Therma-Wave, Inc. Form 10-Q/A Period End 9/29/02

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate the number of shares of the issuer’s class of common stock, as of the latest practical date:

This quarterly report on Form 10-Q/ A is being filed as a result of the restatement of our unaudited condensed consolidated financial statements for the quarterly periods ended September 30, 2001, December 31, 2001, June 30, 2002 and September 30, 2002 and the year ended March 31, 2002 as further described in Note 2 — Restatement of Financial Results of this Form 10-Q/ A. This report still speaks as of the original filing date and, as expressly stated, no attempt has been made to update this report to reflect events occurring subsequent to the date of the original filing.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of Therma-Wave, Inc. and its wholly-owned subsidiaries. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In our opinion, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at September 30, 2002, and the operating results and cash flows for the three and six months ended September 30, 2002 and 2001. These financial statements and notes should be read in conjunction with our audited financial statements and notes thereto for the year ended March 31, 2002.

The results of operations for the interim periods are not necessarily indicative of the results of operations that may be expected for any other period or for the fiscal year, which ends on March 30, 2003. Certain costs and expenses in the six months ended September 29, 2001 have been reclassified to conform to the presentation in the three months ended September 29, 2002.

The second quarters of fiscal years 2003 and 2002 and the entire fiscal year 2002 ended on September 29, 2002, September 30, 2001 and March 31, 2002, respectively. For presentation purposes, the accompanying financial statements have been shown as ending on the last day of the calendar quarter closest to each of these dates.

In late January 2003, management became aware of a possible revenue recognition issue associated with the sale of one tool through one of our foreign branches. In addition, management became aware of potential non-compliance with the company’s expense reimbursement policies by certain employees at the same foreign branch. While the evidence of the revenue recognition issue was not clear at that time, conflicting facts arose that indicated that revenue recognized in the quarter ended September 30, 2001 from the sale of the tool at issue potentially should have been deferred until a later period. In early February 2003, our Audit Committee launched an internal investigation relating to these issues.

In connection with the investigation conducted by our Audit Committee, the Committee engaged outside legal counsel and independent forensic accountants to assist it. The investigation was conducted to (i) identify additional potential revenue recognition issues, if any; and (ii) to review the business expense practices of certain of our employees at that foreign branch.

From February 2003 through April 2003, based on the investigation conducted by our Audit Committee, a number of changes to the Company’s Taiwan management team and executive management team were effected, including termination of certain employees.

As a result of the matters noted above, management conducted a detailed review of revenue recognition with the assistance of the Company’s independent accountants. The additional review undertaken by management resulted in the revenue and related costs (including associated warranty and installation costs) for three transactions to be restated as follows:

(1) Product revenues of $1,000,000 and related cost of goods sold of $367,000, which were originally recognized in the quarter ended September 30, 2001 are being restated to defer the recognition of the revenue and cost of goods sold related to this sale until the quarter ended March 31, 2003. Changes in the original terms of arrangement between the Company and its customer were made just subsequent to the date of original revenue recognition and provided for the completion of additional services. These services were not completed until the quarter ended March 31, 2003.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(2) Product revenues of $760,000 and related cost of goods sold of $499,000 (including $10,000 of warranty and installation costs), related to two tools, which were originally recognized in the quarter ended March 31, 2002, are being restated to defer the recognition of the revenue and related cost of goods sold for one of the tools until the quarter ended September 30, 2002 ($360,000 of revenue and related inventory cost of the tool of $152,000) and for the other tool revenue has not been recognized ($400,000) and cost of the tool $(337,000) is included in inventory. This change relates to shipments made to a distributor that did not have the ability to pay independent of completing the ultimate sale to the end customer.

As a result of the above, we have restated our financial reports for the quarterly periods ended September 30, 2001, December 31, 2001, June 30, 2002 and September 30, 2002, and the year ended March 31, 2002, all of which were affected by the above revenue transactions. No adjustments related to non-compliance with the Company’s expense reimbursement policies were required as unauthorized amounts were expensed at the time they were incurred and are not deemed recoverable from the former employees.

The three and six month periods ended September 30, 2002 and 2001, respectively, and the balance sheets as of September 30, 2002 and March 31, 2002 have been restated for the impact of the items above.

The following table outlines the impact of these adjustments on operating results:

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table outlines the balance sheet impact of these adjustments as of September 30, 2002 and March 31, 2002:

Comprehensive income (loss) consists of net income (loss) for the period and the change in accumulated foreign currency translation adjustments during the period. For the quarters ended September 30, 2002 and 2001, comprehensive income (loss) amounted to approximately $(89.9) million (as restated) and $(2.6) million (as restated), respectively. For the six months ended September 30, 2002 and 2001, comprehensive income (loss) amounted to approximately $(100.8) million (as restated) and $2.8 million (as restated), respectively.

