<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended April 1, 2000, Commission File No 000-27308.
AAVID THERMAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0466826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE EAGLE SQUARE, SUITE 509, CONCORD, NH 03301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 224-1117
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 such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Aggregate market value of the Registrant's common stock held by non-affiliates:
N/A. The number of outstanding shares of the registrant's Common Stock as of May
15, 2000 was 940 shares of Class A, 1,000 shares of Class B and 40 shares of
Class H, all of which are owned by Heat Holdings Corp. On February 2, 2000, a
wholly-owned subsidiary of Heat Holdings Corp. was merged with and into the
Registrant with the Registrant becoming a wholly-owned subsidiary of Heat
Holdings Corp. and each share of Registrant's then outstanding common stock was
converted into $25.50 in cash.
<PAGE> 2
AAVID THERMAL TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
a.) Consolidated Balance Sheets
as of April 1, 2000 and December 31, 1999.................. 3
b.) Consolidated Statements of Operations for the periods
ended February 1, 2000 and April 1, 2000, and the
quarter ended April 3, 1999................................ 4
c.) Consolidated Statements of Cash Flows for the
periods ended February 1, 2000 and April 1, 2000,
and the quarter ended April 3, 1999........................ 5
d.) Notes to Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 17
Part II. Other Information
Item 1. Legal Proceedings........................................ 21
Item 6. Exhibits and Reports on Form 8-K......................... 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 1, 2000 DECEMBER 31,
(UNAUDITED) 1999
------------- ------------
(COMPANY) (PREDECESSOR)
ASSETS
Cash and cash equivalents $ 14,977 $ 18,273
Accounts receivable-trade, net 53,520 53,583
Inventories 30,459 30,059
Refundable income taxes 179 333
Deferred income taxes 2,956 1,963
Prepaid and other current assets 5,110 4,099
--------- ---------
Total current assets 107,201 108,310
Property, plant and equipment, net 58,014 60,955
Goodwill, net 198,819 50,330
Developed technology and assembled
workforce, net 25,875 --
Other assets, net 15,242 9,357
--------- ---------
Total Assets $ 405,151 $ 228,952
========= =========
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' EQUITY
Current portion of debt obligations $ 4,424 $ 2,337
Accounts payable - trade 18,905 21,805
Income taxes payable 7,429 4,637
Restructuring charges 2,328 2,333
Deferred revenue 8,790 7,765
Accrued expenses and other current
liabilities 23,632 22,383
--------- ---------
Total current liabilities 65,508 61,260
Revolving line of credit 7,700 8,182
Term loan 49,000 78,000
12 3/4% senior subordinated notes 143,850 --
Other long term debt obligations 1,170 426
Deferred income taxes 6,608 707
--------- ---------
Total liabilities 273,836 148,575
--------- ---------
Commitments and Contingencies
Minority interests in consolidated
subsidiaries 5,625 809
Stockholders' equity:
Common Stock, $0.01 par value; authorized
25,000,000 shares; 9,608,868 shares issued
and outstanding at December 31, 1999 -- 96
Class A Common Stock, $.0001 par value;
authorized 1,000 shares; 940 shares issued
and outstanding at April 1, 2000 -- --
Class B Common Stock, $.0001 par value;
authorized 1,000 shares; 1,000 shares
issued and outstanding at April 1, 2000 -- --
Class H Common Stock, $.0001 par value;
authorized 1,000 shares; 40 shares issued
and outstanding at April 1, 2000 -- --
Warrants to purchase 60 shares of Class A
common stock and 60 shares of Class H
common stock 4,560 --
Additional paid-in capital 147,187 58,660
Cumulative translation adjustment (63) (1,294)
Retained earnings (deficit) (25,994) 22,106
--------- ---------
Total stockholders' equity 125,690 79,568
--------- ---------
Total liabilities, minority interests and
stockholders' equity $ 405,151 $ 228,952
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
\
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM FOR THE THREE
FEBRUARY 2, TO JANUARY 1, TO MONTHS ENDED
APRIL 1, 2000 FEBRUARY 1, 2000 APRIL 3, 1999
-------------- ---------------- -------------
(COMPANY) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C>
Net sales $ 54,560 $ 23,442 $ 49,841
Cost of goods sold 40,051 15,516 31,360
-------- -------- --------
Gross profit 14,509 7,926 18,481
Selling, general and administrative expenses 13,229 5,032 11,063
Amortization of intangible assets 5,172 182 304
Acquired in-process research and development 15,000 -- --
Research and development 1,723 752 1,729
-------- -------- --------
Income (loss) from operations (20,615) 1,960 5,385
Interest expense, net (3,989) (816) (115)
Other income (expense), net (86) 22 (243)
-------- -------- --------
Income (loss) before income taxes and minority (24,690) 1,166 5,027
interest
Income tax expense (1,294) (547) (1,859)
-------- -------- --------
Income (loss) before minority interest (25,984) 619 3,168
Minority interest in (income) loss of consolidated subsidiaries (10) 6 --
-------- -------- --------
Net income (loss) $(25,994) $ 625 $ 3,168
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
AAVID THERMAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM FOR THE THREE
FEBRUARY 2, TO JANUARY 1, TO MONTHS ENDED
APRIL 1, 2000 FEBRUARY 1, 2000 APRIL 3, 1999
-------------- ---------------- -------------
(COMPANY) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ (25,994) $ 625 $ 3,168
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,307 1,155 2,022
Acquired in-process research and development 15,000 -- --
Charge from inventory write-up to fair value 3,963 569 --
Gain on sale of property, plant and equipment -- -- (52)
Deferred income taxes (529) (22) (201)
Accretion of discount on 12 3/4% senior subordinated notes to
interest expense 98 -- --
Minority interest in (loss) income 10 (6) --
Changes in assets and liabilities:
Accounts receivable - trade 641 (578) (3,391)
Inventories (470) (499) 1,456
Prepaid and other current assets (804) (53) (516)
Other long term assets 1,322 243 189
Accounts payable - trade (5,246) 2,346 (3,581)
Income taxes payable 870 337 --
Deferred revenue 916 109 --
Accrued expenses and other current liabilities 1,154 (473) 1,596
--------- --------- ---------
Total adjustments 24,232 3,128 (2,478)
--------- --------- ---------
Net cash provided by (used in) operating activities (1,762) 3,753 690
Cash flows used in investing activities:
Purchase of property, plant & equipment (1,802) (308) (1,181)
Net proceeds from sale of fixed assets -- -- 60
Note receivable 106 (106) 1,459
--------- --------- ---------
Net cash provided by (used in) investing activities (1,696) (414) 338
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses -- 349 340
Advances under line of credit 7,700 -- --
Repayments of line of credit (8,182) -- --
Advances under other debt obligations 53,856 -- 199
Principal payments under debt obligations (80,000) (25) (849)
Payment of merger and financing expenses (15,793) -- --
Repurchase of common stock, options and warrants (261,268) -- --
Net proceeds from 12 3/4% senior subordinated notes 148,312 -- --
Proceeds from investors 152,000 -- --
--------- --------- ---------
Net cash provided by (used in) financing activities (3,375) 324 (310)
Foreign exchange rate effect on cash and cash equivalents (37) (89) (126)
Net increase (decrease) in cash and cash equivalents (6,870) 3,574 592
Cash and cash equivalents, beginning of period 21,847 18,273 20,027
--------- --------- ---------
Cash and cash equivalents, end of period $ 14,977 $ 21,847 $ 20,619
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 430 $ 834 $ 204
========= ========= =========
Income taxes paid $ 892 $ 117 $ 416
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(1) ORGANIZATION AND MERGER
Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is the leading
global provider of thermal management solutions for electronic products and the
leading developer and marketer of Computational Fluid Dynamics (CFD) software.
