
    
    
    $
    387
    
    
    $
    (1,206
    )*
    
    $
    837Six Months Ended September 30, 2004
    
    $
    1,731
    
    
    $
    632
    
    
    $
    (784
    )
    
    $
    1,579
 
 *
    
    Includes $243,000 assumed by TEL and $469,000 reclassified to Accrued Commissions related to
Hermes agreement. See Note 5 of Notes to the Unaudited Condensed Consolidated Financial
Statements, titled Commitments and Contingencies. 9. Other Assets, Net
  18




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##### Table of Contents



10. Segment Information
      Three Months Ended September 30,
    
    Six Months Ended September 30,2005
    
    2004
    
    2005
    
    2004Revenues by CountryUnited States
    
    
    38
    %
    
    
    26
    %
    
    
    29
    %
    
    
    26
    %Germany
    
    
    19
    %
    
    
    6
    %
    
    
    28
    %
    
    
    6
    %Taiwan
    
    
    19
    %
    
    
    25
    %
    
    
    15
    %
    
    
    16
    %Japan
    
    
    10
    %
    
    
    19
    %
    
    
    14
    %
    
    
    15
    %Europe, excluding Germany
    
    
    5
    %
    
    
    6
    %
    
    
    6
    %
    
    
    5
    %Korea
    
    
    8
    %
    
    
    11
    %
    
    
    6
    %
    
    
    14
    %China
    
    
    
    %
    
    
    4
    %
    
    
    1
    %
    
    
    8
    %Singapore
    
    
    1
    %
    
    
    3
    %
    
    
    1
    %
    
    
    10
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  19




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##### Table of Contents



OtherForeignU.S.
    
    
    Locations
    
    
    Eliminations
    
    
    ConsolidatedSegment Information (in thousands)Three Months Ended September 30, 2005
Sales to unaffiliated customers
    
    $
    15,377
    
    
    $
    1,888
    
    
    $
    
    
    
    $
    17,265Transfers between geographic regions
    
    
    (415
    )
    
    
    167
    
    
    
    248
    
    
    
    Total net revenues
    
    $
    14,962
    
    
    $
    2,055
    
    
    $
    248
    
    
    $
    17,265Operating income (loss)
    
    $
    (4,790
    )
    
    $
    (394
    )
    
    $
    890
    
    
    $
    (4,294
    )Three Months Ended September 30, 2004
Sales to unaffiliated customers
    
    $
    20,144
    
    
    $
    2,458
    
    
    $
    
    
    
    $
    22,602Transfers between geographic regions
    
    
    (557
    )
    
    
    666
    
    
    
    (109
    )
    
    
    Total net revenues
    
    $
    19,587
    
    
    $
    3,124
    
    
    $
    (109
    )
    
    $
    22,602Operating income
    
    $
    760
    
    
    $
    153
    
    
    $
    380
    
    
    $
    1,293Six Months Ended September 30, 2005
Sales to unaffiliated customers
    
    $
    30,489
    
    
    $
    4,315
    
    
    $
    
    
    
    $
    34,804Transfers between geographic regions
    
    
    (845
    )
    
    
    689
    
    
    
    156
    
    
    
    Total net revenues
    
    $
    29,644
    
    
    $
    5,004
    
    
    $
    156
    
    
    $
    34,804Operating income (loss)
    
    $
    (11,145
    )
    
    $
    (450
    )
    
    $
    1,359
    
    
    $
    (10,236
    )Six Months Ended September 30, 2004
Sales to unaffiliated customers
    
    $
    38,926
    
    
    $
    4,827
    
    
    $
    
    
    
    $
    43,753Transfers between geographic regions
    
    
    (184
    )
    
    
    1,076
    
    
    
    (892
    )
    
    
    Total net revenues
    
    $
    38,742
    
    
    $
    5,903
    
    
    $
    (892
    )
    
    $
    43,753Operating income (loss)
    
    $
    (304
    )
    