In accordance with guidance provided in SAB 101, we recorded $6.3 million (net of income tax benefit of $0.4 million), or $0.25 per diluted share, as the cumulative effect of the change in accounting principle as of April 1, 2000. All periods presented are consistent with the guidance provided in SAB 101. During the three months ended September 30, 2002 and 2001, we recognized $0 and $59,000, respectively, out of the $9.4 million revenue that was included in the cumulative effect adjustment as of April 1, 2000. During the six

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

months ended September 30, 2002 and 2001, we recognized $242,000 and $1.5 million, respectively, out of the $9.4 million revenue that was included in the cumulative effect adjustment as of April 1, 2000.

Basic net income (loss) per share is based on the weighted-average number of common shares outstanding excluding contingently issuable or returnable shares such as unvested common stock or shares that contingently convert into common stock upon certain events. Diluted net income (loss) per share is based on the weighted average number of common shares outstanding and the potential dilution of securities, by including stock options in the weighted average number of common shares outstanding for a period if dilutive.

The following table summarizes securities outstanding (in thousands) as of each period end which were not included in the calculation of diluted net income (loss) per share since their inclusion would be anti-dilutive.

For the three months ended September 30, 2002 and 2001, anti-dilutive stock options have a weighted average exercise price of $12.52 and $20.13, respectively. The warrants outstanding at September 30, 2002 that we excluded from the above calculation had a weighted average exercise price of $3.68.

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” SFAS No. 142 supersedes Accounting Principles Board Opinion No. 17, “Intangible Assets,” and discontinues the amortization of goodwill. In addition, SFAS No. 142 includes provisions regarding: 1) reclassification of amounts between goodwill and identifiable intangible assets in accordance with the new definition of identifiable intangible assets set forth in Statement of Financial Accounting Standards No. 141, “Business Combinations;” 2) reassessment of the useful lives of existing recognized intangibles; and 3) testing for impairment of existing goodwill and other intangibles using the discounted cash flows method. Our adoption of SFAS No. 142 did not result in reclassifications between goodwill and intangible assets, impairment charges or changes in the useful lives of amortizable intangible assets. Intangible assets include developed technology, development contract and trade name and are being amortized on a straight-line basis over the original estimated useful lives of two to five years.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair market value of intangible assets after the impairment adjustments (see Note 8) will be amortized on a straight-line basis over the remaining estimated useful lives of 16 to 52 months. Components of intangible assets were as follows (in thousands):

The changes in the carrying value of goodwill for the six months ended September 30, 2002 are as follows:

Amortization of intangible assets was $0.3 and $0.6 million for the three and six months ended September 30, 2002. Amortization expense is expected to be $0.3 million for the remainder of fiscal 2003 (a total of $0.9 million for fiscal 2003). Amortization expense for fiscal 2004, 2005, 2006 and 2007 is expected to be $0.6 million, $0.6 million, $0.6 million, and $0.5 million, respectively.

In September 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” was issued. This statement provides guidance on the recognition and measurement of liabilities associated with exit or disposal activities and requires that such liabilities be recognized when incurred. This statement is effective for exit or disposal activities initiated on or after January 1, 2003 and does not impact the recognition of costs under our existing programs. Adoption of this standard is expected to impact the timing of recognition of costs associated with future exit and disposal activities.

Due to current operating losses, the absence of positive cash flows, recent significant declines in our common stock price and uncertainties resulting from the duration and severity of the industry downturn, we assessed the recoverability of the intangible assets related to the Sensys acquisition subject to amortization in accordance with SFAS No. 144 and tested goodwill related to the Sensys acquisition for impairment in accordance with SFAS No. 142 during the quarter ended September 30, 2002. Based upon our projection of significantly reduced future cash flows related to Sensys products, an impairment expense of $576,000 was recognized for developed technology, $174,000 for development contract and $362,000 for trade name intangible assets in the quarter ended September 30, 2002. The impairment test under SFAS No. 142 was based on a two-step process involving; 1) comparing the estimated fair value of the related reporting unit to its net book value, and 2) comparing the estimated implied fair value of goodwill to its carrying value. As a result of the test, we wrote down goodwill assets by $65.9 million in the quarter ended September 30, 2002.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On December 17, 2001, we signed a definitive agreement to acquire Sensys Instruments Corporation. On December 28, 2001, Sensys was named in a patent infringement suit filed by KLA-Tencor Corporation. KLA-Tencor alleged that it patented an aspect of the integrated metrology technology that Sensys used in their integrated product family. KLA-Tencor was seeking damages and an injunction to stop the sale of the equipment they alleged used this aspect. Subsequent to the quarter ended September 29, 2002, we settled this patent lawsuit with KLA-Tencor. As part of the settlement, KLA-Tencor agreed that it would not assert a claim for infringement against the product that Sensys is currently selling.