On August 23, 1999, the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with Heat Holdings Corp., a corporation newly formed
by Willis Stein & Partners II, L.P. (the "Purchaser"), and Heat Merger Corp., a
wholly-owned subsidiary of the Purchaser ("Merger Sub"), providing for the
merger of the Merger Sub with and into Aavid (the "Merger"), with Aavid being
the surviving corporation. The Merger was approved by the Company's stockholders
on January 29, 2000 and consummated on February 2, 2000. Pursuant to the Merger,
Aavid stockholders received $25.50 in cash for each outstanding share of common
stock, and outstanding stock options and warrants were cashed out. The Merger
was accounted for using the purchase method.
The Merger and related transaction costs were funded by a cash contribution
from the Purchaser of $152,000, proceeds of $148,312, net of original issue
discount, from the sale by the Company of 12 3/4% senior subordinated notes and
warrants due 2007, $54,700 pursuant to a new credit facility entered into by the
Company, and approximately $11,900 of cash on hand. Net stockholders' equity on
the date of acquisition was $156,560. Based upon estimates of the fair value of
assets acquired and liabilities assumed, goodwill of approximately $202,600 was
established. Approximately $139,800 of this goodwill is attributable to Aavid
Thermalloy, the hardware business, and will be amortized over 20 years. The
remainder, $62,800, is attributable to Fluent, the CFD software business, and
will be amortized over 4 years.
The Company recorded a valuation allowance of $12,163 to fully reserve the
unutilized net operating loss carryforwards outstanding at the time of the
acquisition. The Company now believes that the future utilization of those tax
loss carryforwards is now uncertain given that the Company expects to incur U.S.
tax losses resulting from the incremental interest expense arising from the debt
incurred to fund the merger. As the net operating losses are utilized, the
reversal of the valuation allowance will be recorded as a reduction of goodwill.
Of the $152,000 cash contribution from the Purchaser, $4,811 was invested
by Heat Holdings II Corp., a wholly-owned subsidiary of the Purchaser, to
acquire 95% of the common equity of Aavid Thermalloy, LLC, the thermal
management hardware business. The Company controls Aavid Thermalloy, LLC through
a preferred equity interest and holds a 5% common equity interest.
On February 2, 2000, as part of the transactions relating to the Merger,
the Company issued 150,000 units (the "Units"), consisting of $150,000 aggregate
principal amount of its 12 3/4% Senior Subordinated Notes due 2007 (the "Notes")
and warrants (the "Warrants") to purchase an aggregate of 60 shares of the
Company's Class A Common Stock, par value $0.0001 per share, and 60 shares of
the Company's Class H Common Stock, par value $0.0001 per share. The Notes are
fully and unconditionally guaranteed on a joint and several basis by each of the
Company's domestic subsidiaries (the "Subsidiary Guarantors") (see note (10) for
selected consolidating financial statements of parent, guarantors and
non-guarantors). The Notes were issued pursuant to an Indenture (the
"Indenture") among the Company, the Subsidiary Guarantors and Bankers Trust
Company, as trustee. Approximately $4,600 of the proceeds from the sale of the
Units was allocated to the fair value of the Warrants and approximately $143,700
was allocated to the Notes, net of original issue discount of approximately
$1,700. The total discount of $6,300 is being accreted over the term of the
notes, using the effective interest rate method. This accretion is recorded as
interest expense within the accompanying statement of operations from the period
February 2, 2000 to April 1, 2000.
In connection with the Merger, the Company repaid all of the outstanding
term loan and revolving line of credit under its existing credit facility, which
aggregated approximately $88,200 at December 31, 1999, and entered into an
amended and restated credit facility (the "Amended and Restated Credit
Facility"). The Amended and Restated Credit Facility provides for a $22,000
revolving credit facility (the "Revolving Facility") (of which $1,700 was drawn
at the closing of the Merger) and a $53,000 term loan facility (the "Term
Facility") (which was fully drawn at the closing of the Merger). Subject to
compliance with the terms of the Amended and Restated Credit Facility,
borrowings under the Revolving Facility are available for working capital
purposes, capital expenditures and
6
<PAGE> 7
future acquisitions. The Revolving Facility will terminate, and all amounts
outstanding thereunder will be payable, on March 31, 2005. Principal on the Term
Facility is required to be repaid in quarterly installments commencing December
31, 2000 and ending March 31, 2005 as follows: five installments of $2,000; four
installments of $2,500; four installments of $2,750; two installments of $3,200;
two installments of $3,900; and a final installment of $7,800. In addition,
commencing with our fiscal year ending December 31, 2001, the Company is
required to apply 50% of excess cash flow, as defined, to permanently reduce the
Term Facility. The Amended and Restated Credit Facility bears interest at a rate
equal to, at the Company's option, either (1) in the case of Eurodollar loans,
the sum of (x) the interest rate in the London interbank market for loans in an
amount substantially equal to the amount of borrowing and for the period of
borrowing selected by Aavid and (y) a margin of between 1.50% and 2.25%
(depending on the Company's consolidated leverage ratio (as defined in the
Amended and Restated Credit Facility)) or (2) the sum of the higher of (x)
Canadian Imperial Bank of Commerce's prime or base rate or (y) one-half percent
plus the latest overnight federal funds rate plus (z) a margin of between .25%
and 1.00% (depending on the Company's consolidated leverage ratio). At April 1,
2000, the interest rates on the Term Facility and the Revolving Facility were
8.30%.
The Amended and Restated Credit Facility may be prepaid at any time in
whole or in part without penalty, and must be prepaid to the extent of certain
equity or asset sales. The Amended and Restated Credit Facility limits the
Company's ability to incur additional debt, to sell or dispose of assets, to
create or incur liens, to make additional acquisitions, to pay dividends, to
purchase or redeem its stock and to merge or consolidate with any other party.
In addition, the Amended and Restated Credit Facility requires that the Company
meet certain financial ratios, and provides the lenders with the right to
require the payment of all amounts outstanding under the facility, and to
terminate all commitments thereunder, if there is a change in control of Aavid.
The Amended and Restated Credit Facility is guaranteed by each of Heat Holdings
Corp. and Heat Holdings II Corp., and all of the Company's domestic subsidiaries
and secured by the Company's assets (including the assets and stock of its
domestic subsidiaries and a portion of the stock of its foreign subsidiaries).
As of April 1, 2000, $7,700 was outstanding under the revolving credit
facility and $53,000 was outstanding under the term facility, of which $4,000
was classified as current within the accompanying balance sheet.
The Company incurred approximately $7,085 in underwriting, legal and other
professional fees in connection with the issuance of the Notes and the
obtainment of the Senior Amended and Restated Credit Facility. These costs, in
addition to the $1,624 of unamortized costs associated with the original Senior
Credit Facility, have been capitalized as deferred financing fees and are being
amortized over the respective terms of the related debt. This amortization is
recorded in interest expense in the accompanying statement of operations from
February 2, 2000 to April 1, 2000.
(2) BASIS OF PRESENTATION
These financial statements reflect the operations of the Company for the
period from January 1, 2000 to February 1, 2000 and the three months ended April
3, 1999 (collectively "Predecessor financial statements"). The Predecessor
financial statements have been prepared using the historical cost of the
Company's assets and have not been adjusted to reflect the merger with Heat
Holdings Corp. The accompanying financial statements as of April 1, 2000 and for
the period from February 2, 2000 to April 1, 2000 reflect the consolidated
financial position, results of operations, and cash flows of the Company
subsequent to the date of acquisition and include adjustments required under the
purchase method of accounting.
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, consisting only of normal
adjustments, necessary to present fairly the financial position of Aavid Thermal
Technologies, Inc. and its consolidated subsidiaries at April 1, 2000 and
December 31, 1999, and the results of operations and cash flows for the period
from January 1, 2000 to February 1, 2000, the period from February 2, 2000 to
April 1, 2000 and the three months ended April 3, 1999. The results of
operations for the period from January 1, 2000 to February 1, 2000 and the
period from February 2, 2000 to April 1, 2000 should not necessarily be taken as
indicative of the results of operations that may be expected for the entire 2000
year.
Certain reclassifications have been made to the 1999 financial statements
to conform to the 2000 presentation.