    $
    (14
    )
    
    $
    390
    
    
    $
    72
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  20




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21




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Critical Accounting Policies and Estimates
   Restructuring Charges
  Recently Issued Accounting Pronouncements
   22




---



##### Table of Contents



 
   Results of Operations
  Three Months Ended September 30,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeNet revenues
Product
    
    $
    12,348
    
    
    
    71.5
    %
    
    $
    17,528
    
    
    
    77.6
    %
    
    $
    (5,180
    )
    
    
    (29.6
    )%Service and parts
    
    
    4,917
    
    
    
    28.5
    %
    
    
    5,074
    
    
    
    22.4
    %
    
    
    (157
    )
    
    
    (3.1
    )%Total net revenues
    
    
    17,265
    
    
    
    100.0
    %
    
    
    22,602
    
    
    
    100.0
    %
    
    
    (5,337
    )
    
    
    (23.6
    )%Cost of revenues
Product
    
    
    7,320
    
    
    
    42.4
    %
    
    
    8,498
    
    
    
    37.6
    %
    
    
    (1,178
    )
    
    
    (13.9
    )%Service and parts
    
    
    4,001
    
    
    
    23.2
    %
    
    
    3,332
    
    
    
    14.7
    %
    
    
    669
    
    
    
    20.1
    %Total cost of revenues
    
    
    11,321
    
    
    
    65.6
    %
    
    
    11,830
    
    
    
    52.3
    %
    
    
    (509
    )
    
    
    (4.3
    )%Gross profit
    
    $
    5,944
    
    
    
    34.4
    %
    
    $
    10,772
    
    
    
    47.7
    %
    
    $
    (4,828
    )
    
    
    (44.8
    )%
 Six Months Ended September 30,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeNet revenues
Product
    
    $
    25,068
    
    
    
    72.0
    %
    
    $
    33,717
    
    
    
    77.1
    %
    
    $
    (8,649
    )
    
    
    (25.7
    )%Service and parts
    
    
    9,736
    
    
    
    28.0
    %
    
    
    10,036
    
    
    
    22.9
    %
    
    
    (300
    )
    
    
    (3.0
    )%Total net revenues
    
    
    34,804
    
    
    
    100.0
    %
    
    
    43,753
    
    
    
    100.0
    %
    
    
    (8,949
    )
    
    
    (20.5
    )%Cost of revenues
Product
    
    
    13,738
    
    
    
    39.5
    %
    
    
    15,606
    
    
    
    35.7
    %
    
    
    (1,868
    )
    
    
    (12.0
    )%Service and parts
    
    
    8,007
    
    
    
    23.0
    %
    
    
    6,655
    
    
    
    15.2
    %
    
    
    1,352
    
    
    
    20.3
    %Total cost of revenues
    
    
    21,745
    
    
    
    62.5
    %
    
    
    22,261
    
    
    
    50.9
    %
    
    
    (516
    )
    
    
    (2.3
    )%Gross profit
    
    $
    13,059
    
    
    
    37.5
    %
    
    $
    21,492
    
    
    
    49.1
    %
    
    $
    (8,433
    )
    
    
    (39.2
    )%
 23




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Net Revenues.
    Gross Margin.
  24




---



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Research and Development, Selling, General and Administrative Expenses, and Restructuring,
Severance and Other.
 Three Months Ended September 30,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)
    
    
    ChangeResearch and development
    
    $
    3,052
    
    
    
    17.7
    %
    
    $
    3,848
    
    
    
    17.0
    %
    
    $
    (796
    )
    
    
    (20.7
    )%Selling, general and administrative
    
    
    4,922
    
    
    
    28.5
    %
    
    
    5,631
    
    
    
    24.9
    %
    
    
    (709
    )
    
    
    (12.6
    )%Restructuring, severance and other
    
    
    2,264
    
    
    
    13.1
    %
    
    
    
    
    
    
    
    %
    
    
    2,264
    
    
    