On April 22, 2002, we filed a patent infringement suit against Boxer Cross Inc. in the United States District Court, Northern District of California. The suit alleges that Boxer Cross’ BX-10 product infringes certain patents held by Therma-Wave related to ion implant monitoring. Two of the asserted patents were previously found to be valid and infringed in a suit filed against Jenoptik, AG, in 1994. The earlier court rulings led to Jenoptik’s withdrawal from the U.S. market. On June 7, 2002, Boxer Cross filed its amended answer and counterclaims to Therma-Wave’s complaint and asserted various affirmative defenses to Therma-Wave’s claims of patent infringement. The pleading also contained various counterclaims including allegations that Therma-Wave’s Therma-Probe product infringed upon certain patents owned by Boxer Cross and also raised claims of misappropriation of trade secrets, tortious interference with contract, unfair competition and unfair business practices. We replied to Boxer Cross’s counterclaims, denying the material allegations and asserting declaratory judgment counterclaims. At the September 16, 2002 case management conference, the Court scheduled a Markman claim construction hearing on our patents-in-suit for December 9, 2002. No discovery or trial date has been set. We believe that the outcome from this matter, even if adverse to us, would not have a material adverse effect on our financial condition or results of operations.

We are involved in various legal proceedings from time to time arising in the ordinary course of business, none of which are expected to have a material adverse effect on our business or financial condition.

During the second fiscal quarter of 2003, we announced and implemented reduction in force programs aimed at bringing operating expenses in line with our operating environment for the fiscal year 2003. All terminated employees were notified of their severance and related benefits at the time the programs were announced. The programs resulted in a reduction of approximately 115 employees across all functional areas.

All expenses were paid out or are expected to be paid out in cash with the remaining balance expected to be paid out by March 31, 2003. Changes in the accrued expenses relating to reductions in force are summarized in thousands as follows:

On August 1, 2002, the Company’s Board of Directors announced a stock repurchase program for the repurchase of up to 1 million shares of Therma-Wave’s common stock. The Company has repurchased 347,400 shares of common stock at an average price of $2.40 per share in the quarter ended September 30, 2002.

This Quarterly Report on Form 10-Q/A contains forward-looking statements as that term is defined in the Private Securities Reform Act of 1995, which are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The words “believe,” “expect,” “anticipate,” “intend” and other similar expressions generally identify forward-looking statements. Potential investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. Statements relating to our ability to manage our costs and reduce operating expenses, sustain our operations and cash position in an extended global economic downturn, continue the successful development and introduction of new products and improvement of current products and trends in our financial performance are all based on current expectations. Such statements are subject to risks, uncertainties, and changes in conditions, particularly those related to industry performance in the current severe industry and economic downturn, political unrest, foreign currency exchange rates, activities and potential successes of competitors and competing products and other risks, some of which are detailed in documents filed with the Securities and Exchange Commission, including specifically Exhibit 99.1 to the company’s amended Annual Report on Form 10-K/A for the year ended March 31, 2002. See also the discussion of forward-looking statements related to market risk in the first paragraph of Item 3 below. The company undertakes no obligation to update the information in this Quarterly Report on Form 10-Q/A.

We are a worldwide leader in the development, manufacture, marketing and service of process control metrology systems for use in the manufacture of semiconductors. Process control metrology is used to monitor process parameters in order to enable semiconductor manufacturers to maintain high yields on the production lines, reduce feature size, increase wafer size, increase equipment productivity and improve device performance. Our metrology systems are used in all sections of the semiconductor fabrication plant, or fab, to control the wafer fabrication processes. Examples of wafer fab processes, in which our metrology systems supply key information, are photoresist processing to support lithography, deposition of insulator and conductor films, patterned removal, or “etching”, of insulator and conductor films, ion implantation and chemical mechanical planarization. We currently sell four product families of process control metrology systems: Therma-Probe® systems, Opti-Probe® systems, Opti-Probe Real-Time/ Critical Dimensions^TM systems, and Integra^TM and Sensys integrated metrology systems.

Therma-Probe Product Family. Therma-Probe systems utilize our proprietary thermal wave technology and are the predominant non-destructive process control metrology systems used to measure the critical ion implantation process on product wafers in the fabrication of semiconductors.

Opti-Probe Product Family. Opti-Probe Film Metrology systems provide the industry’s most powerful capability to control and diagnose non-opaque films for semiconductor production. This unsurpassed metrology power is achieved by successfully integrating different measurement technologies, including optical technologies that are proprietary to Therma-Wave, into each Opti-Probe system.