The financial information as of and for the period ended April 1, 2000
should be read in conjunction with the financial statements contained in the
Company's Form 10-K Annual Report for 1999.
7
<PAGE> 8
(3) ACCOUNTS RECEIVABLE
The components of accounts receivable at April 1, 2000 and December 31,
1999 are as follows:
<TABLE>
<CAPTION>
APRIL 1, DECEMBER 31,
2000 1999
(COMPANY) (PREDECESSOR)
--------- --------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable $55,734 $ 55,765
Allowance for doubtful accounts (2,214) (2,182)
------- --------
Net accounts receivable $53,520 $ 53,583
======= ========
</TABLE>
(4) INVENTORIES
Inventories are valued at the lower of cost or market (first-in,
first-out), and consist of materials, labor and overhead. The components of
inventories at April 1, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
APRIL 1, DECEMBER 31,
2000 1999
(COMPANY) (PREDECESSOR)
--------- -------------
(UNAUDITED)
<S> <C> <C>
Raw materials $15,535 $15,983
Work-in-process 5,471 5,245
Finished goods 9,453 8,831
------- -------
$30,459 $30,059
======= =======
</TABLE>
(5) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which specifies the presentation and
disclosure requirements for comprehensive income. The following details
comprehensive income for the periods reported herein:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM FOR THE THREE
FEBRUARY 2, JANUARY 1, 2000 MONTHS ENDED
2000 TO APRIL 1, TO FEBRUARY 1, APRIL 3,
2000 2000 1999
(COMPANY) (PREDECESSOR) (PREDECESSOR)
--------------- --------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net income (loss) $(25,994) $ 625 $ 3,168
Foreign currency translation
adjustment, net of taxes (38) (53) (173)
-------- -------- --------
Comprehensive income(loss) $(26,032) $ 572 $ 2,995
======== ======== ========
</TABLE>
(6) IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Merger, the Company allocated $15 million of the
purchase price to in-process research and development projects. This allocation
represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete software research and development projects of Fluent, Inc. At
the date of the merger, the development of these projects had not yet reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the
merger date.
The Company allocated values to the in-process research and development
based on an in depth assessment of the R&D projects. The value assigned to these
assets was limited to significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of the acquired in-process
technologies.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on historical
results, estimates of relevant market sizes and growth factors, expected trends
in technology, and the nature and expected timing of new product
8
<PAGE> 9
introductions by the Company and its competitors. The resulting net cash flows
from such projects are based on management's estimates of cost of sales,
operating expenses, and income taxes from such projects.
The nature of the efforts to develop the acquired in-process technologies
into commercially viable products and services principally related to the
completion of certain planning, designing, coding, prototyping, and testing
activities that were necessary to establish that the developmental software
technologies met their design specifications including functional, technical,
and economic performance requirements. At the merger date, the technologies
under development were between 40% and 80% complete, based upon project
man-month and cost data. Anticipated completion dates ranged from 6 to 18
months, at which times the Company expects to begin selling the developed
products. Development costs to complete the R&D were estimated at approximately
$4,000.
Fluent's primary in-process R&D projects involved developing: (i) Fluent
version 6.0; (ii) Gambit version 2.0; (iii) materials processing functionality;
and, (iv) advanced infrastructure technology. Fluent 6.0 represents the
Company's next-generation computational fluid dynamics (CFD) software engine.
Gambit 2.0 includes new pre-processor CFD technologies. The development of
materials processing technologies is designed to address CFD needs in new
markets. The advanced infrastructure technology establishes a new platform upon
which future products will be more efficiently and rapidly developed.
Aggregate revenues for the developmental Fluent products were estimated to
peak within three years of acquisition and then decline steadily as other new
products and technologies are expected to enter the market. Operating expenses
were estimated based on historical results and management's analysis of Fluent's
cost structure. Projected operating expenses as a percentage of revenues were
expected to be stable for the foreseeable future.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. A discount rate of 18
percent was considered appropriate for the in-process R&D, and a discount rate
of 15 percent was appropriate for the existing products and technologies. These
discount rates were commensurate with the Fluent's long history and market
leadership position. The discount rate utilized for the in-process technology
was higher than Aavid's cost of capital due to the inherent uncertainties
surrounding the successful development of the purchased in-process technology,
the useful life of such technology, the profitability levels of such technology
and the uncertainty of technological advances that are unknown at this time.
With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the development efforts of Fluent prior to the
close of the merger. In doing so, consideration was given to each major
project's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete the projects.
The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the merger. No assurance can be given,
however, that the underlying assumptions used to estimate sales, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. For these reasons, actual results may vary from
projected results. The most significant and uncertain assumptions relating to
the in-process projects relate to the projected timing of completion of,and
revenues attributable to, each project.
If these projects are not successfully developed, the sales and
profitability of the Fluent division may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.
(7) NON-RECURRING CHARGES AND RESTRUCTURING RESERVES
During the third quarter of 1998, the Company recorded a non-recurring
pre-tax charge of $4,882 reflecting the costs associated with the closure of the
Company's Manchester, New Hampshire facility. The restructuring was completed in
1999 except for final net lease payments.
The following amounts have been charged against the Manchester
restructuring reserves during the period ended April 1, 2000:
<TABLE>
<CAPTION>
CHARGES AGAINST
RESTRUCTURING RESERVES FOR THE RESTRUCTURING
RESERVES BALANCE AT PERIOD ENDED RESERVES BALANCE
DECEMBER 31, 1999 APRIL 1, 2000 AT APRIL 1, 2000
------------------- ---------------- ----------------
<S> <C> <C> <C>
Lease terminations and
leasehold improvements
reserve 203 (34) 169
---- ---- ----
Total $203 $(34) $169
==== ==== ====
</TABLE>
9
<PAGE> 10
Approximately $2,130 of restructuring charges have been recorded in
connection with the Company's October 1999 acquisition of Thermalloy, the
thermal management business of Bowthorpe plc. The restructuring plan includes
initiatives to integrate the operations of the Company and Thermalloy and reduce
overhead. The primary components of these plans relate to (a) the closure of
duplicative operations in Hong Kong and the United Kingdom, (b) the elimination
of duplicative selling, general and administration functions on a global basis
and (c) the termination of certain contractual obligations. The Company expects
these activities to result in a workforce reduction of approximately 165
individuals. Management is in the process of implementing its restructuring
plans related to Thermalloy, and, accordingly, the amounts recorded are based on
management's current estimates of those costs. The majority of the restructuring
activities are expected to be completed by the end of 2000. During the three
months ended April 1, 2000, 60 individuals were terminated. The following
amounts have been charged against the Thermalloy restructuring reserves during
the period ended April 1, 2000:
<TABLE>
<CAPTION>
CHARGES AGAINST
RESTRUCTURING RESERVES FOR THE RESTRUCTURING
RESERVES BALANCE AT PERIOD ENDED RESERVES BALANCE
DECEMBER 31, 1999 APRIL 1, 2000 AT APRIL 1, 2000
------------------- ---------------- ----------------
<S> <C> <C> <C>
Lease terminations and
leasehold improvements
reserve $ 670 $ -- $ 670
Employee separation 1,460 (404) 1,056
------ ------ ------
Total $2,130 $ (404) $1,726
====== ====== ======
</TABLE>
Approximately $539 of restructuring charges were recorded in connection
with the merger of Aavid by the Purchaser. The restructuring plans include
initiatives to integrate the operations of the Company and reduce overhead. The
primary components of these plans relate to (a) the closure of operations in
California and the United Kingdom and (b) the termination of certain contractual
obligations. The Company expects these activities to result in a workforce
reduction of approximately 99 individuals. Management is in the process of
finalizing its plans related to this restructuring, and, accordingly, the
amounts recorded are based on management's current estimates of those costs. The
Company will finalize these plans during 2000 and the majority of the
restructuring activities are expected to be completed by the end of 2000. During
the three months ended April 1, 2000, 28 individuals were terminated. The
following amounts have been charged against the merger restructuring reserves
during the three months ended April 1, 2000:
<TABLE>
<CAPTION>
CHARGES TO GOODWILL CHARGES AGAINST RESTRUCTURING
FOR THE RESERVES FOR THE RESERVES
PERIOD ENDED PERIOD ENDED BALANCE
APRIL 1, 2000 APRIL 1, 2000 AT APRIL 1, 2000
------------------- ---------------- ----------------
<S> <C> <C> <C>
Lease terminations and
leasehold improvements
reserve $ 100 $ (70) $ 30
Employee separation 439 (36) 403
----- ----- -----
Total $ 539 $(106) $ 433
===== ===== =====
</TABLE>
(8) SEGMENT REPORTING
Aavid provides thermal management solutions for microprocessors and
integrated circuits ("ICs") for computer and network and industrial
applications. The Company consists of three distinct reportable segments: (1)
thermal management products; (2) computational fluid dynamics ("CFD") software;
and (3) thermal design services. Aavid's thermal management products consist of
products and services that solve problems associated with the dissipation of
unwanted heat in electronic and electrical components and systems. The Company
develops and offers CFD software for computer modeling and fluid flow analysis
of products and processes that reduce time and expense associated with physical
models and the facilities to test them. The Company also provides thermal design
services to customers who choose to outsource their thermal design needs.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as disclosed in the Company's
Form 10-K for the year ended December 31, 1999.