    N/A
    %Total operating expenses
    
    $
    10,238
    
    
    
    59.3
    %
    
    $
    9,479
    
    
    
    41.9
    %
    
    $
    759
    
    
    
    8.0
    %
 Six Months Ended September 30,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)
    
    
    ChangeResearch and development
    
    $
    6,888
    
    
    
    19.8
    %
    
    $
    9,113
    
    
    
    20.8
    %
    
    $
    (2,225
    )
    
    
    (24.4
    )%Selling, general and administrative
    
    
    12,676
    
    
    
    36.4
    %
    
    
    11,934
    
    
    
    27.3
    %
    
    
    742
    
    
    
    6.2
    %Restructuring, severance and other
    
    
    3,731
    
    
    
    10.7
    %
    
    
    373
    
    
    
    0.9
    %
    
    
    3,358
    
    
    
    900.3
    %Total operating expenses
    
    $
    23,295
    
    
    
    66.9
    %
    
    $
    21,420
    
    
    
    49.0
    %
    
    $
    1,875
    
    
    
    8.8
    %
 Research and Development (R&D) Expenses.
  Selling, General and Administrative (SG&A) Expenses.
  Restructuring, Severance and Other.
 Stock-Based Compensation.
 25




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Three Months Ended September 30,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)Cost of revenues
    
    $
    (2
    )
    
    
    
    %
    
    $
    (262
    )
    
    
    1
    %
    
    $
    260Research and development
    
    $
    (68
    )
    
    
    
    %
    
    $
    (564
    )
    
    
    2
    %
    
    $
    496Selling, general and administrative
    
    
    (10
    )
    
    
    
    %
    
    
    (304
    )
    
    
    1
    %
    
    
    294Subtotal
    
    $
    (78
    )
    
    
    1
    %
    
    $
    (868
    )
    
    
    3
    %
    
    $
    790Total stock-based compensation expense
    
    $
    (80
    )
    
    
    1
    %
    
    $
    (1,130
    )
    
    
    4
    %
    
    $
    1,050
 Six Months Ended September 30,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)Cost of revenues
    
    $
    2
    
    
    
    
    %
    
    $
    56
    
    
    
    
    %
    
    $
    (54
    )Research and development
    
    $
    (246
    )
    
    
    1
    %
    
    $
    322
    
    
    
    1
    %
    
    $
    (568
    )Selling, general and administrative
    
    
    5
    
    
    
    
    %
    
    
    243
    
    
    
    
    %
    
    
    (238
    )Subtotal
    
    $
    (241
    )
    
    
    1
    %
    
    $
    565
    
    
    
    1
    %
    
    $
    (806
    )Total stock-based compensation expense
    
    $
    (239
    )
    
    
    1
    %
    
    $
    621
    
    
    
    1
    %
    
    $
    (860
    )
 Stock-Based Employee Compensation.
 Other Income (Expense).
 Three Months Ended September 30,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)Other income (expense)Gain on sale of product line
    
    $
    171
    
    
    
    1.0
    %
    
    $
    
    
    
    
    
    %
    
    $
    171Interest expense
    
    
    (90
    )
    
    
    (0.5
    )%
    
    
    (8
    )
    
    
    
    %
    
    
    (82
    )Interest income
    
    
    43
    
    
    
    0.2
    %
    
    
    48
    
    
    
    0.2
    %
    
    
    (5
    )Other, net
    
    
    33
    
    
    
    0.2
    %
    
    
    (13
    )
    
    
    (0.1
    )%
    
    
    46Total other income (expense), net
    
    $
    157
    
    
    
    0.9
    %
    
    $
    27
    
    
    
    0.1
    %
    
    $
    130
 Six Months Ended September 30,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)Other income (expense)Gain on sale of product line
    
    $
    8,721
    
    
    
    25.1
    %
    
    $
    
    
    
    
    
    %
    
    $
    8,721Interest expense
    
    
    (147
    )
    