Opti-Probe Real-Time/ Critical Dimensions^TM Product Family. Opti-Probe Real-Time/ Critical Dimension systems measure the lateral dimensions, or “critical dimensions”, or CD, using our real time critical dimensions software and a revolutionary, nondestructive technique based on spectroscopic ellipsometry. These systems are capable of providing CD metrology for the smallest features of the next several generations of integrated circuits, or IC’s.

Sensys and Integra Product Family. The Sensys and Integra line of integrated metrology products are a broad-based family of compact metrology “modules” which are installed and function inside an IC process system, such as an etching system or CVD deposition system, to provide metrology on each wafer before it exits the process tool.

From February 2003 through April 2003, based on the investigation conducted by our Audit Committee, a number of changes to the company’s Taiwan management team and executive management team were effected, including termination of certain employees.

As a result of the matters noted above, management conducted a detailed review of revenue recognition with the assistance of the company’s independent accountants. The additional review undertaken by management resulted in the revenue and related costs (including associated warranty and installation costs) for three transactions to be restated as follows:


	(1) Product revenues of $1,000,000 and related cost of goods sold of $367,000, which were originally recognized in the quarter ended September 30, 2001 are being restated to defer the recognition of the revenue and cost of goods sold related to this sale until the quarter ended March 31, 2003. Changes in the original terms of arrangement between the company and its customer were made just subsequent to the date of original revenue recognition and provided for the completion of additional services. These services were not completed until the quarter ended March 31, 2002.

	(2) Product revenues of $760,000 and related cost of goods sold of $499,000 (including $10,000 of warranty and installation costs) related to two tools, which were originally recognized in the quarter ended March 31, 2002, are being restated to defer the recognition of the revenue and related cost of goods sold for one of the tools until the quarter ended September 30, 2002 ($360,000 of revenue and related inventory cost of the tool of $152,000) and for the other tool revenue has not been recognized ($400,000) and cost of the tool ($337,000) is included in inventory. This change relates to shipments made to a distributor that did not have the ability to pay independent of completing the ultimate sale to the end customer.

As a result of the above, we have restated our financial reports for the quarterly periods ended September 30, 2001, December 31, 2001, June 30, 2002 and September 30, 2002, and the year ended March 31, 2002, all of which were affected by the above revenue transactions. However, we do not believe these adjustments have a material impact on our financial position as of March 31, 2002. No adjustments related to non-compliance with the company’s expense reimbursement policies were required as unauthorized amounts were expensed at the time they were incurred and are not deemed recoverable from the former employees.

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, goodwill and intangible assets, inventories and income taxes.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

During the quarter ended September 30, 2002, our critical accounting policies and estimates have not changed as disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2002.

The following table summarizes our unaudited historical results of operations as a percentage of net revenues for the periods indicated. The historical financial data for the three and six months ended September 30, 2002 and 2001 were derived from our unaudited consolidated financial statements which, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the financial condition and results of operations for such periods.

Comparisons of the three and six months ended September 30, 2002 compared to the three and six months ended September 30, 2001, as restated.

Net Revenues. Net revenues for the fiscal quarter ended September 30, 2002 were $10.9 million. Compared to the first quarter of fiscal 2003, net revenues decreased $4.0 million, or 26.8%, from $14.9 million. Net revenues decreased $9.7 million, or 47.0%, from $20.7 million in the same fiscal quarter of the prior year.

For the six months ended September 30, 2002, net revenues were $25.9 million, a decrease of $32.6 million, or 55.7%, from $58.5 million in the comparable period of the prior year. The decrease in revenues was primarily the result of capital spending reductions by our customers due to the downturn of the semiconductor industry and the weakness of the global economy.

The following table summarizes our revenues in different categories as a percentage of total net revenues for the periods indicated.

International sales accounted for approximately 67% and 57% of our total net revenues for the three months ended September 30, 2002 and 2001, respectively. For the six months ended September 30, 2002 and 2001, respectively, international sales accounted for approximately 73% and 58% of our total net revenues. We anticipate that international sales will continue to account for a significant portion of our net revenues in the foreseeable future. A substantial portion of our international sales are denominated in U.S. dollars. As a result, changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. Although we have not been negatively impacted in the past by foreign currency changes in Taiwan, Japan, China, Korea, and Europe, such conditions could negatively impact our international sales in future periods.

