##### 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 January 1, 2006
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ
  Class
    
    Outstanding as of January 31, 2006Common stock, $0.01 par value
    
    
    36,903,749




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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 December 31, 2005
and March 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended December 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2005 and 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    25ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36ITEM 4. Controls and Procedures
    
    
    36PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    38ITEM 1A. Risk Factors
    
    
    38ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    49ITEM 6. Exhibits
    
    
    50SIGNATURES
    
    
    51EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 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)
 December 31,
    
    
    March 31,2005
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    21,835
    
    
    $
    13,419Accounts receivable, net of allowances of
$789 and $715 at December 31, 2005 and March
31, 2005, respectively
    
    
    12,628
    
    
    
    15,678Inventories
    
    
    21,345
    
    
    
    30,870Other current assets
    
    
    1,485
    
    
    
    2,680Total current assets
    
    
    57,293
    
    
    
    62,647Property and equipment, net
    
    
    1,059
    
    
    
    2,976Other assets
    
    
    1,321
    
    
    
    1,950Total assets
    
    $
    59,673
    
    
    $
    67,573Liabilities, redeemable convertible
preferred stock and stockholders equityCurrent liabilities:Accounts payable
    
    $
    3,361
    
    
    $
    8,227Accrued and other liabilities
    
    
    15,316
    
    
    
    15,784Deferred revenues
    
    
    5,628
    
    
    
    15,804Term loan facility, net
    
    
    4,887
    
    
    
    Total current liabilities
    
    
    29,192
    
    
    
    39,815Non-current deferred revenues
    
    
    1,091
    
    
    
    1,425Other long-term liabilities
    
    
    1,433
    
    
    
    370Total liabilities
    
    
    31,716
    
    
    
    41,610Commitments and contingencies (Note 6)Series B redeemable convertible preferred
stock: $0.01 par value; 10,400 shares
authorized; 10,400 shares issued and
outstanding at December 31, 2005 (Series B
liquidation preference of $10,400,000)
    
    
    6,233
    
    
    
    Stockholders equity:Common stock, $0.01 par value; 75,000,000
shares authorized; 36,903,675 shares issued
and outstanding at December 31, 2005;
36,318,565 shares issued and outstanding at
March 31, 2005
    
    
    369
    
    
    
    363Additional paid-in capital
    
    
    336,147
    
    
    
    334,352Notes receivable from stockholders
    
    
    (174
    )
    
    
    (174
    )Accumulated other comprehensive loss
    
    
    (1,095
    )
    
    
    (659
    )Deferred stock-based compensation
    
    
    (36
    )
    
    
    (76
    )Accumulated deficit
    
    
    (313,487
    )
    
    
    (307,843
    )Total stockholders equity
    
    
    21,724
    
    
    
    25,963Total liabilities and stockholders equity
    
    $
    59,673
    
    
    $
    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
    
    
    Nine MonthsEnded December 31,
    
    
    Ended December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenuesProduct
    
    $
    10,488
    
    
    $
    16,044
    
    
    $
    35,556
    
    
    $
    49,761Service and parts
    
    
    4,940
    
    
    
    5,426
    
    
    
    14,676
    
    
    
    15,462Total net revenues
    
    
    15,428
    
    
    
    21,470
    
    
    
    50,232
    
    
    
    65,223Cost of revenuesProduct
    
    
    6,121
    
    
    
    8,037
    
    
    
    20,545
    
    
    
    23,643Service and parts
    
    
    3,939
    
    
    
    4,331
    
    
    
    11,260
    
    
    
    10,986Total cost of revenues
    
    
    10,060
    
    
    
    12,368
    
    
    
    31,805
    
    
    
    34,629Gross profit
    
    
    5,368
    
    
    
    9,102
    
    
    
    18,427
    
    
    
    30,594Operating expenses:Research and development
    
    
    2,755
    
    
    
    4,363
    
    
    
    9,643
    
    
    
    13,476Selling, general and
administrative
    
    
    5,707
    
    
    
    6,493
    
    
    
    18,384
    
    
    
    18,427Restructuring
    
    
    800
    
    
    
    
    
    
    
    4,530
    
    
    
    373Total operating
expenses
    
    
    9,262
    
    
    
    10,856
    
    
    
    32,557
    
    
    
    32,276Operating loss
    
    
    (3,894
    )
    
    
    (1,754
    )
    