The Company accounts for inter-segment sales and transfers as if the sales
or transfers were to third parties, that is, at current market prices.
Aavid's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment requires different marketing and sales strategies.
10
<PAGE> 11
The following summarizes the operations of each reportable segment for the
periods from February 2, 2000 to April 1, 2000, January 1, 2000 to February 1,
2000 and the three months ended April 3, 1999:
<TABLE>
<CAPTION>
SEGMENT
REVENUES INCOME(LOSS)
FROM BEFORE TAXES ASSETS (NET OF
EXTERNAL AND MINORITY INTERCOMPANY
CUSTOMERS INTERESTS BALANCES)
--------- ------------ --------------
<S> <C> <C> <C>
February 2, 2000 to April 1, 2000 (COMPANY)
Thermal Products $ 44,822 $ 1,826 $136,686
CFD Software 9,478 1,534 30,010
Thermal Design Services 260 163 1,047
Corporate Office -- (28,213) 237,408
-------- -------- --------
Total ...................................... $ 54,560 $(24,690) $405,151
======== ======== ========
January 1, 2000 to February 1, 2000 (PREDECESSOR)
Thermal Products 18,144 --
CFD Software 5,208 1,840
Thermal Design Services 90 (43)
Corporate Office -- (631)
-------- --------
Total ...................................... $ 23,442 $ 1,166
======== ========
Three months ended April 3, 1999 (PREDECESSOR)
Thermal Products 36,746 2,385 91,937
CFD Software 12,798 2,626 29,503
Thermal Design Services 297 16 556
Corporate Office -- -- 8,337
-------- -------- --------
Total ...................................... $ 49,841 $ 5,027 $130,333
======== ======== ========
</TABLE>
The following table provides geographic information about the Company's
operations. Revenues are attributable to an operation based on the location the
product was shipped from. Long-lived assets are attributable to a location based
on physical location.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE PERIOD FEBRUARY 2, 2000 JANUARY 1, 2000 FOR THE THREE MONTHS ENDED
TO APRIL 1, 2000 TO FEBRUARY 1, 2000 APRIL 3, 1999
------------------------------- ------------------- --------------------------
(COMPANY) (PREDECESSOR) (PREDECESSOR)
LONG-LIVED LONG-LIVED
ASSETS ASSETS
AS OF PERIOD AS OF PERIOD
REVENUES END REVENUES REVENUES END
-------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C>
United States $ 35,083 $266,358 $ 14,967 $ 33,317 $ 39,542
Taiwan 8,389 7,177 3,539 4,702 1,290
China 7,913 4,255 2,298 5,853 1,561
United Kingdom 3,211 1,711 1,608 4,663 2,458
Other International 10,371 10,387 4,120 10,833 4,045
Intercompany eliminations (10,407) 8,062 (3,090) (9,527) --
-------- -------- -------- -------- --------
Consolidated Revenue $ 54,560 $297,950 $ 23,442 $ 49,841 $ 48,896
======== ======== ======== ======== ========
</TABLE>
(9) SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (UNAUDITED)
The Company's wholly-owned domestic subsidiaries have jointly and severally
guaranteed, on a senior subordinated basis, the $150,000 principal amount of the
Company's 12 3/4% Senior Subordinated Notes, due 2007. The guarantors include
the combined domestic operations of Aavid Thermalloy, LLC and Fluent, Inc. and
the Company's subsidiary Applied Thermal Technologies, Inc. The non-guarantors
include the combined foreign operations of Aavid Thermalloy, LLC and Fluent,
Inc. The consolidating condensed financial statements of the
11
<PAGE> 12
Company depict Aavid Thermal Technologies, Inc., the Parent, carrying its
investment in subsidiaries under the equity method and the guarantor and
non-guarantor subsidiaries are presented on a combined basis. Management
believes that there are no significant restrictions on the Parent's and
guarantors' ability to obtain funds from their subsidiaries by dividend or loan.
The principal elimination entries eliminate investment in subsidiaries and
intercompany balances and transactions.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET AS OF APRIL 1, 2000 (UNAUDITED)
--------------------------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ............ $ 50 $ 3,657 $ 11,319 $ (49) $ 14,977
Accounts receivable-trade, net ....... -- 26,285 27,495 (260) 53,520
Inventories .......................... -- 17,583 13,062 (186) 30,459
Due (to) from affiliate, net ......... 100,096 (19,435) (12,474) (68,187) --
Refundable taxes ..................... (180) -- 179 180 179
Deferred income taxes ................ 13,279 (1,635) 572 (9,260) 2,956
Prepaid and other current assets ..... 563 2,176 2,371 -- 5,110
--------- --------- --------- --------- ---------
Total current assets ................. 113,808 28,631 42,524 (77,762) 107,201
Property, plant and equipment, net.... 126 39,681 19,099 (892) 58,014
Investment in subsidiaries ........... 197,125 -- -- (197,125) --
Other assets, net .................... 16,034 188,497 10,825 24,580 239,936
--------- --------- --------- --------- ---------
Total assets ......................... $ 327,093 $ 256,809 $ 72,448 $(251,199) $ 405,151
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET AS OF APRIL 1, 2000 (UNAUDITED)
----------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
Current portion of debt obligations ............... $ 4,000 $ 64 $ 360 $ -- $ 4,424
Accounts payable-trade ............................ 241 6,124 13,987 (1,447) 18,905
Income taxes payable .............................. (8,644) 13,273 5,131 (2,331) 7,429
Deferred revenue .................................. -- 4,840 3,950 -- 8,790
Accrued expenses and other current liabilities..... 5,534 12,178 8,227 21 25,960
--------- --------- --------- --------- ---------
Total current liabilities ......................... 1,131 36,479 31,655 (3,757) 65,508
--------- --------- --------- --------- ---------
Debt obligations, net of current portion .......... 200,550 2,441 2,079 (3,350) 201,720
Deferred income taxes ............................. (278) 11,608 (83) (4,639) 6,608
--------- --------- --------- --------- ---------
Total liabilities ................................. 201,403 50,528 33,651 (11,746) 273,836
--------- --------- --------- --------- ---------
Commitments and contingencies
Minority interests ................................ -- 4,813 812 -- 5,625
Stockholders' equity:
Common Stock, par value ........................... -- -- -- -- --
Warrants .......................................... 4,560 -- -- -- 4,560
Additional paid-in capital ........................ 147,187 207,509 2,449 (209,958) 147,187
Cumulative translation adjustment ................. (63) 1,861 (1,372) (489) (63)
Retained earnings (deficit) ....................... (25,994) (7,902) 36,908 (29,006) (25,994)
--------- --------- --------- --------- ---------
Total stockholders' equity ........................ 125,690 201,468 37,985 (239,453) 125,690
--------- --------- --------- --------- ---------
Total liabilities, minority interests
and stockholders' equity ........................ $ 327,093 $ 256,809 $ 72,448 $(251,199) $ 405,151
========= ========= ========= ========= =========
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED APRIL 3, 1999 (UNAUDITED)
--------------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
-------------- -------------
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ...................................... $ -- $ 36,568 $ 23,411 $(10,138) $ 49,841