    
    (0.4
    )%
    
    
    (8
    )
    
    
    
    %
    
    
    (139
    )Interest income
    
    
    75
    
    
    
    0.2
    %
    
    
    90
    
    
    
    0.2
    %
    
    
    (15
    )Other, net
    
    
    (63
    )
    
    
    (0.2
    )%
    
    
    (3
    )
    
    
    
    %
    
    
    (60
    )Total other income (expense), net
    
    $
    8,586
    
    
    
    24.7
    %
    
    $
    79
    
    
    
    0.2
    %
    
    $
    8,507
 26




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Other Income (Expense).
 Net Income (Loss).
 Liquidity and Capital Resources
    27




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Off-Balance Sheet Commitments
  MinimumOperating
    
    
    Purchase
    
    
    Royalty
    
    
    CancellationLeases
    
    
    Commitments
    
    
    Payments
    
    
    Fees
    
    
    TotalFiscal Year:2006 (6 months)
    
    $
    641
    
    
    $
    3,159
    
    
    $
    40
    
    
    $
    45
    
    
    $
    3,8852007 (12 months)
    
    
    1,319
    
    
    
    693
    
    
    
    40
    
    
    
    45
    
    
    
    2,0972008 (12 months)
    
    
    1,098
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,0982009 (12 months)
    
    
    1,136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,1362010 (12 months)
    
    
    1,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,1432011 and thereafter
    
    
    1,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,012Total future
minimum payments
    
    $
    6,349
    
    
    $
    3,852
    
    
    $
    80
    
    
    $
    90
    
    
    $
    10,371
 Operating Leases
 Purchase Commitment and Cancellation Fees
 Minimum Royalty Payments
 Financing/Other Contingencies.
  29




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Factors Affecting Future Results
  30




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
    
    customer demand, which is influenced by economic conditions in the semiconductor
industry, demand for products that use semiconductors, market acceptance of our products and
those of our customers, seasonality, changes in product mix, and the timing, cancellation or
delay of customer orders and shipments;
    
    competition, such as competitive pressures on the prices of our products, the
introduction or announcement of new products by us or our competitors and discounts that may
be granted to customers;
    
    fluctuations in the availability and cost of components, subassemblies and production capacity;
    
    expenses incurred in connection with litigation;
    
    product development costs, such as increased research, development, engineering and
marketing expenses associated with new products or product enhancements, and the effect of
transitioning to new or enhanced products; and
    
    levels of fixed expenses relative to revenue levels, including research and development
costs associated with product development.
 31




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
    
    a substantial portion of our cash flow from operations, if any, would be required to be
dedicated to the repayment of indebtedness and would not be available for other purposes;
    
    our future ability to obtain additional debt financing for working capital, capital
expenditures, acquisitions or other purposes may be limited; and
    
    our level of indebtedness has in the past, and could in the future, limit our flexibility
in reacting to changes in the industry, general economic conditions and our ability to
withstand a prolonged downturn in the semiconductor and/or semiconductor capital equipment
industries.
     
    
    when the semiconductor industry will recover; or
    
    whether the recovery will result in increased demand for our capital equipment by the semiconductor industry.
  32




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##### Table of Contents



1.
    
    As of April 3, 2005, we did not maintain effective controls over intercompany accounts.
Specifically, we did not have effective controls to ensure that intercompany account
balances were reconciled timely and properly eliminated in consolidation in accordance with
generally accepted accounting principles.2.
    