    
    (14,130
    )
    
    
    (1,682
    )Other income (expense):Gain on sale of product line
    
    
    
    
    
    
    
    
    
    
    8,721
    
    
    
    Interest expense
    
    
    (205
    )
    
    
    (7
    )
    
    
    (352
    )
    
    
    (15
    )Interest income
    
    
    103
    
    
    
    52
    
    
    
    178
    
    
    
    142Other, net
    
    
    (1
    )
    
    
    7
    
    
    
    (64
    )
    
    
    4Total other income, net
    
    
    (103
    )
    
    
    52
    
    
    
    8,483
    
    
    
    131Loss before provision for income
taxes
    
    
    (3,997
    )
    
    
    (1,702
    )
    
    
    (5,647
    )
    
    
    (1,551
    )Provision (benefit) for income taxes
    
    
    (157
    )
    
    
    209
    
    
    
    (105
    )
    
    
    212Net loss
    
    $
    (3,840
    )
    
    $
    (1,911
    )
    
    $
    (5,542
    )
    
    $
    (1,763
    )Accretion of Series B preferred
stock to redemption value including
dividends accrued
    
    
    (98
    )
    
    
    
    
    
    
    (98
    )
    
    
    Net loss available to common
stockholders
    
    $
    (3,938
    )
    
    $
    (1,911
    )
    
    $
    (5,640
    )
    
    $
    (1,763
    )Net loss per share:Basic
    
    $
    (0.11
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.05
    )Diluted
    
    $
    (0.11
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.05
    )Weighted average common shares
outstanding:Basic
    
    
    36,879
    
    
    
    36,004
    
    
    
    36,647
    
    
    
    35,822Diluted
    
    
    36,879
    
    
    
    36,004
    
    
    
    36,647
    
    
    
    35,822
  4




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THERMA-WAVE, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine months endedDecember 31,2005
    
    
    2004Operating activities:Net loss
    
    $
    (5,542
    )
    
    $
    (1,763
    )Adjustments to reconcile net 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
    
    
    1,597
    
    
    
    2,026Fair value adjustment  warrants
    
    
    20
    
    
    
    Amortization of intangible assets
    
    
    545
    
    
    
    612Stock-based compensation expense (benefit)
    
    
    (267
    )
    
    
    651Provision for excess and obsolete inventories
    
    
    2,923
    
    
    
    3,423Retirement of property and equipment
    
    
    111
    
    
    
    15Changes in operating assets and liabilities (excluding net
assets sold):Accounts receivable
    
    
    3,050
    
    
    
    (7,627
    )Inventories
    
    
    5,796
    
    
    
    (11,906
    )Other assets
    
    
    1,206
    
    
    
    568Accounts payable
    
    
    (4,884
    )
    
    
    1,453Accrued and other liabilities
    
    
    (885
    )
    
    
    415Deferred revenues
    
    
    (10,440
    )
    
    
    2,499Net cash used in operating activities
    
    
    (15,206
    )
    
    
    (9,634
    )Investing activities:Sale of product line
    
    
    8,950
    
    
    
    Purchases of property and equipment
    
    
    (155
    )
    
    
    (797
    )Purchase of patents
    
    
    (197
    )
    
    
    (395
    )Net cash provided by (used in) investing activities
    
    
    8,598
    
    
    
    (1,192
    )Financing activitiesBorrowings from term loan facility
    
    
    5,000
    
    
    
    Net proceeds from issuance of common stock
    
    
    669
    
    
    
    499Net proceeds from issuance of Series B preferred stock
and warrants
    
    
    9,791
    
    
    
    Net cash provided by financing activities
    
    
    15,460
    
    
    
    499Effect of exchange rates on cash
    
    
    (436
    )
    
    
    139Net increase (decrease) in cash and cash equivalents
    
    
    8,416
    
    
    
    (10,188
    )Cash and cash equivalents at beginning of period
    
    
    13,419
    
    
    
    23,899Cash and cash equivalents at end of period of period
    
    $
    21,835
    
    
    $
    13,711Supplemental disclosures:Application of customer deposit to sale of product line
    
    $
    1,000
    
    
    $
    Issuance costs incurred  Series B preferred stock
    
    $
    609
    
    
    $
    Fair market value of warrants issued in conjunction with
Series B preferred stock
    