Cost of goods sold ............................. -- 23,807 14,554 (7,001) 31,360
-------- -------- -------- -------- --------
Gross profit ................................... -- 12,761 8,857 (3,137) 18,481
Selling, general and administrative expenses.... 1,007 8,620 4,776 (3,036) 11,367
Research and development ....................... -- 1,621 1,536 (1,428) 1,729
-------- -------- -------- -------- --------
Income (loss) from operations .................. (1,007) 2,520 2,545 1,327 5,385
Interest income (expense), net ................. -- (137) 23 (1) (115)
Other income (expense), net .................... 972 (16) 164 (1,363) (243)
Equity in income of subsidiaries ............... 3,190 -- -- (3,190) --
-------- -------- -------- -------- --------
Income (loss) before income taxes .............. 3,155 2,367 2,732 (3,227) 5,027
Income tax benefit (expense) ................... 13 (1,051) (1,061) 239 (1,859)
-------- -------- -------- -------- --------
Net income (loss) .............................. $ 3,168 $ 1,316 $ 1,671 $ (2,987) $ 3,168
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 2, TO APRIL 1, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
-------------- -------------
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ....................................... $ -- $ 34,992 $ 29,953 $(10,385) $ 54,560
Cost of goods sold .............................. -- 28,392 19,706 (8,047) 40,051
-------- -------- -------- -------- --------
Gross profit .................................... -- 6,600 10,247 (2,338) 14,509
Selling, general and administrative expenses..... 669 13,951 5,491 (1,710) 18,401
Research and development ........................ -- 16,367 1,744 (1,388) 16,723
-------- -------- -------- -------- --------
Income (loss) from operations ................... (669) (23,718) 3,012 760 (20,615)
Interest income (expense) net ................... (3,909) (94) (9) 23 (3,989)
Other income (expense), net ..................... 408 64 (120) (437) (86)
Equity in income of subsidiaries ................ (23,696) -- -- 23,696 --
-------- -------- -------- -------- --------
Income (loss) before income taxes and
minority interests ............................ (27,867) (23,748) 2,883 24,042 (24,690)
Income tax benefit (expense) .................... 1,873 (152) (891) (2,124) (1,294)
-------- -------- -------- -------- --------
Income (loss) before minority interests ......... (25,994) (23,900) 1,992 21,918 (25,984)
Minority interests in income of
consolidated subsidiaries ..................... -- -- (10) -- (10)
-------- -------- -------- -------- --------
Net income (loss) ............................... $(25,994) $(23,900) $ 1,982 $ 21,918 $(25,994)
======== ======== ======== ======== ========
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE PERIOD FROM JANUARY 1, TO FEBRUARY 1, 2000 (UNAUDITED)
------------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
-------------- -------------
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales .......................................... $ -- $ 14,810 $ 11,662 $ (3,030) $ 23,442
Cost of goods sold ................................. -- 9,912 7,796 (2,192) 15,516
-------- -------- -------- -------- --------
Gross profit ....................................... -- 4,898 3,866 (838) 7,926
Selling, general and administrative expenses ....... 19 3,324 2,157 (286) 5,214
Research and development ........................... -- 577 824 (649) 752
-------- -------- -------- -------- --------
Income (loss) from operations ...................... (19) 997 885 97 1,960
Interest (expense), net ............................ (818) (9) -- 11 (816)
Other income (expense), net ........................ 206 13 (21) (176) 22
Equity in income of subsidiaries ................... 1,256 -- -- (1,256) --
-------- -------- -------- -------- --------
Income (loss) before income taxes and
minority interests............................... 625 1,001 864 (1,324) 1,166
Income tax benefit (expense) ....................... -- (540) (419) 412 (547)
-------- -------- -------- -------- --------
Income (loss) before minority interests ............ 625 461 445 (912) 619
Minority interests in loss of consolidated
subsidiaries ..................................... -- -- 6 -- 6
-------- -------- -------- -------- --------
Net income (loss)................................... $ 625 $ 461 $ 451 $ (912) $ 625
======== ======== ======== ======== ========
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 2, 2000 TO APRIL 1, 2000 (UNAUDITED)
-------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
-------------- -------------
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities.. $ 3,185 $(9,634) $ 3,622 $ 1,065 $ (1,762)
Cash flows used in investing activities:
Notes receivable ...................................... 106 -- -- -- 106
Purchases of property, plant and equipment ............ -- (1,286) (333) (183) (1,802)
--------- ------- -------- --------- ---------
Net cash provided by (used in) investing activities ... 106 (1,286) (333) (183) (1,696)
Cash flows provided by (used in) financing activities:
Advances under other debt obligations ................. 53,856 53,856
Principal payments on other debt obligations .......... (80,000) -- -- -- (80,000)
Advances under line of credit ......................... 7,700 -- 506 (506) 7,700
Repayments of line of credit .......................... (8,182) 93 357 (450) (8,182)
Payment of merger and financing expense ............... (15,793) -- -- -- (15,793)
Repurchase of common stock, options and warrants ...... (261,268) -- -- -- (261,268)
Net proceeds from 12 3/4% senior subordinated notes ... 148,312 -- -- -- 148,312
Proceeds from investors ............................... 152,000 152,000
--------- ------- -------- --------- ---------
Net cash provided by (used in) financing activities ... (3,375) 93 863 (956) (3,375)
Foreign exchange effect on cash and cash equivalents .. -- -- (158) 121 (37)
--------- ------- -------- --------- ---------
Net increase (decrease) in cash and cash equivalents .. (84) (10,827) 3,994 47 (6,870)
Cash and cash equivalents, beginning of period......... 134 14,483 7,278 (48) 21,847
--------- ------- -------- --------- ---------
Cash and cash equivalents, end of period .............. $ 50 $ 3,656 $ 11,272 $ (1) $ 14,977
========= ======= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, TO FEBRUARY 1, 2000 (UNAUDITED)
-----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
-------------- -------------
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities.. $ (363) $ 9,639 $(5,614) $ 91 $ 3,753
Cash flows used in investing activities:
Proceeds from sale of property, plant and equipment..
Note receivable...................................... -- (106) (106)
Purchases of property, plant and equipment........... -- (288) (38) 18 (308)
-------- ----------- ------- ------ -------
Net cash used in investing activities................ -- (394) (38) 18 (414)
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses............ 349 -- -- -- 349
Advances under line of credit........................
Repayments of line of credit.........................
Advances under debt obligations......................