Gross Profit (Loss). Gross loss for the second quarter of fiscal 2003 was $(7.0) million, a decrease of $10.1 million, from a gross profit of $3.1 million in the previous fiscal quarter. Compared to the same quarter of fiscal 2002, gross profit decreased $14.9 million. As a percentage of net revenues, gross margin for the current quarter was (64.2)%, compared to 20.6% for last fiscal quarter and 38.3% for the same quarter of last fiscal year. For the six months ended September 30, 2002, gross loss was $(3.9) million, a decrease of $29.5 million, or 115.4%, from $25.6 million in the comparable period of the prior year. As a percentage of net revenues, gross margin for the current six months was (15.2)%, compared to 43.8% in the comparable period of the prior year. The change of gross profit from the previous fiscal quarter is primarily due to a $7.4 million charge associated with additional reserves for obsolete and excess inventory and lower net revenues and production volume. The significant decrease of gross profit from the same quarter of fiscal 2002 is primarily due to our substantially lower net revenues and production volume as well as a $7.4 million charge associated with additional reserves for obsolete and excess inventory. The change of gross profit from the six months ended September 30, 2002 to the six months ended September 30, 2001 is primarily due to the above mentioned $7.4 million inventory charge and lower net revenues and production volume.

Research and Development, or R&D, Expenses. R&D expenses for the second quarter of fiscal 2003 were $8.1 million, an increase of 1.4% from the prior quarter and an increase of 24.1% from the same quarter of last fiscal year. For the six months ended September 30, 2002, R&D expenses were $16.1 million, an increase of $2.6 million, or 19.2%, from $13.5 million in the comparable period of the prior year. The increase of R&D expenses was primarily due to legal expenses related to patent litigation in the second quarter of fiscal 2003 and higher depreciation expenses for the six months ended September 30, 2002. Our reduction in force programs during the second quarter of fiscal 2003 reduced headcount in R&D functions but we expect to continue to commit significant resources to the development of new advanced metrology products of precision performance at higher wafer throughputs.

Selling, General and Administrative, or SG&A, Expenses. SG&A expenses for the second quarter of fiscal 2003 were $6.7 million, an increase of 8.8% from SG&A expenses of $6.1 million in the prior fiscal

quarter. Compared to the second quarter of last fiscal year, SG&A expenses increased by 35.3%. For the six months ended September 30, 2002, SG&A expenses were $12.8 million, an increase of $2.2 million, or 20.2%, from $10.6 million in the comparable period of the prior year. The increase was primarily due to the addition of SG&A expenses incurred by Sensys which we acquired in January 2002.

Impairment of Goodwill and Other Intangible Assets. During the quarter ended September 30, 2002, we completed a goodwill impairment test, and the results of that test indicated that our goodwill and intangible assets were impaired by $67.0 million. The impairment test under SFAS No. 144 and No. 142 was based on a two-step process involving; 1) comparing the estimated fair value of the related reporting unit to its net book value, and 2) comparing the estimated implied fair value of goodwill to its carrying value. The circumstances leading to the impairment of goodwill and intangible assets primarily relate to current operating losses, the absence of positive cash flows and uncertainties resulting from the duration and severity of the industry downturn. We wrote down goodwill and intangible assets by $67.0 million.

Severance Charge. During the second quarter of fiscal 2003, we announced and implemented reduction in force programs aimed at bringing operating expenses in line with our operating environment for the fiscal year 2003. We reduced our workforce by 21 percent, approximately 115 employees, across all functional areas and recorded a $1.2 million severance charge for the three and six months ended September 30, 2002, an increase of $0.8 million, from $0.4 million in the same periods of fiscal 2002. All terminated employees were notified of their severance and related benefits at the time the programs were announced. The program is expected to improve our cash preservation and maintain a healthy balance sheet.

Stock-Based Compensation. As part of the acquisition of Sensys, we recorded $3.5 million of stock-based compensation to be amortized over the vesting period of the options. The amortization expense was $0.5 million, or 4.3% of revenue, for the quarter ended September 30, 2002. For the six months ended September 30, 2002, the amortization expense was $1.1 million, or 4.0% of revenue. We had no similar expenses for the same period of last fiscal year.

Other Income. Other income for the second quarter of fiscal 2003 was $0.5 million, which was 59.8% higher than other income in the prior fiscal quarter. Compared to the same quarter of the prior fiscal year, other income decreased 28.4%. For the six months ended September 30, 2002, other income was $0.8 million, a decrease of $0.7 million, or 44.5%, from $1.5 million in the comparable period of the prior year. We derive other income primarily from the investment of our cash on hand. An interest refund from Internal Revenue Service in the amount of $0.3 million was included in other income of the second quarter of fiscal 2003.

Provision for Income Taxes. For the six months ended September 30, 2002, the effective tax rate of 0% was based upon our projected tax loss for fiscal 2003.