    $
    1,320
    
    
    $
    Dividends accrued and accretion on Series B convertible
preferred stock
    
    $
    98
    
    
    $
    Fair value embedded derivatives  Series B preferred stock
    
    $
    1,022
    
    
    $
    Beneficial conversion feature  Series B preferred stock
    
    $
    1,314
    
    
    $
    Fair market value of warrants issued in conjunction with
loan and security agreement
    
    $
    121
    
    
    $
    
  5




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##### Table of Contents



THERMA-WAVE, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (As of December 31, 2005)
 1. Basis of Presentation
   Use of Estimates
  Liquidity
  6




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##### Table of Contents



Revenue Recognition
  
     Persuasive evidence of an arrangement exists
 7




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##### Table of Contents



Delivery has occurred or services have been rendered:
 The sellers price to the buyer is fixed or determinable:
 Collectibility is reasonably assured:
  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 recognizes 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.
 8




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##### Table of Contents



Stock-Based Compensation
   Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,2005
    
    2004
    
    2005
    
    2004Assumptions for
Estimating Fair Value
of Option GrantsRisk-free interest rate
    
    
    4.5
    %
    
    
    3.3
    %
    
    
    4.1
    %
    
    
    3.2
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    72
    %
    
    
    74
    %
    
    
    73
    %
    
    
    89
    %Expected life in years
    
    
    3.2
    
    
    
    4.6
    
    
    
    3.2
    
    
    
    4.9Weighted average fair
value per share
    
    $
    0.77
    
    
    $
    1.83
    
    
    $
    0.94
    
    
    $
    2.46
  Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,2005
    
    2004
    
    2005
    
    2004Assumptions for
Estimating Fair Value
of ESPPPurchase RightsRisk-free interest rate
    
    
    4.3
    %
    
    
    1.9
    %
    
    
    3.6
    %
    
    
    1.5
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    67
    %
    
    
    48
    %
    
    
    62
    %
    
    
    67
    %Expected life in years
    
    
    1.12
    
    
    
    1.3
    
    
    
    0.62
    
    
    
    1.2Weighted average fair
value per share
    
    $
    0.62
    
    
    $
    0.78
    
    
    $
    0.75
    
    
    $
    0.44
 9




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except
    
    
    (In thousands, except perper share data)
    
    
    share data)Pro forma Net Loss
Under SFAS No. 123Net loss available to
common stockholders (in
thousands)As reported
    
    $
    (3,938
    )
    
    $
    (1,911
    )
    
    $
    (5,640
    )
    
    $
    (1,763
    )Add: Stock-based
employee compensation
expense (benefit)
included in the
determination of net
loss, as reported
    
    
    (28
    )
    
    
    30
    
    
    
    (267
    )
    
    
    651Deduct: Stock-based
employee compensation
expense as determined
using the fair value
method
    
    
    (404
    )
    
    
    (919
    )
    
    
    (927
    )
    
    
    (3,270
    )Pro forma net loss
    
    $
    (4,370
    )
    
    $
    (2,800
    )
    
    $
    (6,834
    )
    
    $
    (4,382
    )Basic net loss per shareAs reported
    
    $
    (0.11
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.05
    )Pro forma
    
    $
    (0.12
    )
    
    $
    (0.08
    )
    
    $
    (0.19
    )
    
    $
    (0.12
    )Diluted net loss per shareAs reported
    
    $
    (0.11
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.05
    )Pro forma
    
    $
    (0.12
    )
    
    $
    (0.08
    )
    
    $
    (0.19
    )
    
    $
    (0.12
    )
    Recently Issued Accounting Pronouncements
  10




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 
   11




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##### Table of Contents



2. Balance Sheet Components
 December 31,
    
    
    March 31,(in thousands)
    
    2005
    
    
    2005Inventory:Raw materials and field service inventory
    
    $
    4,315
    
    
    $
    11,339Systems in process
    
    
    8,245
    
    
    
    9,700Finished systems
    
    
    4,466
    
    
    
    4,537Inventory at customer locations
    
    
    4,319
    
    
    
    5,294Total inventory
    
    $
    21,345
    
    
    $
    30,870
 December 31,
    
    
    March 31,2005
    
    
    2005Property and equipment:Laboratory and test equipment
    
    $
    4,054
    
    
    $
    4,659Office furniture and equipment
    
    
    10,205
    
    
    