    As of April 3, 2005, we did not maintain effective controls over the review and approval
of journal entries. Specifically, a manual journal entry to allocate certain customer
service and support costs between cost of revenues and selling, general and administrative
expenses was not properly documented, reviewed and approved.
       33




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
    
    unexpected changes in regulatory requirements;
    
    tariffs and other market barriers;
    
    foreign currency exchange fluctuations;
    
    political and economic instability;
    
    potentially adverse tax consequences;
    
    outbreaks of hostilities;
    
    difficulties in accounts receivable collection;
    
    reduced or uncertain protection for intellectual property rights in some countries;
    
    extended payment terms;
    
    difficulties in managing foreign sales representatives; and
    
    difficulties in managing staffing and other elements of foreign subsidiary and branch operations.
 37




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
    
    A classified board of directors;
    
    A prohibition on stockholder action through written consents;
    
    A requirement that special meetings of stockholders be called only by our chief executive
officer or the board of directors;
    
    Advance notice requirements for stockholder proposals and nominations;
    
    Limitations on the ability of stockholders to amend, alter or repeal our bylaws;
    
    The authority of the board of directors to issue, without stockholder approval, preferred
stock with such terms as the board may determine, which could have a dilutive effect on our
stockholders.
 38




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Item 3. Quantitative and Qualitative Disclosure about Market Risk
 Market Risk Disclosures
  Market Risk Related to Interest Rates and Foreign Currency
  Interest Rate Risk
  39




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Foreign Currency Exchange Risk
     40




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Item 4. Controls and Procedures
 Disclosure Controls and Procedures
   1.
    
    As of April 3, 2005, the Company did not maintain effective controls over intercompany
accounts. Specifically, the Company did not have effective controls to ensure that
intercompany account balances were reconciled timely and properly eliminated in
consolidation in accordance with generally accepted accounting principles.2.
    
    As of April 3, 2005, the Company did not maintain effective controls over the review and
approval of journal entries. Specifically, a manual journal entry to allocate certain
customer service and support costs between cost of revenues and selling, general and
administrative expense was not properly documented, reviewed and approved.
  Remediation Steps to Address Material Weaknesses
  
    
    Implemented additional monitoring controls used in conjunction with the performance of
intercompany account reconciliations and independent internal reviews of all key account
reconciliations, including inventory transactions with consolidated entities and support for
allocations of customer service and support costs between cost of revenue and selling
general and administrative expense;
    
    Hired new senior accounting personnel and recruited additional experienced accounting and
finance staff, including a Corporate Controller;
    
    Enhanced our training programs for accounting staff as well as our overall supervision of
finance personnel; and
    
    Implemented procedures to ensure all intercompany accounts are reconciled on a quarterly
basis and to ensure that sufficient support is maintained on a timely basis for all
accounting entries.
   Internal Control Over Financial Reporting
  41




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##### Table of Contents



Limitation on Effectiveness of Controls
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 4. Submission of Matters to a Vote of Security Holders
   Directors
    
    Director Class
    
    Total Vote For Each Director:
    
    Total Vote Withheld From Each Director:David E. Aspnes
    
    (III)
    
    27,732,276
    
    1,247,165John DErrico
    
    (III)
    
    28,379,130
    
    600,311Papken S. Der Tossian
    
    (III)
    
    28,504,612
    
    474,829
   For
    
    Against
    
    Abstain
    
    Non Votes6,842,614
    
    809,328
    
    26,927
    
    21,300,572
  42




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##### Table of Contents



Item 6. Exhibits
 Exhibit Number
    
    Description3.1(1)
    
    Restated Certificate of Incorporation of Therma-Wave, Inc.3.2(2)
    
    Certificate of Amendment to Restated Certificate of Incorporation of Therma-Wave, Inc.3.3(3)
    
    Amended and Restated By-Laws of Therma-Wave, Inc.4.1(4)
    
    Form of certificate representing shares of Common Stock of Therma-Wave, Inc.10.1(5)#
    
    2000 Employee Stock Purchase Plan, as amended to date10.2(6)
    
    First Modification to Loan and Security Agreement between Therma-Wave, Inc. and Silicon Valley Bank,
dated September 30, 200510.3(6)
    
    Warrant to Purchase 115,000 shares of Therma-Wave, Inc. common stock issued to Silicon Valley Bank,
dated September 30, 200510.4(6)#
    
    Form of Change of Control Severance
Agreement for Messrs. Kermani, Matthews, Simmons and Tan,
effective as of October 5, 200510.5(6)#
    