Net Income (Loss). The combination of all the factors discussed above contributed to a net loss of $89.9 million for the second quarter of fiscal 2003, compared with net loss of $11.3 million in the prior fiscal quarter and net loss of $2.8 million in the same quarter of last fiscal year. For the six months ended September 30, 2002, net loss was $101.2 million, a decrease of $103.8 million, from net income of $2.6 million in the comparable period of the prior year.

Our principal liquidity requirements are for working capital. Over the last three fiscal years, we have funded our operating activities principally from funds generated from operations and net proceeds from an initial public offering.

Cash flows provided (used) by operating activities were $(18.6) million and $1.7 million for the first six months of fiscal 2003 and 2002, respectively. The decrease in cash flows provided by operating activities from fiscal year 2002 to 2003 was mainly due to our net loss, exclusive of non-cash charges, in the first six months of fiscal year 2003.

Cash flows provided (used) by investing activities were $(2.4) million and $(1.4) million for the first six months of fiscal 2003 and 2002, respectively. The decrease in cash flows provided by investing activities is

primarily due to an increase in the purchase of short-term investments in the first six months of fiscal year 2003. Purchases of property and equipment were $0.8 million and $1.8 million for the first six months of fiscal 2003 and 2002, respectively.

Cash flows provided by financing activities were $0.1 million and $2.2 million for the first six months of fiscal 2003 and 2002, respectively. Cash was generated from the exercise of stock options and warrants and the issuance of common stock under our employee stock purchase plan.

In June 2001, we entered into a $10.0 million loan and security agreement with Comerica Bank. In December 2001, we amended this bank credit facility. As a result of the amendment, the credit extension limit was increased to $13.5 million. The amended bank credit facility allows us to borrow money bearing interest either at a floating rate per annum equal to the prime rate or at a rate per annum equal to LIBOR plus 2.0%. We may request advances in an aggregate outstanding amount not to exceed the lesser of $13.5 million or the borrowing base, in each case minus the aggregate face amount of outstanding letters of credit, including any drawn but unreimbursed letters of credit. Our borrowings under the Comerica bank credit facility are secured by substantially all of our assets. The existing amended Comerica bank credit facility matures on June 30, 2004. We currently have a $3.5 million standby letter of credit as required by the lessor of our building. During the quarter ended September 30, 2002, we violated the loss covenants related to the $10.0 million of unused bank credit facility. The bank has provided a proposed amendment which would change the covenants to allow the loss incurred during the quarter and amend certain other covenants and conditions going forward. We are currently reviewing the bank’s proposal.

Our other contractual obligations at September 30, 2002 and the effect such obligations are expected to have on our liquidity and cash flow in future periods, have not changed materially since March 31, 2002 as described in our Form 10-K.

Our principal sources of funds are anticipated to be cash and short-term investments on hand ($39.5 million as of September 30, 2002), cash flows from operating activities and, if necessary, borrowings under the bank credit facility. We expect to limit our capital spending to essential items. We believe that these funds will provide us with sufficient liquidity and capital resources for us to meet our current and future financial obligations for at least the next twelve months. No assurance can be given, however, that this will be the case. We may require additional equity or debt financing to meet our working capital requirements, to fund our research and development activities. There can be no assurance that additional financing will be available when required or, if available, will be on terms satisfactory to us.

The impact of inflation on our business has not been material for the fiscal quarter ended September 30, 2002.

During the 90-day period prior to the filing date of this report, management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the company’s disclosure controls and procedures. Based upon that evaluation and the investigation discussed in Note 2 of the financial statements entitled “Restatement of Financial Results,” a material weakness has been identified relating to controls surrounding evaluating and reporting revenue transactions, particularly in the Asia/Pacific region. As a result, we have implemented or are in the process of implementing the following changes or additions to our internal controls and procedures, among others:


	•	Changing our internal reporting structure to require branch accounting personnel to report directly to our finance department in the United States;

	•	Establishing audit and review procedures for each foreign branch consistent with each branch’s exposure, including, as appropriate, outside auditors;


	•	Requiring managers of foreign operations to attest in writing that final acceptance documents for any given period are valid acceptances that justify revenue recognition and that will result in customer payment;

	•	Requiring corporate financial management personnel to investigate transactions where revenue has been recognized but the customer has not paid according to terms;

	•	Re-training employees and developing an ongoing training program with particular focus on company policies and procedures related to revenue recognition, expense reimbursements and bank account reconciliations;

	•	Establishing yearly or twice-yearly (for larger branches) reviews with both internal and external accounting personnel and local management, to be coordinated with quarterly business reviews; and

	•	Establishing controls to closely monitor the credit status of certain customers, with emphasis on distributors.