    10,802Machinery and equipment
    
    
    727
    
    
    
    709Leasehold improvements
    
    
    7,492
    
    
    
    8,649Total property and equipment
    
    
    22,478
    
    
    
    24,819Accumulated depreciation and amortization
    
    
    (21,419
    )
    
    
    (21,843
    )Total property and equipment, net
    
    $
    1,059
    
    
    $
    2,976
  December 31,
    
    
    March 31,(in thousands)
    
    2005
    
    
    2005Accrued and other liabilities:Accrued compensation and related expenses
    
    $
    2,542
    
    
    $
    3,352Accrued warranty
    
    
    566
    
    
    
    1,656Commissions payable
    
    
    1,606
    
    
    
    1,830Income taxes
    
    
    4,773
    
    
    
    4,972Restructuring liabilities
    
    
    1,347
    
    
    
    178Other accrued liabilities
    
    
    2,120
    
    
    
    3,796Embedded derivatives
    
    
    1,022
    
    
    
    Warrant liability
    
    
    1,340
    
    
    
    Total accrued and other liabilities
    
    $
    15,316
    
    
    $
    15,784
 3. Income Taxes
  4. Comprehensive Gain (Loss)
  5. Net Loss Per Share
 12




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Three Months Ended
    
    
    Nine Months EndedDecember 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2005
    
    
    December 31, 2004Basic:Net loss
    
    $
    (3,938
    )
    
    $
    (1,911
    )
    
    $
    (5,640
    )
    
    $
    (1,763
    )Weighted shares
outstanding
    
    
    36,879
    
    
    
    36,004
    
    
    
    36,647
    
    
    
    35,822Net loss per share
    
    $
    (0.11
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.05
    )Diluted:Net loss
    
    $
    (3,938
    )
    
    $
    (1,911
    )
    
    $
    (5,640
    )
    
    $
    (1,763
    )Weighted shares
outstanding
    
    
    36,879
    
    
    
    36,004
    
    
    
    36,647
    
    
    
    35,822Effect of dilutive
securities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive weighted
shares outstanding
    
    
    36,879
    
    
    
    36,004
    
    
    
    36,647
    
    
    
    35,822Net loss per share
    
    $
    (0.11
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.05
    )
  Three Months
    
    Three Months
    
    Nine Months
    
    Nine Monthsended
    
    ended
    
    ended
    
    endedDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,2005
    
    2004
    
    2005
    
    2004Securities Excluded
From Diluted Net
Loss per
Share (In thousands)Stock options
    
    
    5,366
    
    
    
    6,405
    
    
    
    5,366
    
    
    
    6,405Warrants
    
    
    1,722
    
    
    
    47
    
    
    
    1,722
    
    
    
    47Series B mandatorily
redeemable convertible
preferred stock
(assuming conversion,
to common shares)
    
    
    6,710
    
    
    
    
    
    
    
    6,710
    
    
    
    
 6. Commitments and Contingencies
   2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Thereafter
    
    Total(In thousands)Contractual
obligations By
Fiscal Year March
31:Operating lease
obligations
    
    $
    331
    
    
    $
    1,319
    
    
    $
    1,098
    
    
    $
    1,136
    
    
    $
    1,143
    
    
    $
    1,012
    
    
    $
    6,039
 13




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Operating Leases
    14




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##### Table of Contents



Nine Months EndedDecember 31, 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
 7. Financing Arrangements
    15




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Indemnification
  Legal Proceedings
  16




---



##### Table of Contents



8. Mandatorily Redeemable Convertible Preferred Stock
    December 31, 2005 (dollars in thousands)Redeemable convertible preferred stock
    
    $
    10,400Less:Issuance costs
    
    $
    609Fair value of warrants at issuance (see Warrants)
    
    $
    1,320Fair value of bifurcated derivative features at issuance (see Bifurcated Embedded
Derivatives)
    
    $
    1,022Beneficial conversion feature (see Conversion)
    
    $
    1,314Subtotal
    
    $
    6,135Plus:Accrued unpaid dividends (see Dividends)
    
    $
    67Accretion of discount to redemption value
    
    $
    31Convertible preferred stock
    
    $
    6,233
   Registration Rights
  17




---



##### Table of Contents



Voting Rights
  Board Nomination Rights
  Dividends
    Conversion
    18




---



##### Table of Contents



Redemptions
    19




---



##### Table of Contents



Liquidation Preference
  Warrants
  Bifurcated Embedded Derivatives
  9. Restructuring
  20