    Change of Control Severance Agreement between Therma-Wave, Inc. and Jon L. Opsal, effective as of
October 5, 200531.1
    
    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated herein by reference to Therma-Waves Annual Report on Form 10-K for the period
ended April 2, 2000 (File No. 000-26911) and filed with the SEC on June 30, 2000.(2)
    
    Incorporated herein by reference to Therma-Waves Quarterly Report on Form 10-Q for the
period ended September 29, 2002 (File No. 000-26911) and filed with the SEC on November 13,
2002.(3)
    
    Incorporated herein by reference to Therma-Waves Annual Report on Form 10-K for the period
ended April 1, 2001 (File No. 000-26911) and filed with the SEC on June 21, 2001.(4)
    
    Incorporated herein by reference to Therma-Waves Amendment No. 3 to Registration Statement
on Form S-1 (Registration No 333-76019) and filed with the SEC on July 21, 1999.(5)
    
    Incorporated by reference to Therma-Waves Current Report on Form 8-K dated August 18, 2005
(File No. 000-26911) filed with the SEC on August 23, 2005.(6)
    
    Incorporated by reference to Therma-Waves Current Report on Form 8-K dated September 30,
2005 (File No. 000-26911) and filed with the SEC on October 6, 2005#
    
    Denotes management contract 43




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##### Table of Contents



SIGNATURES
  THERMA-WAVE, INC.(Registrant)/s/ Joseph PassarelloJoseph PassarelloSenior Vice President, Chief Financial Officer and Assistant Secretary(as Registrant and as Principal Accounting Officer)November 10, 2005
 44




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description3.1(1)
    
    Restated Certificate of Incorporation of Therma-Wave, Inc.3.2(2)
    
    Certificate of Amendment to Restated Certificate of Incorporation of Therma-Wave, Inc.3.3(3)
    
    Amended and Restated By-Laws of Therma-Wave, Inc.4.1(4)
    
    Form of certificate representing shares of Common Stock of Therma-Wave, Inc.10.1(5)#
    
    2000 Employee Stock Purchase Plan, as amended to date10.2(6)
    
    First Modification to Loan and Security Agreement between Therma-Wave, Inc. and Silicon Valley Bank,
dated September 30, 200510.3(6)
    
    Warrant to Purchase 115,000 shares of Therma-Wave, Inc. common stock issued to Silicon Valley Bank,
dated September 30, 200510.4(6)#
    
    Form of Change of Control Severance
Agreement for Messrs. Kermani, Matthews, Simmons and Tan,
effective as of October 5, 200510.5(6)#
    
    Change of Control Severance Agreement between Therma-Wave, Inc. and Jon L. Opsal, effective as of
October 5, 200531.1
    
    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated herein by reference to Therma-Waves Annual Report on Form 10-K for the period
ended April 2, 2000 (File No. 000-26911) and filed with the SEC on June 30, 2000.(2)
    
    Incorporated herein by reference to Therma-Waves Quarterly Report on Form 10-Q for the
period ended September 29, 2002 (File No. 000-26911) and filed with the SEC on November 13,
2002.(3)
    
    Incorporated herein by reference to Therma-Waves Annual Report on Form 10-K for the period
ended April 1, 2001 (File No. 000-26911) and filed with the SEC on June 21, 2001.(4)
    
    Incorporated herein by reference to Therma-Waves Amendment No. 3 to Registration Statement
on Form S-1 (Registration No 333-76019) and filed with the SEC on July 21, 1999.(5)
    
    Incorporated by reference to Therma-Waves Current Report on Form 8-K dated August 18, 2005
(File No. 000-26911) filed with the SEC on August 23, 2005.(6)
    
    Incorporated by reference to Therma-Waves Current Report on Form 8-K dated September 30,
2005 (File No. 000-26911) and filed with the SEC on October 6, 2005#
    
    Denotes management contract