Management is considering additional controls as a result of the special investigation and development is ongoing.


(1)	Incorporated by reference to the same numbered exhibit in the Company’s originally filed Quarterly Report on Form 10-Q for the period ended September 29, 2002, filed on November 13, 2002 (File No. 000-26911)

(2)	Incorporated by reference to the same numbered exhibit in the Company’s amended Annual Report on Form 10-K/ A for the period ended March 31, 2002 (File No. 000-26911)

On August 14, 2002, we reported on Form 8-K the certification of our Form 10-Q for the quarterly period ended June 30, 2002 by Martin M. Schwartz, our Chief Executive Officer, and L. Ray Christie, our Chief Financial Officer.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THERMA-WAVE, INC.

	(Registrant)

	/s/ L. RAY CHRISTIE

	L. Ray Christie
	Chief Financial Officer
	(as Registrant and as Principal Accounting Officer)


	1. I have reviewed this quarterly report on Form 10-Q/ A of Therma-Wave, Inc.;

	2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):


	a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	1. I have reviewed this quarterly report on Form 10-Q/ A of Therma-Wave, Inc.;

	2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):


	a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


(1)	Incorporated by reference to the same numbered exhibit in the Company’s originally filed Quarterly Report on Form 10-Q for the period ended September 29, 2002, filed on November 13, 2002 (File No. 000-26911)

(2)	Incorporated by reference to the same numbered exhibit in the Company’s amended Annual Report on Form 10-K/A for the period ended March 31, 2002 (File No. 000-26911)


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 29, 2002

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware		94-3000561
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)


Class		Outstanding as of October 31, 2002

Common stock, $.01 par value		29,012,013


PART I -- FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 4. Controls and Procedures
PART II. -- OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT 10.40
EXHIBIT 10.41
EXHIBIT 99.2


		Page

Item 1.	Financial Statements		1
	Condensed Consolidated Balance Sheets as of September 30, 2002 and March 31, 2002		1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2002 and 2001		2
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2002 and 2001		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 4.	Controls and Procedures		15
PART II. OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K		16
Signatures			17
Certifications			18

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			September 30,			March 31,
			2002			2002


			(As Restated)
ASSETS
Current assets:
	Cash and cash equivalents		$	25,979		$	46,484
	Short-term investments			13,565			12,575
	Accounts receivable, net			14,565			15,635
	Inventories			29,719			34,677
	Other current assets			1,963			3,415

		Total current assets		85,791			112,786
	Property and equipment, net			11,784			14,041
	Goodwill and intangible assets, net			2,538			70,096
	Other assets			4,753			4,723

		Total assets	$	104,866		$	201,646

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	7,701		$	6,297
	Accrued warranty costs			949			1,777
	Deferred revenue			11,911			9,493
	Income tax payable			4,892			4,903
	Other current liabilities			9,469			9,303

		Total current liabilities		34,922			31,773
	Long term debt			16			16
	Other liabilities			2,047			2,358

		Total liabilities		36,985			34,147

Stockholders’ equity:
	Common stock			293			291
	Treasury stock			(846	)		—
	Additional paid-in capital			322,434			321,466
	Notes receivable from stockholders			(196	)		(200	)
	Accumulated deficit			(250,514	)		(149,325	)
	Accumulated other comprehensive loss			(1,426	)		(1,790	)
	Deferred stock-based compensation			(1,864	)		(2,943	)

		Total stockholders’ equity		67,881			167,499

		Total liabilities and stockholders’ equity	$	104,866		$	201,646



			Three Months Ended						Six Months Ended
			September 30,						September 30,

			2002			2001			2002			2001


			(As Restated)						(As Restated)
Net revenues
	Product		$	5,688		$	16,360		$	15,398		$	50,060
	Service and parts			5,257			4,300			10,496			8,421

Total net revenues				10,945			20,660			25,894			58,481
Cost of revenues				17,969			12,739			29,840			32,888

Gross profit				(7,024	)		7,921			(3,946	)		25,593

Operating expenses:
	Research and development			8,108			6,533			16,103			13,514
	Selling, general and administrative			6,659			4,921			12,780			10,628
	Impairment of goodwill and other intangible assets			66,977			—			66,977			—
	Severance charge			1,165			377			1,165			377
	Stock-based compensation			466			—			1,052			—

		Total operating expenses		83,375			11,831			98,077			24,519

Operating income (loss)				(90,399	)		(3,910	)		(102,023	)		1,074

Other income (expense):
	Interest expense			(51	)		(23	)		(102	)		(107	)
	Interest income			501			751			765			1,583
	Other, net			63			(12	)		171			27