---



##### Table of Contents



Liability as of
    
    
    
    
    
    
    Payments and
    
    
    Liability as ofMarch 31, 2005
    
    
    Provision
    
    
    Reductions
    
    
    December 31, 2005(In thousands)FY 2006 Restructuring
ProgramsSeverance and
workforce
reduction
    
    $
    
    
    
    $
    2,219
    
    
    $
    (1,567
    )
    
    $
    652Consolidation of
excess
facilities
    
    
    
    
    
    
    2,157
    
    
    
    (548
    )*
    
    
    1,609Other
    
    
    
    
    
    
    54
    
    
    
    (54
    )
    
    
    FY 2005 Restructuring Program
    
    
    178
    
    
    
    100
    
    
    
    (210
    )
    
    
    68Total
    
    $
    178
    
    
    $
    4,530
    
    
    $
    (2,379
    )
    
    $
    2,329
 
 
    
    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.
   21




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##### Table of Contents



Restructuring of the Companys European operations.
  Restructuring program in fiscal year 2005.
  10. Accrued Warranty
  ProvisionsFor Warranties
    
    
    SettlementsIssued
    
    
    ofBeginning
    
    
    During
    
    
    Pre-Existing
    
    
    EndingBalance
    
    
    the Period
    
    
    Warranties
    
    
    Balance(In thousands)Accrued WarrantyThree Months
Ended December 31,
2005
    
    $
    837
    
    
    $
    154
    
    
    $
    (425
    )
    
    $
    566Three Months
Ended December 31,
2004
    
    $
    1,579
    
    
    $
    722
    
    
    $
    (622
    )
    
    $
    1,679
 ProvisionsFor Warranties
    
    
    SettlementsIssued
    
    
    ofBeginning
    
    
    During
    
    
    Pre-Existing
    
    
    EndingBalance
    
    
    the Period
    
    
    Warranties
    
    
    Balance(In thousands)Accrued WarrantyNine Months Ended
December 31, 2005
    
    $
    1,656
    
    
    $
    541
    
    
    $
    (1,631
    )*
    
    $
    566Nine Months Ended
December 31, 2004
    
    $
    1,731
    
    
    $
    1,354
    
    
    $
    (1,406
    )
    
    $
    1,679
 
 *
    
    Includes $243,000 assumed by TEL and $469,000 reclassified to Accrued Commissions related
to Hermes agreement. See Note 6 of Notes to the Unaudited Condensed Consolidated Financial
Statements, titled Commitments and Contingencies. 22




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##### Table of Contents



11. Other Assets, Net
  12. Segment Information
      23




---



##### Table of Contents



Three Months Ended December 31,
    
    Nine Months Ended December 31,2005
    
    2004
    
    2005
    
    2004Revenues by CountryUnited States
    
    
    39
    %
    
    
    29
    %
    
    
    33
    %
    
    
    27
    %Germany
    
    
    14
    %
    
    
    0
    %
    
    
    24
    %
    
    
    3
    %Taiwan
    
    
    10
    %
    
    
    31
    %
    
    
    13
    %
    
    
    21
    %Japan
    
    
    5
    %
    
    
    11
    %
    
    
    11
    %
    
    
    14
    %Europe,
excluding
Germany
    
    
    8
    %
    
    
    4
    %
    
    
    7
    %
    
    
    5
    %Korea
    
    
    12
    %
    
    
    20
    %
    
    
    7
    %
    
    
    16
    %China
    
    
    11
    %
    
    
    4
    %
    
    
    4
    %
    
    
    7
    %Singapore
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    7
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    24




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##### Table of Contents



Segment Information
    
    
    
    
    
    Foreign(in thousands)
    
    U.S.
    