Principal payments on debt obligations............... -- (25) -- -- (25)
-------- ----------- ------- ------ -------
Net cash provided by (used in) financing activities.. 349 (25) -- -- 324
Foreign exchange effect on cash and cash equivalents. -- -- (89) -- (89)
-------- ----------- ------- ------ -------
Net increase (decrease) in cash and cash equivalents. (14) 9,220 (5,741) 109 3,574
Cash and cash equivalents, beginning of period....... 152 5,132 13,035 (46) 18,273
-------- ----------- ------- ------ -------
Cash and cash equivalents, end of period............. $ 138 $ 14,352 $ 7,294 $ 63 $21,847
======== =========== ======= ====== =======
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1999
---------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents .......................... $ 148 $ 5,134 $ 13,040 $ (49) $ 18,273
Notes receivable ................................... -- 200 (200) --
Accounts receivable-trade, less allowance for
doubtful accounts ................................ -- 27,294 26,606 (317) 53,583
Inventories ........................................ -- 17,372 13,041 (354) 30,059
Due (to) from affiliates, net ...................... 112,125 (28,289) (16,306) (67,530) --
Refundable taxes ................................... (180) -- 333 180 333
Deferred income taxes .............................. 7,066 3,584 573 (9,260) 1,963
Prepaid and other current assets ................... 160 1,746 2,192 -- 4,099
--------- --------- --------- --------- ---------
Total current assets ............................... 119,319 27,041 39,479 (77,530) 108,310
Property, plant and equipment, net ................. 146 41,952 20,023 (1,166) 60,955
Investment in subsidiaries ......................... 45,329 -- -- (45,329) --
Other assets, net .................................. 1,138 23,352 10,962 24,236 59,687
--------- --------- --------- --------- ---------
Total assets ....................................... $ 165,932 $ 92,345 $ 70,464 $ (99,789) $ 228,952
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt obligations ................ 2,000 317 20 -- 2,337
Accounts payable-trade ............................. 254 6,727 14,960 (136) 21,805
Income taxes payable ............................... (6,380) 10,840 4,221 (4,044) 4,637
Deferred revenue ................................... -- 4,408 3,357 -- 7,765
Accrued expenses and other current liabilities ..... 4,586 12,890 7,219 21 24,716
--------- --------- --------- --------- ---------
Total current liabilities .......................... 460 35,182 29,777 (4,159) 61,260
Debt obligations, net of current portion ........... 86,182 1,253 5,295 (6,122) 86,608
Deferred income taxes .............................. (278) 5,725 (99) (4,641) 707
--------- --------- --------- --------- ---------
Total liabilities .................................. 86,364 42,160 34,973 (14,922) 148,575
Commitments and contingencies
Minority interest in consolidated subsidiary ....... -- -- 809 -- 809
Stockholders' equity:
Common stock, $0.01 par value; authorized 25,000,000
shares; 9,608,868 shares issued and outstanding .. 96 -- -- -- 96
Additional paid-in capital ......................... 58,660 11,772 2,438 (14,210) 58,660
Cumulative translation adjustment .................. (1,294) 148 (1,016) 868 (1,294)
Retained earnings .................................. 22,106 38,265 33,260 (71,525) 22,106
--------- --------- --------- --------- ---------
Total stockholders' equity ......................... 79,568 50,185 34,682 (84,867) 79,568
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity ......... $ 165,932 $ 92,345 $ 70,464 $( 99,789) $ 228,952
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 3, 1999 (UNAUDITED)
------------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
-------------- -------------
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities.. $ (399) $ (779) $ 2,189 $ (321) $ 690
Cash flows used in investing activities:
Notes receivable..................................... -- 1,459 -- -- 1,459
Proceeds from sale of property, plant and equipment.. -- 60 -- -- 60
Purchases of property, plant and equipment........... -- (660) (802) 282 (1,180)
--------- ----------- ---------- ---------- ------------
Net cash used in investing activities................ -- 859 (802) 282 338
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses............ 340 -- -- -- 340
Advances under line of credit........................ -- -- -- -- --
Repayments of line of credit......................... -- -- -- -- --
Advances under debt obligations...................... -- -- 183 16 199
Principal payments on debt obligations............... -- (828) -- (21) (849)
--------- ----------- ---------- ---------- ------------
Net cash provided by (used in) financing activities.. 340 (828) 183 (5) (310)
Foreign exchange effect on cash and
cash equivalents.................................... -- -- 3 (129) (126)
--------- ----------- ---------- ---------- ------------
Net increase in cash and cash equivalents............ (59) (748) 1,573 (174) 592
Cash and cash equivalents, beginning of period....... 84 12,971 6,806 166 20,027
--------- ----------- ---------- ---------- ------------
Cash and cash equivalents, end of period............. $ 25 $ 12,223 $ 8,379 $ (8) $ 20,619
========= =========== ========== ========== ============
</TABLE>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Quarterly Report on Form 10-Q concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; introductions and advancements in
development of products, and plans and objectives related thereto; and
statements concerning assumptions made or expectations as to any future events,
conditions, performance or other matters, are "forward-looking statements" as
that term is defined under the Federal Securities Laws. Forward-looking
statements are subject to risks, uncertainties and other factors that could
cause actual results to differ materially from those stated in such statements.
Such risks, uncertainties and factors include, but are not limited to, changes
in the Company's markets, particularly the potentially volatile semiconductor
market, changes in and delays in product development plans and schedules,
customer acceptance of new products, changes in pricing or other actions by
competitors, patents owned by the Company and its competitors, risk of foreign
operations and markets, the Company's substantial indebtedness, the Company's
ability to integrate its Thermolloy acquisition and general economic conditions,
as well as other risks detailed in the Company's filings with the Securities and
Exchange Commission, including the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
The Company undertakes no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
OVERVIEW
Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is the leading
global provider of thermal management solutions for electronics products and the
leading developer and marketer of computational fluid dynamics (CFD) software.
Each of these businesses has the leading reputation for high product quality,
service excellence and engineering innovation in its market. Aavid designs,
manufactures and distributes on a worldwide basis thermal management products
that dissipate heat from microprocessors and industrial electronics products.
Aavid's products include heat sinks, interface and attachment accessories, fans,
heat spreaders and liquid cooling and phase change devices that can be
configured to meet customer-specific needs. CFD software is used in complex
computer-generated modeling of fluid flows, heat and mass transfer and chemical
reactions. Aavid's CFD software is used in a variety of industries, including
the automotive, aerospace, chemical processing, power generation, electronics
and bio-medical industries.
On August 23, 1999, the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with Heat Holdings Corp., a corporation newly formed
by Willis Stein & Partners II, L.P. (the "Purchaser"), and Heat Merger Corp., a
wholly-owned subsidiary of the Purchaser ("Merger Sub"), providing for the
merger of the Merger Sub with and into Aavid (the "Merger"), with Aavid being
the surviving corporation. The Merger was approved by the Company's stockholders
on January 29, 2000 and consummated on February 2, 2000. Pursuant to the Merger,
Aavid stockholders received $25.50 in cash for each outstanding share of common
stock, and outstanding stock options and warrants were cashed out. The Merger
was accounted for using the purchase method.
The Merger and related transaction costs were funded by a cash contribution
from the Purchaser of $152,000, proceeds of $148,312, net of original issue
discount, from the sale by the Company of 12 3/4% senior subordinated notes and
warrants due 2007, $54,700 pursuant to a new credit facility entered into by the
Company, and approximately $11,900 of cash on hand. Net stockholders' equity on
the date of acquisition was approximately $156,560. Based upon estimates of the
fair value of assets acquired and liabilities assumed, goodwill of approximately
$202,600 was established. Approximately $139,800 of this goodwill is
attributable to Aavid Thermalloy, the hardware business, and will be amortized
over 20 years. The remainder, $62,800, is attributable to Fluent, the software
business, and will be amortized over 4 years. Management does not believe that
the final purchase price allocation will produce materially different results
than those reflected herein.
The Company recorded a valuation allowance of $12,163 to fully reserve the
unutilized net operating loss carryforwards outstanding at the time of the
acquisition. The Company believes the future utilization of those tax loss
carryforwards is uncertain given that the Company expects to incur U.S. tax
losses resulting from the incremental interest expense arising from the debt
incurred to fund the merger. As the net operating losses are utilized, the
reversal of the valuation allowance will be recorded as a reduction of goodwill.
Of the $152,000 cash contribution from the Purchaser, $4,811 was invested
by Heat Holdings II Corp., a wholly-owned subsidiary of the Purchaser, to
acquire 95% of the common equity of Aavid Thermalloy, LLC, the thermal
management hardware business. The Company controls Aavid Thermalloy, LLC through
a preferred equity interest and a 5% common equity interest. Since the Company
was in a net loss position from February 2, 2000 through April 1, 2000, Heat
Holding II's minority interest ownership as of April 1, 2000 did not change from
February 2, 2000.