		Total other income		513			716			834			1,503

Income (loss) before income tax benefit				(89,886	)		(3,194	)		(101,189	)		2,577
Income tax benefit				—			346			—			—

Net income (loss)			$	(89,886	)	$	(2,848	)	$	(101,189	)	$	2,577

Net income (loss) per share:
	Basic		$	(3.16	)	$	(0.12	)	$	(3.55	)	$	0.11

	Diluted		$	(3.16	)	$	(0.12	)	$	(3.55	)	$	0.10

Weighted average common shares outstanding:
	Basic			28,480			23,968			28,525			23,902
	Diluted			28,480			23,968			28,525			25,188



	September 30, 2002						March 31, 2002

	As Previously						As Previously
	Reported			As Restated			Reported			As Restated


	(In thousands)						(In thousands)
Accounts receivable, net	$	15,115		$	14,565		$	16,585		$	15,635
Inventories		29,032			29,719			33,838			34,677
Other current assets		1,970			1,963			3,427			3,415
Total current assets		85,661			85,791			112,909			112,786
Total assets		104,736			104,866			201,769			201,646
Accrued warranty costs		960			949			1,802			1,777
Deferred revenue		10,956			11,911			8,683			9,493
Total current liabilities		33,978			34,922			30,988			31,773
Total liabilities		36,041			36,985			33,362			34,147
Accumulated deficit		(249,700	)		(250,514	)		(148,417	)		(149,325	)
Total stockholders’ equity		68,695			67,881			168,407			167,499
Total liabilities and stockholders’ equity		104,736			104,866			201,769			201,646



		September 30, 2002					March 31, 2002

		Gross Carrying		Accumulated			Gross Carrying		Accumulated
		Amount		Amortization			Amount		Amortization

Intangible assets
	Developed technology	$	314	$	(314	)	$	890	$	(92	)
	Development contract		2,416		(366	)		2,590		(107	)
	Trade name		628		(140	)		990		(40	)

Intangible assets		$	3,358	$	(820	)	$	4,470	$	(239	)

Goodwill		$	—	$	—		$	65,865	$	—


Balance as of March 31, 2002	$	65,865
Impairment in second quarter of fiscal 2003		(65,865	)

Balance as of September 30, 2002	$	—


	Balance							Balance
	March 31, 2002		Additions		Utilized			September 30, 2002

Severance	$	301	$	1,165	$	(633	)	$	833


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*



			Three Months						Six Months
			Ended						Ended
			September 30,						September 30,

			2002			2001			2002			2001


			(As Restated)						(As Restated)
Net revenues
	Product			52.0	%		79.2	%		59.5	%		85.6	%
	Service and parts			48.0			20.8			40.5			14.4

Total net revenues				100.0			100.0			100.0			100.0
Cost of revenues				164.2			61.7			115.2			56.2

Gross profit				(64.2	)		38.3			(15.2	)		43.8

Operating expenses:
	Research and development			74.1			31.6			62.2			23.1
	Selling, general and administrative			60.8			23.8			49.4			18.2
	Impairment of goodwill and other intangible assets			611.9			—			258.7			—
	Severance charge			10.7			1.8			4.5			0.6
	Stock-based compensation			4.3			—			4.0			—

		Total operating expenses		761.8			57.2			378.8			41.9

Operating income (loss)				(826.0	)		(18.9	)		(394.0	)		1.9

Other income (expense):
	Interest expense			(0.5	)		(0.1	)		(0.4	)		(0.2	)
	Interest income			4.6			3.6			3.0			2.7
	Other, net			0.6			(0.1	)		0.6			—

		Total other income		4.7			3.4			3.2			2.5

Income (loss) before income tax benefit				(821.3	)		(15.5	)		(390.8	)		4.4
Income tax benefit				—			1.7			—			—

Net income (loss)				(821.3	)%		(13.8	)%		(390.8	)%		4.4	%


Exhibit
Number		Description

	3.1	Restated Certificate of Incorporation of Therma-Wave.(1)
	10.26.2	Amendment No. 2 to the 2000 Employee Stock Purchase Plan.(1)
	10.40	Separation Agreement and General Release of Claims, dated as of August 13, 2002, by and between Therma-Wave, Inc. and Robert G. Ozarski.
	10.41	Amendment, dated September 5, 2002, to the Separation Agreement and General Release of Claims, dated as of August 13, 2002, by and between Therma-Wave, Inc. and Robert G. Ozarski.
	99.1	Risk Factors.(2)
	99.2	Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	/s/ BORIS LIPKIN

	Boris Lipkin
	President and Chief Executive Officer


3.	Inventories


4.	Comprehensive Income (Loss)


5.	Change in Accounting Principle


6.	Net Income (Loss) Per Share