    
    Locations
    
    
    Eliminations
    
    
    ConsolidatedThree Months Ended
December 31, 2005Sales
to unaffiliated
customers
    
    $
    13,506
    
    
    $
    1,922
    
    
    $
    
    
    
    $
    15,428Transfers between
geographic regions
    
    
    465
    
    
    
    287
    
    
    
    (752
    )
    
    
    Total net revenues
    
    $
    13,971
    
    
    $
    2,209
    
    
    $
    (752
    )
    
    $
    15,428Operating loss
    
    $
    (3,845
    )
    
    $
    (100
    )
    
    $
    51
    
    
    $
    (3,894
    )Three Months Ended
December 31, 2004Sales
to unaffiliated
customers
    
    $
    18,993
    
    
    $
    2,477
    
    
    $
    
    
    
    $
    21,470Transfers between
geographic regions
    
    
    236
    
    
    
    602
    
    
    
    (838
    )
    
    
    Total net revenues
    
    $
    19,229
    
    
    $
    3,079
    
    
    $
    (838
    )
    
    $
    21,470Operating loss
    
    $
    (1,233
    )
    
    $
    (56
    )
    
    $
    (465
    )
    
    $
    (1,754
    )Nine Months Ended
December 31, 2005Sales
to unaffiliated
customers
    
    $
    43,995
    
    
    $
    6,237
    
    
    $
    
    
    
    $
    50,232Transfers between
geographic regions
    
    
    (380
    )
    
    
    976
    
    
    
    (596
    )
    
    
    Total net revenues
    
    $
    43,615
    
    
    $
    7,213
    
    
    $
    (596
    )
    
    $
    50,232Operating loss
    
    $
    (14,990
    )
    
    $
    (550
    )
    
    $
    1,410
    
    
    $
    (14,130
    )Nine Months Ended
December 31, 2004Sales
to unaffiliated
customers
    
    $
    57,919
    
    
    $
    7,304
    
    
    $
    
    
    
    $
    65,223Transfers between
geographic regions
    
    
    52
    
    
    
    1,678
    
    
    
    (1,730
    )
    
    
    Total net revenues
    
    $
    57,971
    
    
    $
    8,982
    
    
    $
    (1,730
    )
    
    $
    65,223Operating loss
    
    $
    (1,537
    )
    
    $
    (70
    )
    
    $
    (75
    )
    
    $
    (1,682
    )
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  25




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##### Table of Contents



Critical Accounting Policies and Estimates
  26




---



##### Table of Contents



Restructuring Charges
  Recently Issued Accounting Pronouncements
    
 27




---



##### Table of Contents



Results of Operations
  Three Months Ended December 31,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeNet revenuesProduct
    
    $
    10,488
    
    
    
    68.0
    %
    
    $
    16,044
    
    
    
    74.7
    %
    
    $
    (5,556
    )
    
    
    (34.6
    )%Service and parts
    
    
    4,940
    
    
    
    32.0
    %
    
    
    5,426
    
    
    
    25.3
    %
    
    
    (486
    )
    
    
    (9.0
    )%Total net revenues
    
    
    15,428
    
    
    
    100.0
    %
    
    
    21,470
    
    
    
    100.0
    %
    
    
    (6,042
    )
    
    
    (28.1
    )%Cost of revenuesProduct
    
    
    6,121
    
    
    
    39.7
    %
    
    
    8,037
    
    
    
    37.4
    %
    
    
    (1,916
    )
    
    
    (23.8
    )%Service and parts
    
    
    3,939
    
    
    
    25.5
    %
    
    
    4,331
    
    
    
    20.2
    %
    
    
    (392
    )
    
    
    (9.1
    )%Total cost of revenues
    
    
    10,060
    
    
    
    65.2
    %
    
    
    12,368
    
    
    
    57.6
    %
    
    
    (2,308
    )
    
    
    (18.7
    )%Gross profit
    
    $
    5,368
    
    
    
    34.8
    %
    
    $
    9,102
    
    
    
    42.4
    %
    
    $
    (3,734
    )
    
    
    (41.0
    )%
 Nine Months Ended December 31,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeNet revenuesProduct
    
    $
    35,556
    
    
    
    70.8
    %
    
    $
    49,761
    
    
    
    76.3
    %
    
    $
    (14,205
    )
    
    
    (28.5
    )%Service and parts
    
    
    14,676
    
    
    
    29.2
    %
    
    
    15,462
    
    
    
    23.7
    %
    
    
    (786
    )
    
    
    (5.1
    )%Total net revenues
    
    
    50,232
    
    
    
    100.0
    %
    
    
    65,223
    
    
    
    100.0
    %
    
    
    (14,991
    )
    
    
    (23.0
    )%Cost of revenuesProduct
    
    
    20,545
    
    
    
    40.9
    %
    
    
    23,643
    
    
    
    36.3
    %
    
    
    (3,098
    )
    