On February 2, 2000, as part of the transactions relating to the Merger,
the Company issued 150,000 units (the "Units"), consisting of $150,000 aggregate
principal amount of its 12 3/4% Senior Subordinated Notes due 2007 (the
"Notes") and warrants (the "Warrants") to purchase an aggregate of 60 shares of
the Company's Class A Common Stock, par value $0.0001 per share, and 60
17
<PAGE> 18
shares of the Company's Class H Common Stock, par value $0.0001 per share. The
Notes are fully and unconditionally guaranteed on a joint and several basis by
each of the Company's domestic subsidiaries (the "Subsidiary Guarantors"). The
Notes were issued pursuant to an Indenture (the "Indenture") among the Company,
the Subsidiary Guarantors and Bankers Trust Company, as trustee. Approximately
$4,600 of the proceeds from the sale of the Units was allocated to the fair
value of the Warrants and approximately $143,700 was allocated to the Notes, net
of original issue discount of approximately $1,700. The total discount of $6,300
is being accreted over the term of the notes, using the effective interest rate
method. This accretion is recorded as interest expense within the accompanying
statement of operations for the period February 2, 2000 to April 1, 2000.
The Indenture limits the Company's ability to incur additional debt, to
pay dividends or make other distributions, to purchase or redeem our stock or
make other investments, to sell or dispose of assets, to create or incur liens,
and to merge or consolidate with any other person. The Indenture also contains
provisions requiring additional equity investments by Willis Stein & Partners
in the event the Company does not achieve certain leverage to EBITDA ratios, as
defined, in years 2000 and 2001. The Indenture provides that upon a change in
control of Aavid, the Company must offer to repurchase the Notes at 101% of
the face value thereof, together with accrued and unpaid interest. The Notes
are subordinated in right of payment to amounts outstanding under the Amended
and Restated Credit Facility and certain other permitted indebtedness.
In connection with the Merger, the Company repaid all of the outstanding
term loan and revolving line of credit under its existing credit facility, which
aggregated approximately $88,200 at December 31, 1999, and entered into an
amended and restated credit facility ("the Amended and Restated Credit
Facility"). The Amended and Restated Credit Facility provides for a $22,000
revolving credit facility ("the Revolving Facility") (of which $1,700 was drawn
at the closing of the Merger) and a $53,000 term loan facility ("the Term
Facility") (which was fully drawn at the closing of the Merger). Subject to
compliance with the terms of the Amended and Restated Credit Facility,
borrowings under the Revolving Facility are available for working capital
purposes, capital expenditures and future acquisitions. The Revolving Facility
will terminate, and all amounts outstanding thereunder will be payable, on March
31, 2005. Principal on the Term Facility is required to be repaid in quarterly
installments commencing December 31, 2000 and ending March 31, 2005 as follows:
five installments of $2,000; four installments of $2,500; four installments of
$2,750; two installments of $3,200; two installments of $3,900; and a final
installment of $7,800. In addition, commencing with our fiscal year ending
December 31, 2001, we are required to apply 50% of our excess cash flow to
permanently reduce the Term Facility. The Amended and Restated Credit Facility
bears interest at a rate equal to, at the Company's option, either (1) in the
case of Eurodollar loans, the sum of (x) the interest rate in the London
interbank market for loans in an amount substantially equal to the amount of
borrowing and for the period of borrowing selected by Aavid and (y) a margin of
between 1.50% and 2.25% (depending on the Company's consolidated leverage ratio
(as defined in the Amended and Restated Credit Facility)) or (2) the sum of the
higher of (x) Canadian Imperial Bank of Commerce's prime or base rate or (y)
one-half percent plus the latest overnight federal funds rate plus (z) a margin
of between .25% and 1.00% (depending on the Company's consolidated leverage
ratio). At April 1, 2000, the interest rates on the Term Facility and the
Revolving Facility were 8.30%.
The Amended and Restated Credit Facility may be prepaid at any time in
whole or in part without penalty, and must be prepaid to the extent of certain
equity or asset sales. The Amended and Restated Credit Facility limits the
Company's ability to incur additional debt, to sell or dispose of assets, to
create or incur liens, to make additional acquisitions, to pay dividends, to
purchase or redeem its stock and to merge or consolidate with any other person.
In addition, the Amended and Restated Credit Facility requires that the Company
meet certain financial ratios, and provides the lenders with the right to
require the payment of all amounts outstanding under the facility, and to
terminate all commitments thereunder, if there is a change in control of Aavid.
The Amended and Restated Credit Facility is guaranteed by each of Holdings Corp.
and Heat Holdings II Corp., and all of the Company's domestic subsidiaries and
secured by the Company's assets (including the assets and stock of its domestic
subsidiaries and a portion of the stock of its foreign subsidiaries). The
Company was in compliance with all covenants at April 1, 2000.
As of April 1, 2000, $7,700 was outstanding under the revolving credit
facility and $53,000 was outstanding under the term facility, of which $4,000
was classified as current within the accompanying balance sheet.
The company incurred approximately $7,085 in underwriting, legal and other
professional fees in connection with the issuance of the notes and the
obtainment of the Senior Amended and Restated Credit Facility. These costs, in
addition to the $1,624 of unamortized costs associated with the original Senior
Credit Facility have been capitalized as deferred financing fees and are being
amortized over the respective terms of the related debt. This amortization is
recorded in interest expense in the accompanying statement of operations from
February 2, 2000 to April 1, 2000.
As further discussed in Footnote (6) under "In-Process Research and
Development", in connection with the Merger, the Company allocated $15.0 million
of the purchase price to in-process research and development projects. This
allocation represented the estimated fair value based on risk-adjusted cash
flows related to the incomplete software research and development projects of
Fluent, Inc. At the date of the merger, the development of these projects had
not yet reached technological feasibility and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed
as of the date of the merger.
On April 3, 2000, Mr. Brian Byrne joined the Company as Chief Financial
Officer.
18
<PAGE> 19
RESULTS OF OPERATIONS
FOR THE QUARTER ENDED APRIL 1, 2000 COMPARED WITH QUARTER ENDED APRIL 3, 1999
The results of operations for the quarter ended April 1, 2000 are the
result of the combination of the results for the period from January 1, 2000
through February 1, 2000 and the period from February 2, 2000 through April 1,
2000. As a result of purchase accounting adjustments for the Merger, which was
consummated February 2, 2000, and the Thermalloy acquisitions, which was
consummated in October 1999, the Company had a significant increase in goodwill
and interest expense, and incurred one-time restructuring charges and a charge
for acquired in-process research and development. In addition, the results of
operations for the quarter ended April 1, 2000 include the results of operations
of Thermalloy. Accordingly, a comparison of the results for the quarters ended
April 1, 2000 and April 3, 1999 may not necessarily be meaningful.
<TABLE>
<CAPTION>
SALES (DOLLARS IN MILLIONS) FOR THE THREE MONTHS ENDED
--------------------------
APRIL 1, APRIL 3,
2000 1999 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Computers and Network $ 27.5 $ 18.7 47.1%
Industrial Electronics 35.5 15.4 130.5%
Consulting and Design (Applied) 0.3 0.3 --
------- ------- -----
63.3 34.4 84.0%
Intel Special Product -- 2.6 (100.0)%
------- ------- -----
Total Aavid Thermalloy 63.3 37.0 71.1%
Total Fluent 14.7 12.8 14.8%
------- ------- -----
Total Company $ 78.0 $ 49.8 56.5%
======= ======= =====
</TABLE>
Sales in the first quarter of 2000 were $78.0 million, an increase of $28.2
million, or 56.5% from the comparable period of 1999. $27.8 million, or
approximately 98.6% of the increase, was attributable to acquired Thermalloy
entities.
Fluent software sales of $14.7 million in the first quarter of 2000 were
$1.9 million, or 14.8% higher than the first quarter of 1999. The increase was
spread among all product offerings due to overall growth in the market for
computational fluid dynamics design software, as well as the success of
application specific products, such as "Icepak".
Aavid Thermalloy's sales were $63.3 million in the first three months of
2000, an increase of $26.3 million, or 71.1%, over the comparable period of
1999. Excluding sales of the Intel Special Product, sales in the first quarter
of 2000 were $28.9 million or 84.0% over the first quarter of 1999, reflecting
both added sales resulting from the Thermalloy acquisition and a strong recovery
in sales to industrial electronics customers in which first quarter 2000 sales
increased 130.5% over the first quarter of 1999. Revenue in Computer and Network
related products (excluding the Intel Special Product) in the first quarter of
2000 increased 70.8% over the same period in the prior year.