    
    (13.1
    )%Service and parts
    
    
    11,260
    
    
    
    22.4
    %
    
    
    10,986
    
    
    
    16.8
    %
    
    
    274
    
    
    
    2.5
    %Total cost of revenues
    
    
    31,805
    
    
    
    63.3
    %
    
    
    34,629
    
    
    
    53.1
    %
    
    
    (2,824
    )
    
    
    (8.2
    )%Gross profit
    
    $
    18,427
    
    
    
    36.7
    %
    
    $
    30,594
    
    
    
    46.9
    %
    
    $
    (12,167
    )
    
    
    (39.8
    )%
 28




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##### Table of Contents



Net Revenues.
     Gross Margin.
  29




---



##### Table of Contents



Research and Development, Selling, General and Administrative Expenses, and Restructuring,
Severance and Other.
 Three Months Ended December 31,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    

(Decrease)
    
    
    ChangeResearch and
Development
    
    $
    2,755
    
    
    
    17.8
    %
    
    $
    4,363
    
    
    
    20.3
    %
    
    $
    (1,608
    )
    
    
    (36.8
    )%Selling, general and
administrative
    
    
    5,707
    
    
    
    37.0
    %
    
    
    6,493
    
    
    
    30.3
    %
    
    
    (786
    )
    
    
    (12.1
    )%Restructuring charges
    
    
    800
    
    
    
    5.2
    %
    
    
    
    
    
    
    
    %
    
    
    800
    
    
    
    100
    %Total operating expenses
    
    $
    9,262
    
    
    
    60.0
    %
    
    $
    10,856
    
    
    
    50.6
    %
    
    $
    (1,594
    )
    
    
    (14.7
    )%
 Nine Months Ended December 31,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)
    
    
    ChangeResearch and
development
    
    $
    9,643
    
    
    
    19.2
    %
    
    $
    13,476
    
    
    
    20.7
    %
    
    $
    (3,833
    )
    
    
    (28.4
    )%Selling, general and
administrative
    
    
    18,384
    
    
    
    36.6
    %
    
    
    18,427
    
    
    
    28.2
    %
    
    
    (43
    )
    
    
    (0.2
    )%Restructuring,
severance and other
    
    
    4,530
    
    
    
    9.0
    %
    
    
    373
    
    
    
    0.6
    %
    
    
    4,157
    
    
    
    1,114.5
    %Total operating expenses
    
    $
    32,557
    
    
    
    64.8
    %
    
    $
    32,276
    
    
    
    49.5
    %
    
    $
    (281
    )
    
    
    0.9
    %
 Research and Development (R&D) Expenses.
  Selling, General and Administrative (SG&A) Expenses.
  30




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##### Table of Contents



Restructuring.
 Stock-Based Employee Compensation.
 Other Income (Expense).
 Three Months Ended December 31,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)Other income
(expense)Gain on sale
of product
line
    
    $
    
    
    
    
    0.0
    %
    
    $
    
    
    
    
    0.0
    %
    
    $
    Interest expense
    
    
    (205
    )
    
    
    (1.3
    )%
    
    
    (7
    )
    
    
    0.0
    %
    
    
    (198
    )Interest income
    
    
    103
    
    
    
    (0.7
    )%
    
    
    52
    
    
    
    0.2
    %
    
    
    51Other, net
    
    
    (1
    )
    
    
    0.0
    %
    
    
    7
    
    
    
    0.0
    %
    
    
    (8
    )Total other income
(expense), net
    
    $
    (103
    )
    
    
    (2.0
    )%
    
    $
    52
    
    
    
    0.2
    %
    
    $
    (155
    )
 Nine Months Ended December 31,2005
    
    
    2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)Other income
(expense)Gain on sale of product line
    
    $
    8,721
    
    
    
    17.3
    %
    
    $
    
    
    
    
    0.0
    %
    
    $
    8,721Interest expense
    
    
    (352
    )
    
    
    (0.7
    )%
    
    
    (15
    )
    
    
    (0.0
    )%
    
    
    (337
    )Interest income
    
    
    178
    
    
    
    0.4
    %
    
    
    142
    
    
    
    0.3
    %
    
    
    36Other, net
    
    
    (64
    )
    
    
    (0.1
    )%
    
    
    4
    
    
    