International sales (which include North American exports) increased to 59%
of sales for the first quarter of 2000 compared with 41% in the first quarter of
1999.
No customer generated greater than 5% of the Company's revenues in the
first quarter of 2000 or 1999.
The Company's gross profit for the first three months of 2000 was $22.4
million compared with $18.5 million in the comparable period from 1999. Gross
margin as a percentage of sales decreased from 37.1% in the first three months
of 1999 to 28.8% for the comparable period of 2000. Excluding $4.0 million of
additional cost of sales associated with the write-up of inventory to fair value
on the date of the Merger and $.5 million of additional cost of sales associated
with the write-up of Thermalloy inventory to fair value in Q499, gross margin
was 34.6% in the first three months of 2000. In addition, there was a slight
decrease in gross margins due to the acquisition of Thermalloy which caused
Fluent's higher gross margin business to become a smaller percentage of the
Company's overall gross profit. Furthermore, underutilization of factories
contributed to the decrease in margins, however, this is being addressed through
the on-going integration process.
In the first three months of 2000 the Company's operating loss of $18.7
million compares with operating income of $5.4 million in the first three months
of 1999. This loss is primarily the result of $5.4 million of goodwill and other
Merger related intangible amortization, $4.5 million of additional cost of sales
associated with the write-up of inventory to fair value on the date of the
Merger, and a $15 million one-time charge related to the write-off of acquired
in-process research and development related to Fluent.
Interest charges for the Company were $4.8 million in the first three
months of 2000, which compares with $0.1 million for the comparable period of
1999, reflecting significantly increased levels of indebtedness, as further
discussed in Footnote (1) in the accompanying financial statements.
The Company recorded a $1.8 million provision on a $23.5 million pre-tax
loss. The provision differs from the expected benefit because of the
non-deductible acquired in-process research and development charge of $15.0
million, non-deductible goodwill amortization, a foreign tax provision of $1.2
million and required tax provisions on certain foreign earnings which are
expected to be repatriated into the U.S. to service debt. The Company is in a
net operating loss position for U.S. tax purposes and accordingly will not
receive any benefit for foreign tax credits. However, the Company will receive a
deduction for cash paid related to foreign taxes.
19
<PAGE> 20
Repatriated earnings will therefore incur both foreign income taxes and U.S.
income taxes, thereby effectively doubling up the tax rate, to the extent that
foreign earnings exceed current U.S. tax losses. The significant net operating
loss carryforwards in the U.S. will help offset the actual cash paid for taxes
in the U.S. when foreign earnings are repatriated. In purchase accounting for
the Willis Stein merger the Company recorded a full valuation allowance on net
operating loss carryforwards because their realization is now uncertain because
the Company expects U.S tax losses resulting from increased interest expense
from debt incurred to fund the merger. As net operating losses are utilized, the
reversal of the valuation allowance will be recorded as a reduction to goodwill
rather than the income tax provision.
The Company's net loss for the first three months of 2000 was $25.4
million, versus net income for the comparable period of 1999 of $3.2 million.
The first three months of 2000 includes a $15 million one-time charge associated
with the write-off of acquired in-process research and development related to
Fluent, $5.4 million of amortization associated with goodwill and other
purchased intangibles and $4.5 million of additional cost of sales which
represents the impact of the write-up of inventory to fair value that occurred
in conjunction with the Merger. The written up inventory was sold during
February and March 2000, and so this write-up is recorded as additional cost of
sales.
FINANCIAL CONDITION
APRIL 1, 2000 COMPARED WITH DECEMBER 31, 1999
Historically, the Company has used internally generated funds and proceeds
from financing activities to meet its working capital and capital expenditure
requirements. As a result of the Thermalloy acquisition and the Merger, the
Company has significantly increased its cash requirements for debt service
relating to the Notes and Amended and Restated Credit Facility described in
footnote (1) in the accompanying financial statements. The Company intends to
use amounts available under the Amended and Restated Credit Facility, future
debt and equity financings and internally generated funds to finance its working
capital requirements, capital expenditures and potential acquisitions.
During the first three months of 2000, the Company generated $2.0 million
of cash from operations. During the period, the Company used $3.1 million of
cash in connection with financing activities and $2.1 million for capital
expenditures.
Total indebtedness at April 1, 2000 was $206.1 million, which compares with
$88.9 million at December 31, 1999. Total indebtedness as a percent of
stockholders' equity at April 1, 2000 was 164.0%, compared with 111.8% at
December 31, 1999. Long-term debt at April 1, 2000 was $201.7 million, an
increase of $115.1 million from December 31, 1999. The Company had $7.7 million
outstanding under its line of credit as of April 1, 2000, which is classified as
long term debt on the accompanying balance sheet. $8.2 million of borrowings
were outstanding under the Company's revolving line of credit on December 31,
1999.
As further discussed in Note (6) in the accompanying financial statements
development costs to complete ongoing development projects at Fluent are
estimated to be $4.0 million.
There were no material purchase commitments as of April 1, 2000.
At April 1, 2000, inventory turns were 6.4, which compare with 6.0 at
December 31, 1999.
At April 1, 2000, accounts receivable days sales outstanding ("DSO") were
63.1, which compare with 71 days at December 31, 1999.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Following the public announcement of the merger with Heat Merger Corp.,
lawsuits were filed against the Company, Willis Stein, the Company's directors,
and one former director in the Court of Chancery of the State of Delaware by
certain of the Company's stockholders. The complaints allege, among other
things, that the Company's directors have breached their fiduciary duties and
seek to enjoin, preliminarily and permanently, the merger and also seek
compensatory damages. The stockholder plaintiffs, on behalf of the Company's
public stockholders, also seek class action certification for their lawsuits.
The Company believes the actions to be without merit and intend to contest the
actions vigorously.
On January 29, 2000, a special meeting of our stockholders was held to
consider and approve the proposed merger pursuant to which we would become a
wholly-owned subsidiary of Heat Holdings Corp. The Merger was approved, with
6,622,985 shares voted in favor, 132,812 shares voted against and 430 shares
abstained.
The litigation and arbitration pending between and among Materials
Innovation, Inc. and its principals has been settled without any material
adverse effect on the Company.
The Company is involved in various other legal proceedings that are
incidental to the conduct of the Company's business, none of which the Company
believes could reasonably be expected to have a materially adverse effect on the
Company's financial condition.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial data schedule.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial data schedule
22
<PAGE> 23
(b) Reports on Form 8-K
Current Report on Form 8-K dated February 2, 2000 and filed on
February 17, 2000 relating to the Merger Agreement and our proposed
acquisition of the Thermalloy Division.
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.
SIGNATURES
DATE: May 16, 2000 AAVID THERMAL TECHNOLOGIES, INC.
By /s/ Brian A. Byrne
--------------------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> APR-01-2000
<EXCHANGE-RATE> 1
<CASH> 14,977
<SECURITIES> 0
<RECEIVABLES> 55,734
<ALLOWANCES> (2,214)
<INVENTORY> 30,459
<CURRENT-ASSETS> 107,201
<PP&E> 60,149
<DEPRECIATION> (2,135)
<TOTAL-ASSETS> 405,151
<CURRENT-LIABILITIES> 65,508
<BONDS> 143,850
0
0
<COMMON> 0
<OTHER-SE> 125,690
<TOTAL-LIABILITY-AND-EQUITY> 405,151
<SALES> 78,002
<TOTAL-REVENUES> 78,002
<CGS> 55,567
<TOTAL-COSTS> 96,657
<OTHER-EXPENSES> 64
<LOSS-PROVISION> 32
<INTEREST-EXPENSE> 4,805
<INCOME-PRETAX> (23,524)
<INCOME-TAX> 1,841
<INCOME-CONTINUING> (25,365)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,369)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