    0.0
    %
    
    
    (68
    )Total other income (expense), net
    
    $
    8,483
    
    
    
    16.9
    %
    
    $
    131
    
    
    
    0.3
    %
    
    $
    8,352
 Other Income (Expense).
 31




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##### Table of Contents



Provision for Income Taxes (Benefit).
 Accretion of Series B Preferred Stock to Redemption Value.
 Net loss.
 Liquidity and Capital Resources
      32




---



##### Table of Contents



Commitments
  33




---



##### Table of Contents



Series BredeemableMinimum
    
    
    
    
    
    
    convertibleOperating
    
    
    Purchase
    
    
    Royalty
    
    
    Cancellation
    
    
    preferredLeases
    
    
    Commitments
    
    
    Payments
    
    
    Fees
    
    
    stock
    
    
    TotalFiscal Year:2006 (3 months)
    
    $
    331
    
    
    $
    6,239
    
    
    $
    40
    
    
    $
    45
    
    
    $
    
    
    
    $
    6,6552007 (12 months)
    
    
    1,319
    
    
    
    4,897
    
    
    
    40
    
    
    
    45
    
    
    
    
    
    
    
    6,3012008 (12 months)
    
    
    1,098
    
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,2842009 (12 months)
    
    
    1,136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,1362010 (12 months)
    
    
    1,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,1432011 and thereafter
    
    
    1,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,400
    
    
    
    11,412Total future minimum payments
    
    $
    6,039
    
    
    $
    11,322
    
    
    $
    80
    
    
    $
    90
    
    
    $
    10,400
    
    
    $
    27,931
 Operating Leases
 Purchase Commitment and Cancellation Fees
 Minimum Royalty Payments
 Financing/Other Contingencies.
  34




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##### Table of Contents



Series B Redeemable Convertible Preferred Stock
  35




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosure about Market Risk
 Market Risk Disclosures
  Market Risk Related to Interest Rates and Foreign Currency
  Interest Rate Risk
   Foreign Currency Exchange Risk
     
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
 36




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##### Table of Contents



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 and Assistant 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
  37




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##### Table of Contents



Limitation on Effectiveness of Controls
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
 Factors Affecting Future Results
   38




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##### Table of Contents




    
    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;
    
    delays in manufacturing or product shipments or contractual terms that require a delay
between when our products are shipped and when we can recognize revenue in connection with
such shipments; and
    
    levels of fixed expenses relative to revenue levels, including research and development
costs associated with product development.
 39




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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.
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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 expenses was not properly documented, reviewed and approved.
   
    
    Implementing 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;
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
    
    Hiring new senior accounting personnel and recruiting additional experienced accounting
and finance staff, including a Corporate Controller and Assistant Controller;
    
    Enhancing our training programs for accounting staff as well as our overall supervision
of finance personnel; and
    
    Implementing 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.
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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.
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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; and
    
    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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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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
    
    Stockholders Agreement related to Mandatorily Redeemable
Convertible Preferred Stock dated November 22, 200510.2
    
    Therma-Wave, Inc Purchase Agreement related to Mandatorily
Redeemable Convertible Preferred Stock dated November 18,
200510.3
    
    Warrant to Purchase Therma-Wave, Inc. common stock related
to Mandatorily Redeemable Convertible Preferred Stock10.4
    
    Registration Rights Agreement related to related to
Mandatorily Redeemable Convertible Preferred Stock dated on
November 22, 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. 50




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SIGNATURES
  THERMA-WAVE, INC.(Registrant)/s/ Boris LipkinBoris LipkinPresident, Chief Executive Officer and DirectorFebruary 15, 2006THERMA-WAVE, INC.(Registrant)/s/ Joseph PassarelloJoseph PassarelloSenior Vice President, Chief Financial Officer and Secretary(as Registrant and as Principal Accounting Officer)February 15, 2006
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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
    
    Stockholders Agreement related to Mandatorily Redeemable
Convertible Preferred Stock dated November 22, 200510.2
    
    Therma-Wave, Inc Purchase Agreement related to Mandatorily
Redeemable Convertible Preferred Stock dated November 18,
200510.3
    
    Warrant to Purchase Therma-Wave, Inc. common stock related
to Mandatorily Redeemable Convertible Preferred Stock10.4
    
    Registration Rights Agreement related to related to
Mandatorily Redeemable Convertible Preferred Stock dated on
November 22, 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.